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June 13, 2016
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On June 13, 2016, the Supreme Court unanimously rejected the Federal Circuit’s current standard for awarding enhanced patent damages, finding it too rigid and inconsistent with the enhanced damages statute, 35 U.S.C. §284. As a result, patent owners (including patent trolls, as the Supreme Court acknowledged) can more easily prove they should receive damages increased up to three times the actual amount assessed in order to punish the infringing behavior.  In doing so, the Supreme Court nevertheless cautioned that “discretion” is not the same as “whim,” and that enhanced damages should still be awarded rarely, and only in egregious cases.

The Supreme Court’s decision was the result of appeals in two companion cases, Halo Electronics v. Pulse Electronics and Stryker Corp. v. Zimmer, Inc. In both instances, victorious patent owners were denied enhanced damages because of the Federal Circuit’s current two-part Seagate test.  The Seagate test was established in 2007 and allowed a patent owner to recover enhanced damages only if (1) the infringer’s activities were objectively reckless and (2) the risk of infringement was known or so obvious that it should have been known to the infringer.  Further, the patent owner had to demonstrate both parts of the test by clear and convincing evidence.

The Supreme Court rejected every aspect of the Seagate test; while acknowledging the purpose of the test was correct in attempting to limit enhanced damages only as a sanction for the most egregious acts of infringement, the Supreme Court also found the test’s rigidity was inconsistent with the statute.  Here, that statute simply states that a court “may increase” damages up to three times the total amount originally assessed. Seagate thus removed the discretion the statute was intended to provide.

In assessing the first, objective part of the test, the Supreme Court was troubled with the objective standard. This meant even “wanton and malicious pirate[s]” that deliberately copied a patented invention could avoid enhanced damages so long as they advanced a reasonable non-infringement or invalidity defense at trial.  As a result, the possibility of enhanced damages was essentially eviscerated, as a defendant that could offer any non-frivolous defense at trial necessarily showed its activities were not objectively reckless and thus its own culpability became irrelevant.

In assessing the second part of Seagate, the Supreme Court also found the Federal Circuit’s test problematic because it requires the infringer’s subjective understanding be proved by the rigorous standard of clear and convincing evidence, rather than the more traditional preponderance of the evidence standard.  The Court held the same standard needed to prove infringement is sufficient to also prove entitlement to enhanced damages.

The Supreme Court’s Halo decision reflects a continuing (and often unanimous) trend of cases in which it has rejected a bright line test established by the Federal Circuit in favor of a discretionary approach.  A concurring opinion by Justice Breyer, joined by Justices Kennedy and Alito, addressed what will likely be the concern of many following this decision – does a relaxed standard for enhanced patent damages encourage patent trolls?  They seem to conclude it may and, for that reason, re-emphasized the primary opinion’s explanation that enhanced damages are still appropriate only in egregious cases and that such damages are reserved as a punitive sanction for deliberate or wanton conduct.  The concurrence went on to suggest that the exercise of discretion by the District Court requires it to consider the cost-benefit analysis that occurs when deciding how one proceeds in the face of a patent, and that not every instance might require patent counsel to avoid the risk of enhanced damages.

Nevertheless, the newly announced standard for enhanced damages does raise the possibility of greater exposure to businesses when faced with patent infringement. The full effects of this decision may not be known for some time, at least until the lower courts have had a chance to apply the Supreme Court’s reasoning in the real world of patent litigation.