With the Supreme Court’s decision in Halo Electronics overruling the 2007 Seagate case, non-practicing entities (“NPEs”) may resume an old, familiar practice to enable them to make a case for willful infringement. See Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (June 13, 2016); See also In re Seagate Technology LLC, 497 F.3d 1360 (Fed. Cir. 2007). Before the Federal Circuit decision in Seagate, NPEs would often send a list of patents in their possession to numerous businesses which possessed or produced items or utilized processes which in the view of the NPE arguably infringed any of the patents on the list. The reason for sending the list was to set up a claim for willful infringement against any parties whom the NPE sued in court by demonstrating that the parties being sued had notice of the listed patents, and chose to continue their allegedly infringing activities anyway. A recipient of the list risked liability for willful infringement, which may be penalized with up to treble (triple) damages.
Prior to Seagate, to avoid being found liable for willful infringement, businesses receiving such a list would seek legal counsel to review the listed patents and provide an opinion as to whether the business infringed the listed patents. If the opinion of counsel indicated possible infringement, the business would have the option of trying to license the patented idea or to simply avoid its use in their business activities. However, if the opinion of counsel instead indicated non-infringement, the business may choose to proceed with their business activities under a colorable argument that even if they were found to have infringed the NPEs’ patents, the non-infringement opinion negated the intent requirement necessary to find willful infringement.
After Seagate, however, this practice was dramatically reduced. In Seagate, the Federal Circuit created a two-part test for willful infringement, which created a new path for infringing parties to follow to avoid being liable for willful infringement. Seagate, 497 F.3d at 1384. In Seagate, the CAFC held that 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. Id. In other words, Seagate established that to hold a party liable for willful infringement and pursue enhanced damages, there must be at least a showing of objective recklessness. Id.
As noted by the Court in Halo, the decision in Seagate created a situation whereby a district court is not permitted to even consider enhanced damages for a willful infringer, going so far as to call such a person a pirate, unless the court first determines that the infringement was objectively reckless. Halo, 136 S.Ct. at 1932. The problem with Seagate, as identified by the Court in Halo, arises where a patent infringer’s subjective willfulness may warrant enhanced damages, but is able to muster a reasonable defense at trial, even if the infringer did not act on the basis of the defense or was unaware of the defense at the time of action. Halo, 136 S. Ct. at 1926, 1930.
The Supreme Court overruled Seagate and instead instructs federal courts to use their discretion in deciding when parties guilty of infringement may be described as engaging in behaviors that are considered “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or – indeed – characteristic of a pirate.” Halo, 136 S. Ct. at 1932. In other words, courts may award enhanced damages in egregious cases of culpable behavior. Id.
What does that mean for affected parties going forward? Under Seagate, many companies chose to eschew legal counsel when presented with examples of patents which they may potentially infringe, instead choosing to rely on Seagate’s heightened standard of clear and convincing evidence as well as being able to mount a defense that any alleged infringement was not “objectively reckless,” as was required under Seagate for enhanced damages.
After Halo, parties would be smart to resume their previous practice of seeking out legal advice, from a patent attorney, regarding any activities that the party believes may run the risk of infringing a broadly construed patent. While there is no affirmative duty to seek out legal advice and failure to do so may not be used against a party, as codified in 35 USC § 298, taking the initiative to have a legal opinion concerning infringement prepared likely will be viewed very favorably by a court in attempting to determine intent of a party found to have infringed a valid patent. Any evidence that a potentially infringing party investigated and after such an investigation had reasons to believe their behavior was not infringing would likely influence a court using its discretion to determine if enhanced damages are warranted.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
[View source.]
