On June 13, 2016, the Supreme Court issued an opinion that replaces the Federal Circuit’s strict Seagate test for enhanced patent damages with a test that is easier for patent owners to meet. Relying extensively on the Court’s recent Octane and Highmark decisions that created an easier standard to receive attorney fees in exceptional patent cases, the Supreme Court ruled as follows:
-
Eliminated Seagate’s objective recklessness prong (that avoided an accused infringer’s subjective belief) and focused on a subjective basis for enhancing damages given an infringer’s egregious conduct in the particular circumstances of the case, which behavior goes beyond what is found in a typical patent case.
-
Lowered the patent owner’s burden of proof from the “clear and convincing evidence” standard to the lower “preponderance of the evidence” standard generally applied to infringement.
-
Adopted a simple “abuse of discretion” standard of review that requires the Federal Circuit to defer more to the district court’s decision whether to enhance damages.
Judge Breyer’s concurring opinion explains his understanding of the June 13 decision and the limits on enhancing damages. He sought to avoid the perception that the decision reverts back to pre-Seagate law where costly opinions of counsel were sought upon simply receiving notice of a patent and much litigation centered around such opinions and waiving privilege by relying on them.
Below is a summary of the decision. This includes at the end a verbatim (minus citations) quote of the Court’s historical discussion of the enhancement statute, because the Court repeatedly pointed to that specific discussion as providing guidance for enhancing damages in the future.
Background
The Seagate Regime for Enhanced Damages
In 2007, the Federal Circuit’s Seagate decision set the standard for awarding enhanced damages under 35 U.S.C. § 284 based on a showing that patent infringement was willful using a two-part test that the patent owner must prove by clear and convincing evidence. The Seagate test has an objective prong that first must be established, followed by a subjective prong.
Under the first objective prong, the patent owner must show that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent; importantly, this prong is determined without regard to the accused infringer’s state of mind. This “objective recklessness” prong could be defeated if the infringer defending the case raised a “substantial question” about whether the patent was valid or infringed.
Under the second subjective prong, the patent owner must show that the infringer either knew about the risk of infringement or the risk was so obvious that the infringer should have known of it.
Under the Seagate regime, the Federal Circuit on appeal would apply three different standards of review to the district court’s application of the Seagate test: (1) the first objective prong was reviewed de novo (i.e., without any deference to the district court’s decision on this prong); (2) the second subjective prong was reviewed for substantial evidence (i.e., with some deference to the district court’s decision if it was reasonable based on the evidence even if a different decision reasonably could have been made); and (3) the ultimate decision whether to enhance damages was reviewed for whether the district court abused its discretion (i.e., very deferential to the district court’s decision). This overall Seagate scheme was part of the Federal Circuit’s effort to address expenses and problems that arose under a pure subjective standard, such as side-litigation on the accused infringer’s state of mind, opinions of counsel and waiver of privilege based on reliance on same.
The Two Separate Patent Cases Under Review
The instant decision involves appeals from two separate cases. The first case involves Halo Electronics (Halo), which is an electronic component supplier that owns patents directed to transformers that are mounted on printed circuit boards. Halo sent Pulse Electronics (Pulse) two letters offering to license the patents. Pulse continued to sell accused infringing components, but decided not to take a license because one of its engineers concluded that the Halo patents were invalid. Halo sued Pulse for patent infringement. The jury found that Halo infringed the patent and there was a high probability such infringement was willful. But the district court declined to enhance damages because Pulse’s defenses at trial wernot objectively baseless or a sham and, thus, the first Seagate prong was not met.
The second case under review involves Stryker and Zimmer who compete in the market for orthopedic pulsed lavage devices, which are a combination spray gun and suction tube for cleaning tissue during surgery. In 2010, Stryker sued Zimmer for patent infringement and a jury found that Zimmer willful infringed Stryker’s patents. The district court trebled damages based on evidence that Zimmer copied Stryker’s products and accepted the risk of legal consequences given its high-risk/high reward competition strategy. On appeal, the Federal Circuit vacated the enhanced damages award because Zimmer had asserted “reasonable defenses.”
Supreme Court Decision
The Supreme Court started with the language of the enhanced damages statute, which simply states as follows:
the court may increase damages up to three times the amount found or assessed. 35 U.S.C. § 284
That language provides no specific guidance. Although the Patent Act of 1783 originally “mandated treble damages in any successful infringement suit,” the statute was changed to be discretionary and for over 180 years enhancement was reserved as a punitive or vindictive sanction “not to be meted out in a typical infringement case.” Generally, discretionary enhancement awards are “for egregious cases of culpable behavior.” The Court stated that, although the Federal Circuit’s Seagate test recognizes this, that test is “unduly rigid” and “can have the effect of insulating some of the worst patent infringers” from enhanced damages.
