Supreme Court Unanimously Rejects Federal Circuit’s Enhanced Damages Standard For Patent Infringement

On June 13, 2016, the Supreme Court issued its unanimous opinion in Halo Electronics v. Pulse Electronics (available here). Halo rejected the Federal Circuit’s Seagate test for enhanced damages.

The Patent Act specifies that, in cases of infringement, “the court may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284. The Federal Circuit had applied a multi-part test, founded upon In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007) (en banc), to determine the circumstances when an award of enhanced damages was appropriate:

[Under the Federal Circuit’s test], a plaintiff seeking enhanced damages must show that the infringement of his patent was “willful.” The Federal Circuit announced a two-part test to establish such willfulness: First, “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 objectively defined risk is to be “determined by the record developed in the infringement proceedings.” “Objective recklessness will not be found” at this first step if the accused infringer, during the infringement proceedings, “raise[s] a ‘substantial question’ as to the validity or noninfringement of the patent.” That categorical bar applies even if the defendant was unaware of the arguable defense when he acted.

Second, after establishing objective recklessness, a patentee must show—again 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.” Only when both steps have been satisfied can the district court proceed to consider whether to exercise its discretion to award enhanced damages.

Then, under Federal Circuit law, an award of enhanced damages would be subject to “trifurcated” appellate review:

The first step of Seagate—objective recklessness—is reviewed de novo; the second—subjective knowledge—for substantial evidence; and the ultimate decision—whether to award enhanced damages—for abuse of discretion.

Hardly anything about Seagate survived Halo. Halo found:

• Enhanced damages “are not to be meted out in a typical infringement case, but are instead designed as a ‘punitive’ or ‘vindictive’ sanction for egregious infringement behavior” which has been described as “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.”

• Enhanced damages are “generally reserved for egregious cases of culpable behavior.”

• Seagate’s test “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.” “[I]t can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages.”

• Objective recklessness need not be found before district courts may award enhanced damages. “In the context of [] deliberate wrongdoing, [] it is not clear why an independent showing of objective recklessness—by clear and convincing evidence, no less—should be a prerequisite to enhanced damages.”

• “The subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.”

• “[C]ulpability is generally measured against the knowledge of the actor at the time of the challenged conduct” not on the strength of the actor’s “attorney’s ingenuity.”

• Enhanced damages need not follow a finding of egregious misconduct. “[C]ourts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.”

• Enhanced damages “should generally be reserved for egregious cases typified by willful misconduct.”

• “Bad-faith infringement” is an independent basis for enhancing patent damages, and a showing of objective recklessness is not required.

• The enhanced damages determination is not governed by a clear and convincing standard of proof—a preponderance of the evidence standard applies.

Finally, Halo rejected the Federal Circuit’s “tripartite” framework for appellate review. Enhanced damages awards should be reviewed for abuse of discretion. Appellate review should be informed by “the considerations . . . identified” by the Supreme Court.

In light of its holdings, Halo is a very favorable decision for patent holders. For example, post-Seagate, many defendants had basically ignored patentees’ assertions of infringement, relying on the fact that, under Seagate, so long as the defendant came up with an “objectively reasonable” defense of either non-infringement or invalidity by the time of trial, enhanced damages could not be awarded. Halo, however, made it clear in no uncertain terms that engaging in this conduct will not preclude an award of enhanced damages. Other notable aspects of Halo are that the Federal Circuit will no longer review enhanced damages awards de novo, and a clear and convincing standard of proof no longer applies to the enhanced damages inquiry.