In a continuing trend of rejecting bright-line rules and multi-faceted tests created by the Federal Circuit, the Supreme Court last week issued an opinion in Halo Electronics, Inc. v. Pulse Electronics, Inc., (No. 14-1513) in which the Court unanimously vacated and remanded the Federal Circuit’s decision affirming the District Court’s decision not to award enhanced damages under the Federal Circuit’s precedent in In re Seagate Technology, LLC, 497 F.ed 1360 (Fed. Cir. 2007) (en banc). The Court found that the Seagate test was too rigid and did not give trial courts sufficient discretion to award enhanced damages under 35 U.S.C. § 284. Chief Justice Roberts wrote the decision for the Court.
The Patent Act provides that the Court “the court may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284. In response to this language, the Federal Circuit has created various tests for courts and litigants to following, culminating with its most recent pronouncement in Seagate. Under the Seagate test, “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,”without regard to “[t]he state of mind of the accused infringer.” This objective prong is not satisfied if the accused infringer later developed a reasonably defense at trial, even if that defense was not known or relied on during the time of the infringing conduct.
If the patentee can demonstrate objective recklessness, it must show by clear and convincing evidence that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” If the patentee meets this subjective prong, the court is entitled to award enhanced damages.
The Supreme Court Rejects this 2-step Process
While initially recognizing that “[t]he Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under § 284 only in egregious cases,” it found that the test “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”
In particular, the Court was troubled by the fact that an accused infringer could avoid enhanced damages in cases where it intentionally ignored the patentee’s patent if its lawyers could later develop a reasonable defense during litigation that was never relied on previously. Under the Seagate test, a patentee could never get past the first objective prong.
Having said that, the Court also stressed that enhanced damages should still be the exception, and not the rule. It traced the history of enhanced damages and noted that they were typically reserved for egregious cases and were “vindictive or punitive” in nature. The Court cautioned that a trial court’s discretion to grant enhanced damages is not boundless and that the Federal Circuit is in a unique position to evaluate the exercise of that discretion based on its long history of dealing with patent cases.
Finally, the Court rejected a clear and convincing evidentiary standard for proving entitlement to enhanced damages. Under § 284, only a preponderance of the evidence is necessary to obtain enhanced damages.
The Court concluded by stating:
Section 284 gives district courts the discretion to award enhanced damages against those guilty of patent infringement. In applying this discretion, district courts are “to be guided by [the] sound legal principles” developed over nearly two centuries of application and interpretation of the Patent Act. . . . Those principles channel the exercise of discretion, limiting the award of enhanced damages to egregious cases of misconduct beyond typical infringement. The Seagate test, in contrast, unduly confines the ability of district courts to exercise the discretion conferred on them. Because both cases before us were decided under the Seagate framework, we vacate the judgments of the Federal Circuit and remand the cases for proceedings consistent with this opinion.
Justice Breyer’s Concurrence
While agreeing with the majority’s opinion, Justice Breyer wrote separately to caution that awards of enhanced damages should be made only in egregious circumstances.
He also noted that an award of enhanced damages requires conduct beyond simple knowledge of a patent by the infringer. Justice Breyer explained that there are several legitimate reasons why an infringer may be aware of a patent that do not rise to the level of willful misconduct required. He also noted that opinions of counsel of non-infringement or invalidity are not required to defeat a claim for enhanced damages. For one thing, they can be extremely expensive and can deter legitimate innovation or otherwise upset the proper balance between the patent laws and promoting the progress of the science and useful arts.
Finally, he noted that enhanced damages are not a mechanism for compensating patentees for litigation expenses or other infringement-related costs. There are difference statutory provisions that address those concerns.
This is yet another case in which the Supreme Court has struck down a bright-line rule or multi-faceted test developed by the Federal Circuit. The Federal Circuit has tended to create these rules and tests in an effort to provide more clarity and certainty in the patent arena, even if these rules and tests lack a strong statutory basis. In contrast, the Supreme Court seems less concerned about clarity and certainty, and is more concerned in treating the patent laws like any other area of the law. It has repeatedly rejected efforts by the Federal Circuit to treat the patent laws as somehow different than other laws or not bound by the same rules and procedures. The Halo decision is another decision that brings the patent laws closer to the rest of the law.