No “Objective Recklessness” Prong
The Supreme Court found Seagate’s first objective recklessness prong was problematic, because it could shield “many of the most culpable offenders.” Similar to the Court’s decision in Octane Fitness (concerning attorney fee awards in exceptional cases), “‘subjective bad faith’ alone could ‘sufficiently set itself apart from mine-run cases to warrant a fee award” and damages should be enhanced “regardless whether the infringement was objectively reckless, the Supreme Court stating:
The Seagate test aggravates the problem by making dispositive the ability of the infringer to muster a reasonable (even though unsuccessful) defense at the infringement trial. The existence of such a defense insulates the infringer from enhanced damages, even if he did not act on the basis of the defense or was even aware of it. Under that standard, someone who plunders a patent–infringing it without any reason to suppose his conduct is arguably defensible–can nevertheless escape any comeuppance under §284 solely on the strength of his attorney’s ingenuity.
Culpability should be measured by what the actor knew at the time of the challenged conduct, not by “facts that the defendant neither knew or had reason to know at the time he acted.” Rather, the court should take into account the particular circumstances and exercise its discretion “in a manner free from the inelastic constraints of the Seagate test.” Further, “[c]onsistent with nearly two centuries of enhanced damages under patent law … such punishment should generally be reserved for egregious cases typified by willful conduct.” The Court later further emphasized that enhanced damages should not be awarded “in garden-variety cases.”
No “Clear And Convincing Evidence” Burden of Proof
As in Octane Fitness, the Supreme Court also rejected Seagate’s requirement that enhanced damages be proved under the high “clear and convincing evidence” standard:
The Seagate test is also inconsistent with §284 because it requires clear and convincing evidence to prove recklessness. On this point Octane Fitness is again instructive. There too the Federal Circuit had adopted a clear and convincing standard of proof, for awards of attorney’s fees under §285 of the Patent Act. Because that provision supplied no basis for imposing such a heightened standard of proof, we rejected it. We do so here as well. Like §285, §284 “imposes no specific evidentiary burden, much less such a high one.” And the fact that Congress expressly erected a higher standard of proof elsewhere in the Patent Act, see 35 U.S.C. §273(b), not in §284, is telling. Furthermore, nothing in historical practice supports a heightened standard. As we explained in Octane Fitness, “patent-infringement litigation has always been governed by a preponderance of the evidence standard.” Enhanced damages are no exception.
Abuse of Discretion Standard of Review
Again following its Octane Fitness/Highmark rulings for attorneys fees in exceptional cases, the Supreme Court eschewed the Federal Circuit’s tripartite scheme of appellate review. Rather, the district court’s decision on enhancing damages should be reviewed simply for abuse of discretion. The Supreme Court explained that applying the limits learned from almost two centuries of case law should address concerns that courts may too readily use their discretion to award enhanced damages:
That [abuse of discretion] standard allows for review of district court decisions informed by “the considerations we have identified.” Octane Fitness, 572 U.S., at __. The appellate review framework adopted by the Federal Circuit reflects a concern that district courts may award enhanced damages too readily, and distort the balance between the protection of patent rights and the interest in technological innovation. Nearly two centuries of exercising discretion in awarding enhanced damages in patent cases, however, has given substance to the notion that there are limits to that discretion. The Federal Circuit should review such exercises of discretion in light of the longstanding considerations we have identified as having guided both Congress and the courts.
The Court, in conclusion, reemphasized that the discretion to enhance damages should be guided by nearly two centuries of patent law on the issue, “limiting the award of enhanced damages to egregious cases of misconduct beyond typical infringement.
Justice Breyer Concurrence
Justice Breyer (joined by Justices Kennedy and Alito), wrote a concurrence to explain his understanding of the decision. His concurrence seeks to ensure that prior problems the Seagate standard sought to resolve will not arise following the instant decision. He made three primary points.
First, enhanced damages should not be awarded “simply because the evidence shows that the infringer knew about the patent and nothing more.” (emphasis in original). Rather, enhanced damages “are generally appropriate … only for egregious cases” such as deliberate or wanton conduct. (emphasis in original). Thus, “intentional or knowing” infringement “may” warrant enhancement, but the Court’s decision does not mean that such conduct “must” require enhancement.
