On June 13, 2016, the Supreme Court of the United States set forth a new standard for awarding enhanced damages in patent infringement cases by striking down the Federal Circuit’s en banc Seagate framework as an “artificial construct” and allowing district courts to evoke the statutory discretion intended by Congress. Chief Justice John Roberts authored the opinion for the unanimous Court, which relied on the plain language of 35 U.S.C. § 284 and nearly two centuries of enhanced damages jurisprudence to overturn Seagate’s “objectively reckless” standard and the accompanying “trifurcated appellate review.” The Supreme Court declined to replace the Federal Circuit’s test with a specific analytical framework and instead explained that there is no precise rule or formula for awarding damages under § 284. Accordingly, the Court instructed district courts to exercise discretion in light of the particular circumstances at issue.

Background

In 2007, petitioner Halo Electronics, Inc. (“Halo”) sued respondents Pulse Electronics, Inc. and Pulse Electronics Corporation (collectively “Pulse”). The suit stemmed from Halo’s allegation that Pulse infringed its patents for electronic packages containing transformers designed to be mounted to the surface of circuit boards. The jury not only found that Pulse had infringed Halo’s patents, but also determined that there was a high probability that Pulse had done so willfully. Nevertheless, the district court declined to award enhanced damages because Pulse presented a litigation defense that “was not objectively baseless, or a sham” under Federal Circuit precedent. The Federal Circuit affirmed and Halo petitioned for certiorari.

In 2010, petitioners Stryker Corporation, Stryker Puerto Rico, Ltd., and Stryker Sales Corporation (collectively “Stryker”) sued respondents Zimmer, Inc. and Zimmer Surgical, Inc. (collectively “Zimmer”). Stryker alleged that Zimmer willfully infringed Stryker’s patents covering pulsed lavage devices that are used to clean tissue during surgery. The jury agreed with Stryker and found Zimmer liable for $70 million for having willfully infringed Stryker’s patents. The district court, having heard testimony that Zimmer had “all-but instructed its design team to copy Stryker’s products,” found that treble damages were appropriate under § 284. The Federal Circuit affirmed the judgment of infringement, but vacated the award of treble damages. Stryker petitioned for certiorari.

The Supreme Court granted each petition for certiorari and combined the cases. Upon resolution of the cases at bar, the Supreme Court vacated and remanded the Federal Circuit judgments.

The Supreme Court’s Decision

By statute, “the court may increase the damages up to three times the amount found or assessed” for patent infringement. 35 U.S.C. § 284 (emphasis added). However, in 2007, the Federal Circuit adopted a heightened two-part test for determining when a district court may increase damages pursuant to the statute. In re Seagate Technology, LLC, 497 F.3d 1360 (2007) (en banc). Specifically, the Seagate test required a patentee to show by clear and convincing evidence that (1) “the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,” and (2) the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” In short, the Supreme Court rejected the Seagate two-part test as unduly rigid and impermissibly encumbering the statutory grant of discretion to the district courts.

The Court’s opinion largely tracks, reaffirms, and cites heavily principles established in Octane Fitness, where the Supreme Court similarly rejected the Federal Circuit’s overly rigid approach to permitting district courts to exercise discretion in awarding attorneys’ fees to prevailing parties for “exceptional” cases. The Court faulted the Seagate test for “insulating some of the worst patent infringers from any liability for enhanced damages.” Specifically, the Court explained that Seagate’s heightened “objective recklessness” standard excluded from discretionary punishment the “wanton and malicious pirate” who intentionally steals the patentee’s business.

The Court explained that the Seagate test is inconsistent with the congressional intent of § 284 for at least three reasons: (1) culpability is assessed at the time of litigation rather than infringement, (2) the standard of proof for showing enhanced damages is too high, and (3) the appellate standard of review is too cumbersome. First, the Court explained that culpability is typically measured against the knowledge of the act at the time of the challenged conduct, rather than via post-hoc attorney argument. Accordingly, under Seagate, one “who plunders a patent—infringing it without any reason to suppose his conduct is arguably defensible—can nevertheless escape [liability] solely on the strength of his attorney’s ingenuity.” The Court determined that permitting an infringer to dodge enhanced damages for reasons not contemplated at the time of infringement is erroneous. Second, the Court explained that Seagate inappropriately requires the patentee to prove enhanced damages by clear and convincing evidence, rather than the preponderance of the evidence standard typically applied in patent infringement litigation. Third, the Court explained that the appellate review under Seagate erroneously required “trifurcated” review, i.e., (a) de novo review for objective recklessness, (b) substantial evidence for subjective knowledge, and (c) abuse of discretion for the ultimate question of enhanced damages. Rather, the Supreme Court held that enhanced damages are to be applied at the discretion of the district court, and the Federal Circuit is to review those decisions for an abuse of discretion.

Justice Breyer authored a concurring opinion, joined by Justice Kennedy and Justice Alito, to clarify four points in the Court’s opinion. First, the concurrence makes clear that “willful misconduct,” which may appropriately justify enhanced damages, is distinct from mere knowledge of the patent and that enhanced damages ought to be available “only in egregious cases.” Second, the concurrence cites § 298 to highlight that failure of an infringer to obtain advice of counsel may not be used to prove that the accused infringer willfully infringed. The concurrence relies on several amicus briefs to explain that such advice from counsel is often expensive and could be cost prohibitive for start-up companies. Third, the concurrence makes clear that enhanced damages are not to be used to compensate patentees for infringement-related costs or litigation expenses. Finally, the concurrence encourages the Federal Circuit to “take advantage of its own experience and expertise in patent law” while reviewing enhanced damages determinations for an abuse of discretion.

Practical Effects

By overturning the “unduly rigid” Seagate test, the Supreme Court’s decision has removed a bright-line rule developed by the Federal Circuit to provide district courts clear guidance when determining enhanced damages. The Supreme Court leaves open many questions for the district court’s discretion. For example, going forward, district courts will need to determine whether cases that are less than “egregious” warrant enhanced damages. Slip Op. at 11 (“Yet none of this is to say that enhanced damages must follow a finding of egregious misconduct.”); but see Concurring Op. at 1-2. Additionally, district courts will need to determine the proper role of freedom-to-operate opinions in deciding whether an infringer’s conduct was “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.” Slip Op. at 8; but see Concurring Op. at 2-3. Accordingly, moving forward, there may be an increased number of situations where clients should consider obtaining an “opinion letter” from patent counsel for the purpose of reducing the risk of enhanced damages for patent infringement.