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Much like Congress, legal pundits, and IP stakeholders, in the last few years, the U.S. Supreme Court has shown great interest in tinkering with the balance of power, litigation costs, and risks associated with the current intellectual property system in an effort to find ways to better support their underlying policies.

This term, the Supreme Court took up two companion cases — Halo Electronics v. Pulse Electronics and Stryker v. Zimmer Inc. — which both raised the question of whether the current legal test for awarding increased damages for willful infringement is consistent with the Patent Act. Ultimately, the Supreme Court decided that it was inconsistent with the willful infringement patent statute, and unanimously agreed (8-0) to soften the legal test used by district courts when awarding discretionary damages that punish culpable parties who intentionally infringe a patent. 35 U.S.C. §284 (stating that in a case of infringement, courts may increase the damages up to 3 times the amount awarded). Once again, in the Halo and Stryker cases, the Supreme Court has continued its recent trend of revising and relaxing legal standards established by the Federal Circuit and other circuit courts regarding damages awards, costs, or fees in intellectual property cases.

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The Halo decision replaces the Federal Circuit’s rarely satisfied test for awarding enhanced patent damages with a new test that is easier for patent owners to meet. Relying on its own recent decisions relating to awards of attorneys’ fees in patent litigations in the Octane Fitness and Highmark cases, the Court decided that the Federal Circuit’s two-part test developed in its 2007 Seagate opinion was too rigid. In particular, it excludes from punishment many of the most culpable infringers, including “wanton and malicious patent pirates” who intentionally take patented technology for their own gain with the purpose of stealing the patentee’s business and market share.

The Federal Circuit’s Seagate test requires that the patent owner show, by clear and convincing evidence (a very high evidentiary standard), that: (1) the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent (the “objective recklessness” finding); and (2) the infringement risk was either known, or so obvious that it should have been known by the accused infringer (the “subjective knowledge” finding). Only when both steps have been satisfied could a district court consider whether it should exercise its discretion and award enhanced damages to the patent owner.

Returning Real Discretion to Increase Patent Damages Awards to the District Courts

Federal district courts (not state courts) manage litigations involving patent infringement disputes since patent rights are entirely grounded in federal laws. For over 180 years under patent laws dating back to 1836, those courts have been deciding whether an infringer’s actions warrant an increase in the damages award based on the specific facts of the case, including the infringer’s behavior at the time that the infringement started. Until the 2007 Seagate decision, this discretionary analysis was based on the district court’s own practical evaluation of the case and the facts relating to the particular infringer’s behavior when compared to other typical infringement cases that the courts adjudicated. One major concern that seemed to affect the Supreme Court’s decision is the fact that the Seagate willful infringement test took away much of the district courts’ discretion to mete out punishment in some of the most egregious patent pirating cases.

The new Halo willful infringement test replaces the “clear and convincing evidence” standard with a relaxed requirement allowing the patentee to demonstrate its entitlement to enhanced damages under the much lower “preponderance of the evidence” standard. This means that, all other things being equal, patent owners will have an easier time demonstrating that an infringer’s behavior warrants a willful patent infringement damages award. The Supreme Court also threw out the requirement that the patentee prove “objective recklessness” in every case, particularly when there is evidence of deliberate wrongdoing on the part of the accused infringer.

And importantly—the Halo decision got rid of an offshoot line of case law that allowed an infringer to kill a willful infringement claim by mustering an objectively “reasonable defense” offered by trial counsel during the subsequent litigation between the patent owner and accused infringer, even if that defense was not known to or part of the infringer’s decision making process when the infringing activity began. Noting that the culpable state of mind of an infringer is measured at the time the conduct started, the Supreme Court explicitly removed this defense as a basis for barring a willful infringement award. This is an important case law correction that was sorely needed. Frankly, it makes no sense for a court to look at whether a party’s litigation counsel can devise an argument that the patent is weak or a reasonable non-infringement position and use it as a basis for killing a willful infringement claim (which considers the culpable state of mind at the time a party became aware of the patent and appropriated the technology).