Second, opinions of counsel of non-infringement may not be necessary to avoid enhanced damages. The patent statute precludes using the absence of such an opinion to prove willful infringement (see 35 U.S.C. §298). Expensive opinions of counsel may not be necessary under the circumstances of a particular case:
It may well be expensive to obtain an opinion of counsel. Such costs can prevent an innovator from getting a small business up and running. At the same time, an owner of a small firm, or a scientist, engineer, or technician working there, might, without being “wanton” or “reckless,” reasonably determine that its product does not infringe a particular patent, or that that patent is probably invalid. I do not say that a lawyer’s informed opinion would be unhelpful. To the contrary, consulting counsel may help draw the line between infringing and noninfringing uses. But on the other side of the equation lie the costs and the consequent risk of discouraging lawful innovation. Congress has thus left it to the potential infringer to decide whether to consult counsel–without the threat of treble damages influencing that decision. That is, Congress has determined that where both “advice of counsel” and “increased damages” are at issue, insisting upon the legal game is not worth the candle.
Third, enhanced damages should not be used to compensate the patent owner for infringement costs or litigation expenses.
Justice Breyer acknowledged concerns about patent assertion entities that might use the threat of treble damages to extract unwarranted settlements. He counsels that courts, therefore, should be “careful” in applying enhanced damages “to ensure that they only target cases of egregious conduct.”
Finally, Justice Breyer indicated that the Federal Circuit might apply a lighter abuse of discretion standard than typical given its experience in patent law, stating:
[I]n applying [the abuse of discretion standard], the Federal Circuit may take advantage of its own experience and expertise in patent law. Whether, for example, an infringer truly had “no doubts about [the] validity” of a patent may require an assessment of the reasonableness of a defense that may be apparent from the face of that patent. And any error [by the district court] on such a question would be an abuse of discretion.
Supreme Court’s Historical Analysis of Enhanced Damages
The following is a verbatim recitation of the Supreme Court opinion’s historical analysis of enhanced damages except that citations are omitted (to shorten it). We provide this here given the importance that the Court’s decision gives to its historical discussion in guiding future enhancement decisions.
========================================================
Enhanced damages are as old as U.S. patent law. The Patent Act of 1793 mandated treble damages in any successful infringement suit. In the Patent Act of 1836, however, Congress changed course and made enhanced damages discretionary, specifying that “it shall be in the power of the court to render judgment for any sum above the amount found by [the] verdict … not exceeding three times the amount thereof, according to the circumstances of the case.” In construing that new provision, this Court explained that the change was prompted by the “injustice” of subjecting a “defendant who acted in ignorance or good faith” to the same treatment as the “wanton and malicious pirate.” There “is no good reason,” we observed, “why taking a man’s property in an invention should be trebly punished, while the measure of damages as to other property is single and actual damages. But “where the injury is wanton or malicious, a jury may inflict vindictive or exemplary damages, not to recompense the plaintiff, but to punish the defendant.”
The Court followed the same approach in other decisions applying the 1836 Act, finding enhanced damages appropriate, for instance, “where the wrong [had] been done, under aggravated circumstances,” but not where the defendant “appeared in truth to be ignorant of the existence of the patent right, and did not intend any infringement.”
In 1870, Congress amended the Patent Act, but preserved district court discretion to award up to treble damages “according to the circumstances of the case.” We continued to describe enhanced damages as “vindictive or punitive,” which the court may “inflict” when “the circumstances of the case appear to require it. At the same time, we reiterated that there was no basis for increased damages where “[t]here is no pretence of any wanton and wilful breach” and “nothing that suggests punitive damages, or that shows wherein the defendant was damnified other than by the loss of the profits which the plaintiff received.”
Courts of Appeals likewise characterized enhanced damages as justified where the infringer acted deliberately or willfully.
Some early decisions did suggest that enhanced damages might serve to compensate patentees as well as to punish infringers. Such statements, however, were not for the ages, in part because the merger of law and equity removed certain procedural obstacles to full compensation absent enhancement. In the main, moreover, the references to compensation concerned costs attendant to litigation. That concern dissipated with the enactment in 1952 of 35 U.S.C. § 285, which authorized district courts to award reasonable attorney’s fees to prevailing parties in “exceptional cases” under the Patent Act.
It is against this backdrop that Congress, in the 1952 codification of the Patent Act, enacted §284. “The stated purpose” of the 1952 revision “was merely reorganization in language to clarify the statement of the statutes.” This Court accordingly described §284–consistent with the history of enhanced damages under the Patent Act–as providing that “punitive or ‘increased’ damages” could be recovered “in a case of willful or bad-faith infringement.”
[View source.]
