By Kevin E. Noonan --
The aphorism that "[t]he race is not always to the swift nor the battle to the strong, but that's the way to bet," variously attributed to Damon Runyon, Franklin P. Adams, and Hugh Keough, could readily be updated to include that "Federal Circuit opinions are not always overturned by the Supreme Court" because recently that is decidedly the way to bet. And had anyone bet on the Court reversing (formally, vacating and remanding) the Federal Circuit's In re Seagate Tech. LLC jurisprudence they would have been in the money, because that is just what the Court did today in Halo Electronics, Inc. v. Pulse Electronics, Inc. and a companion case, Stryker Corp. v. Zimmer, Inc.
To recap, the statute (35 U.S.C. § 284) provides that a district court "may increase the damages [awarded to a patentee against an infringer] up to three times the amount found or assessed." The Federal Circuit's Seagate test created a two-pronged analysis for deciding willfulness, wherein a district court was instructed to find that infringement occurred "despite an objectively high likelihood" that the accused infringer's actions constituted infringement, as well as a subjective component, that the risk of infringement "was either known or so obvious that it should have been known to the accused infringer." Moreover, the evidentiary standard under the Seagate test was, for each prong, clear and convincing evidence. As a consequence, Seagate also provided a "trifurcated" standard of appellate review: de novo for the objective prong, substantial evidence for the subjective prong, and abuse of discretion for the overall determination of whether willful infringement would lie under particular circumstances.
Regarding the cases at bar, in Halo a jury found infringement but the District Court refused to award enhanced damages, despite evidence that defendant Pulse knew of the patents (because Halo had written, twice, offering a license), because Halo had not established the objective recklessness prong of the Seagate test. The Federal Circuit affirmed. In Stryker, the District Court enhanced a jury award against defendant Zimmer from $76.1 million to over $228 million based on willful infringement. But the Federal Circuit reversed the enhanced award, holding that Zimmer had asserted "reasonable defenses" at trial and despite a jury finding that Zimmer had "all-but instructed its design team to copy Stryker's products" and had adopted an aggressive stance in competing with Stryker while "opt[ing] to worry about the potential legal consequences later."
Chief Justice Roberts delivered the opinion of the unanimous Court that swept away these complexities for a simple discretionary standard to be applied by district courts and the Federal Circuit. The Court' s opinion first focused on the language of the statute itself, wherein a court "may" award enhanced damages but was not required to do so ("we have emphasized that the 'word "may" clearly connotes discretion,'" citing Martin v. Franklin Capital Corp., 546 U. S. 132, 136 (2005) (quoting Fogerty v. Fantasy, Inc., 510 U. S. 517, 533 (1994)). However, in the very next sentence the opinion cautions that "discretion is not a whim," according to Martin, and that this discretion is dependent on a district court's judgment "guided by sound legal principles." While eschewing any "precise rule or formula" the Court directs district courts to exercise its discretion "'in light of the considerations' underlying the grant of that discretion," citing Octane Fitness, LLC v. ICON Health & Fitness Inc., 572 U. S. ___, ___ (2014). The Court emphasizes that enhanced damages should not be "meted out in the typical infringement case" but are warranted only for "egregious infringement behavior" (providing a host of synonyms for such behavior, including "willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or -- indeed -- characteristic of a pirate"). While acknowledging "180 years" of patent decisions regarding enhanced damages the Court also recognizes that "the channel of discretion ha[s] narrowed," citing Friendly, Indiscretion About Discretion, 31 Emory L.J. 747, 772 (1982), and that enhanced damages "are generally reserved for egregious cases of culpable behavior."
The Court found precedent for its decision in its case law going back to the beginning of the U.S. patent system, wherein the initial provision of treble damages for all infringement was changed (in the 1836 Patent Act) to be limited to cases of infringement by the "wanton and malicious pirate." Seymour v. McCormick, 16 How. 480, 488 (1854). This provision was expressly punitive, and as such not warranted by infringement undertaken in "ignorance or good faith." This cabining of enhanced damage award to cases of egregious conduct found support in Dean v. Mason, 20 How. 198, 203 (1858) ("aggravated circumstances"), contrasted with unintentional infringement due to ignorance regarding the patent (Hogg v. Emerson, 11 How. 587, 607 (1850). This limit on enhanced damages was maintained in the 1870 Patent Act as interpreted by the Court, including cases where enhanced damages were justified, Tilghman v. Proctor, 125 U. S. 136, 143–144 (1888); Topliff v. Topliff, 145 U. S. 156, 174 (1892), and those where they were not, Cincinnati Siemens-Lungren Gas Illuminating Co. v. Western Siemens-Lungren Co., 152 U. S. 200, 204 (1894). The opinion further distinguished apparently contrary precedent as being "not for the ages," Clark v. Wooster, 119 U. S. 322, 326 (1886), or being more properly directed to attorneys' fees awards, which are now the province of Section 285 of the Patent Act, such as Day v. Woodworth, 13 How. 363, 372 (1852), and Teese v. Huntingdon, 23 How. 2, 8–9 (1860). Finally, the Court found support for its interpretation of Section 284 in earlier cases directed to its proper ambit, such as Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U. S. 476, 505, n. 20 (1964); Dowling v. United States, 473 U. S. 207, 227, n. 19 (1985); and Florida Prepaid Postsecondary Ed. Expense Bd. v. College Savings Bank, 527 U. S. 627, 648, n. 11 (1999).