Finally, the Supreme Court swept away the Federal Circuit’s complicated three-step review process for willful infringement judgments and replaced it with a simple deferential standard of review. After Halo, the Federal Circuit now owes significant deference to the district court’s decision about whether enhanced damages should be awarded in a particular patent case. In the future, the Federal Circuit will be reviewing these decisions under the very deferential “abuse of discretion” standard, which I like to call the “judge lost her mind” test.

What Types of Patent Cases Warrant Enhanced Damages?

So what types of patent infringement cases might warrant an enhanced damages award after Halo? The Supreme Court discussed situations in which the injury inflicted by the infringer was willful, wanton, deliberate, malicious, in bad-faith, consciously wrongful, flagrant, and where the wrong (infringement) occurred under aggravated circumstances, such as when an infringer knowingly pirated and sold copied technology. In contrast, it noted that where the infringer appeared to be ignorant of the existence of the patent right, and did not intend infringement, this type of penalty would not be appropriate. In an additional concurring opinion, Justices Breyer, Kennedy, and Alito stated their understanding that evidence showing that the infringer simply knew about the patent, and nothing more, would not be considered willful misconduct.

While an infringer may consult with legal counsel and obtain an opinion about the patent that would help demonstrate that their actions at the time were not willful or wanton, they are not required to do so. In other words, there is a separate section of patent law that explicitly states that the failure to obtain a legal opinion about the patent may not be used as negative evidence to prove that the accused party willfully infringed the patent. See 35 U.S.C. §289. Thus, we should not expect that enhanced damages awards should be awarded in “garden variety” patent infringement cases under the new Halo standard.

Do Halo Electronics and Stryker Get Increased Damages Awards?

This brings us back to the two cases that the Supreme Court reviewed in order to determine whether the willful infringement test was consistent with the patent statutes. In the Halo case, years before it filed a lawsuit, Halo Electronics sent Pulse two letters offering to license Halo’s patents. Evidently, a Pulse engineer concluded that Halo’s patents were invalid and Pulse continued to sell its electronic packages containing mountable transformers for circuit boards surfaces. At trial, the jury found that Pulse had infringed Halo’s patents, and that there was a high probability it had done so willfully. But the district court did not award enhanced damages after determining that Pulse had offered defenses at trial that were not a sham, or “objectively baseless,” meaning the objective recklessness prong of the Seagate test had not been satisfied in that case. Since that test is gone, the Federal Circuit will now be asked to determine whether the record evidence supports an enhanced damages award under the new Halo test. It may decide to send the case back to the district court to reconsider the issue in the first instance.

As for the Stryker case, it has also been returned to the Federal Circuit for review in light of the relaxed test created by the Supreme Court. Stryker and Zimmer Surgical compete in the market for orthopedic pulsed lavage devices used to clean tissue during surgery. During trial, the jury heard testimony that Zimmer had “all-but instructed its design team to copy Stryker’s products” and had chosen to aggressively compete in the market while worrying about the legal consequences later. Based on that evidence, the district court trebled the damages award under the willful infringement statute, but the Federal Circuit vacated these increased damages based on “reasonable defenses” Zimmer offered at trial. Again, the reasonable litigation position prong saved Zimmer, but that defense is now gone. So the Federal Circuit will now have to consider whether there is another reason to set aside the district court’s treble damages award under the Halo standard. It seems like Zimmer’s going to have a hard time demonstrating that the district court abused its discretion in awarding punitive damages for willful infringement in this case.

Looking Forward to Future Patent Disputes

 The new willful infringement test announced in the Halo and Stryker cases is not surprising. Two years ago, the Supreme Court killed a similar stringent two-part test the Federal Circuit created for analyzing whether, under the Patent Act (35 U.S.C. §285), an award of attorneys’ fees makes sense if a particular patent case is exceptional—if it stands apart from the average case. (See the Octane Fitness and Highmark decisions discussed above.) The district courts will now have more discretion to punish egregious infringer conduct while the Federal Circuit will be granted less discretion in modifying or overturning the district courts’ decisions. It will be interesting to see how this change in the law affects the percentage or types of cases in which the court awards additional damages for willful infringement of patents.

Photo Credit: Angela N.