The Supreme Court to Review Enhanced Damages -- Octane Revisited, or Something Entirely Different?

By Andrew Williams --

On October 19, 2015, the Supreme Court granted certiorari in two related cases:  Halo Electronics, Inc. v. Pulse Electronics, Inc. (Supreme Court docket number 14-1513) and Stryker Corp. v. Zimmer, Inc. (Supreme Court docket number 14-1520).  The issue on appeal in the Halo case was limited to Question 1 presented in the petition:

QUESTION PRESENTED:

1.  Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285.

In the Stryker case, the questions that will be considered are:

1.  Has the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. § 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. § 285, the statute providing for attorneys' fee awards in exceptional cases?

2.  Does a district court have discretion under 35 U.S.C. § 284 to award enhanced damages where an infringer intentionally copied a direct competitor's patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention?

Of course, Octane Fitness was one of the more significant Supreme Court cases in recent history.  That case, along with the other 2013-2014 term cases of Highmark, Alice and Nautilus, was seen as addressing the so-called "patent troll" problem.  After Octane Fitness, district courts had much greater flexibility in awarding attorney's fees to the prevailing party, and Highmark made it more difficult to overturn that award on appeal.  And even though Octane and Highmark apply equally to both prevailing plaintiffs and defendants, it was seen as a victory for parties facing abusive patent litigation from non-practicing patent owning entities.

The relevant statute in the present case(s), on the other hand, only applies to one set of parties -- accused infringers.  The relevant text of this section of the statute reads:  "In either event the court may increase the damages up to three times the amount found or assessed."  As a comparison, the text of the statute at issue in Octane Fitness (35 U.S.C. § 285) reads:  "The court in exceptional cases may award reasonable attorney fees to the prevailing party."  The enhanced damages statute has been interpreted as containing a "willfulness" requirement, even though no such words appear in the statute.  See, e.g., In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (en banc) ("Absent a statutory guide, we have held that an award of enhanced damages requires a showing of willful infringement.").  This may begin to give a clue as to why cert was granted in this case.

However, as the questions presented suggest, the Federal Circuit had developed a similar two-part test to assess willfulness as had been used to determine whether a case was exceptional, both containing a subjective and objective component.  In the case of 35 U.S.C. § 285, the Federal Circuit had held that a case is only exceptional when "both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless," absent misconduct in litigation or in securing the patent.  See Brooks Furniture Mfg. v. Dutailier, Inc., 393 F.3d 1378 (Fed. Cir. 2005).  Similarly, the Federal Circuit in Seagate had held that a finding of willfulness required a showing that the defendant (1) "acted despite an objectively high likelihood that its actions constituted infringement of a valid patent," and that (2) "this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer."  One of the difficulties though, as Halo outlined in its petition, is that almost any accused infringer can "concoct a defense," such as "arguing the patent is invalid as obvious under 35 U.S.C. § 103 by using the advantage of hindsight to locate and combine bits and pieces from prior publications to yield the invention."  Another problem, as noted by Judges O'Malley and Hughes in dissent from the Federal Circuit's denial of Halo's petition for rehearing en banc, is that the "evidentiary wall . . . erected between the objective and subjective portions of the inquiry," "preclude[s] consideration of subjective bad faith -- no matter how egregious -- from informing" the objective prong inquiry.

It would seem, therefore, by looking at the Supreme Court's reasoning in Octane, that the outcome of this case is certain.  The Octane Court did away with the rigid two-part test, and instead introduced a flexible standard for finding a case exceptional -- whether it stands out from other cases.  However, the comparison of the Octane case to that of enhanced damages does not take into account the presumed undercurrent of the Octane case -- that attorney's fees can be used to assist lower courts in deterring abusive patent litigation.  No such similar outrage has been expressed in the mainstream media about blatant patent infringers that flout the legitimate intellectual property rights of patent holders.  In fact, in the petition, Halo stressed that "[p]atents are the most valuable assets that many small businesses possess–they are often started with a valuable idea and little else."  However, as we have seen, if such small businesses asset their patent rights before being able to commercialize their products, they are labelled as "non-practicing entity," or worse, "patent trolls."  And, we cannot overlook the fact that if the standard to obtain enhanced damages is relaxed, truly nefarious NPEs will be able to use this to their advantage when attempting to extract settlements from accused infringers.  As a result, even though the present case(s) should be dictated by Octane Fitness, it will be interesting to see if the political climate will cause the Court to treat these two similar statutes differently.

Patent Docs will continue to monitor this case and provide any updates as warranted.

Comments

[The Memory Motel]

"No such similar outrage has been expressed in the mainstream media about blatant patent infringers that flout the legitimate intellectual property rights of patent holders."

Here's an idea: try to find some "patent holders" who are a bit more sympathetic than the "patent holders" you typically defend here.

You might find traction that way.

Better hurry, though, or some "legitimate" "little guy" working hard in his garage might patent this traction-gaining scheme and come after you with this awesome patent.

[Read the Order]

The issue on appeal was not limited to question 1 of Halo's petition. Halo's petition was granted limited to question 1. Stryker's petition was granted.

[EG]

Hey Andrew,

Like the "man behind the curtain" in the Wizard of Oz, I would suggest you ignore the comment from TMM (aka "Malcolm Mooney", aka "MM").