With this backdrop, the opinion states that the Seagate test "reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under §284 only in egregious cases." But, as has so frequently been the case, the Court concludes that the test "is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts," just as it did in Octane Fitness in 2014. One example of this rigidity is the Court's apprehension that the test might "insulat[e] some of the worst patent infringers from any liability for enhanced damages"; in the Court's view, the objective prong precluded a finding of willfulness categorically provided that the accused infringer could mount a colorable challenge at trial to a patent's validity or the infringer's non-infringement of it (regardless of whether the infringer appreciated these grounds when commencing infringement) as being one example of this risk. This "threshold requirement" for finding willfulness liability under the Seagate test "excludes from discretionary punishment many of the most culpable offenders, such as the 'wanton and malicious pirate' who intentionally infringes another's patent -- with no doubts about its validity or any notion of a defense -- for no purpose other than to steal the patentee's business." Under these circumstances the Court can see no basis for requiring an "independent showing" of objective recklessness (by clear and convincing evidence no less) in the face of evidence of intentional infringement. In this regard the Court cites its recent decision in Octane Fitness for the principle that "subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless." This standard of "knowledge of the actor at the time of the challenged conduct" is also consistent with traditional tort law principles according to the Court.
Nevertheless, the opinion is also careful to state that merely finding egregious misconduct does not require a district court to award enhanced damages. The lodestar is discretion, wherein a district court "take[s] into account the particular circumstances of each case in deciding whether to award damages, and in what amount."
The opinion also disagrees with the Federal Circuit's clear and convincing evidence standard for recklessness, finding no basis in the statutory language (and particularly with reference to other statutory provisions that recite the clear and convincing evidentiary standard).
Finally, consistent with its rejection of the Seagate test, the opinion also rejects the Federal Circuit's "tripartite" nature of appellate review. The proper standard is abuse of discretion, following the Court's similar rejection of multipart standards of review in Highmark Inc. v. Allcare Health Management System, Inc., 572 U. S. ___ (2014). And while the Court recognizes the Federal Circuit's concerns ("The appellate review framework adopted by the Federal Circuit reflects a concern that district courts may award enhanced damages too readily, and distort the balance between the protection of patent rights and the interest in technological innovation") the Court also believes that "[n]early two centuries of exercising discretion in awarding enhanced damages in patent cases  has given substance to the notion that there are limits to that discretion."
With regard to the concerns of Respondents and certain amici, that "allowing district courts unlimited discretion to award up to treble damages in infringement cases will impede innovation as companies steer well clear of any possible interference with patent rights," particularly from the dreaded "trolls," the Court acknowledges the risk that the "careful balance" between the need for patents to promote innovation and the importance of encouraging "imitation and refinement" could be disrupted "if enhanced damages are awarded in garden-variety cases." But "they should not be," says the Court, providing the most certain instruction to district courts and limitations of enhanced damages awards that the Court believes to be consistent with traditional application of the statute.
Justice Breyer concurred, in an opinion joined by Justices Kennedy and Alito. The concurrence gave voice to Justice Breyer's well-worn concerns regarding the burden on innovation occasioned by the need for due diligence in the form of a clearance opinion, bolstered by several amici who would rather not be bothered by patenting in the first place. One particular concern for the concurring Justices is that the Court's opinion should not be taken by district courts to mean willful misconduct can be established by knowledge of the patent "and nothing more." In this regard the concurrence stresses the "context" of the behavior as contributing to its characterization as "willful" or "wanton":
I describe these limitations on enhanced damages awards for a reason. Patent infringement, of course, is a highly undesirable and unlawful activity. But stopping infringement is a means to patent law's ends. Through a complex system of incentive-based laws, patent law helps to encourage the development of, disseminate knowledge about, and permit others to benefit from useful inventions. Enhanced damages have a role to play in achieving those objectives, but, as described above, that role is limited.
Once again Justice Breyer resorts to the balance between the "helpfulness" of an opinion of counsel to "help draw the line between infringing and noninfringing uses" and "the costs and consequent risk of discouraging lawful innovation," concerns accentuated by several amici. Also of concern is the "troll" question, with the Justice citing the practice of using patents to obtain licensing fees (and, curiously citing Thomas Jefferson regarding "the abuse of frivolous patents"). The Justice draws the conclusion, assuming that letters offering licenses are somehow an abuse of the patent system, that "[t]he more that businesses, laboratories, hospitals, and individuals adopt this approach, the more often a patent will reach beyond its lawful scope to discourage lawful activity, and the more often patent-related demands will frustrate, rather than 'promote," the "Progress of Science and useful Arts'" (in rhetoric thus "begging the question").
As for the majority opinion, to some degree the Court has made less burdensome a patentee's task of establishing willful infringement, by lowering the evidentiary standard ("patent-infringement litigation has always been governed by a preponderance of the evidence standard"; Octane Fitness) and by eliminating the "high bar" of establishing objective recklessness. However the Court was just as adamant that enhanced damages should not be available for "garden-variety infringement" and thus the Federal Circuit's Seagate standard as been supplanted (as in so many other areas of the patent law) by a much less defined, "totality of the circumstances" test. While Justice Breyer may admonish the Federal Circuit to "take advantage of its own experience and expertise in patent law" in reviewing a district court's performance in awarding enhanced damages, it will be interesting to see the extent to which the Court is willing to give credence to the Federal Circuit in doing so.
Halo Electronics, Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer, Inc. (2016)
Opinion by Chief Justice Roberts; concurring opinion by Justice Breyer, joined by Justices Kennedy and Alito