Trolls v. Pirates: Supreme Court Oral Argument Reviewing Enhanced Damages

By Andrew Williams --

Earlier today, the Supreme Court heard oral arguments 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?

As suggested by the question in the Halo case, issues in these two cases are similar to those decided by the Court in the Octane Fitness and Highmark cases from the 2013-2014 term.  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."  An important distinction between these cases and the prior ones is that any change in the way that this statute is applied will only benefit patent owners.  As a result, not surprisingly, a theme that permeated throughout the argument today was whether pirates, or willful infringers, are as dangerous as the so-called trolls.  How the various Justices view this dichotomy will likely be determinative of the outcome of these cases.

The Petitioner

Jeffrey Wall, counsel for Stryker Corp., argued on behalf of both petitioners.  The position of both patent owners in this case was that the Federal Circuit had developed a test for enhanced damages that is too rigid.  According to In re Seagate Technologies, the currently controlling en banc Federal Circuit decision, a patent owner needs to show both (1) an alleged infringer acted despite an objectively high likelihood it was infringing the patent, and (2) the infringer knew or should have known of the risk.  As Mr. Wall put it, instead of focusing exclusively on "the nature of the infringement," the district courts also look to defenses developed by litigation counsel to get the accused infringer "off the hook."  Mr. Wall even quoted Justice Breyer from the Octane case in saying that "a patent lawyer can virtually always come up with some non-frivolous defense in litigation."

This was an opening for Justice Breyer to begin his questioning.  In what will not be a surprise to anyone, Justice Breyer began his comments with the following observation:  "Today's patent world is not a steam-engine world."  Unfortunately, this was followed up with:

We have decided to patent tens of thousands of software products and similar things where hardly anyone knows what the patent's really about.  A company that's a start-up, a small company, once it gets a letter, cannot afford to pay 10,000 to $100,000 for a letter from counsel, and may be willing to run its chances.

Mr. Wall responded a little later:

Because on the other side of the parade of horribles you're worried about are the people who can infringe, knowing that they can discount by the probability that they'll be found to have infringed in litigation with virtually no back-end penalty, even if they were a very bad infringer . . . .

When pressed for how to articulate a test by Justice Sotomayor, Mr. Wall again pointed to the nature of the infringement, and added "[t]hat needs to be intentional or reckless based on the facts as they were known to the infringer."  Moreover, Mr. Wall suggested taking into account the strength of the notice, such as "what kind of notice were they on the patent, and what would have been commercially reasonable in the industry as it exists."

The United States

Roman Martinez argued on behalf of the United States as amicus curiae.  He took the position that the Federal Circuit moved in the right direction with the Seagate case, but that they made two mistakes: (1) when "they said that in a case where you have subjective intent, that, in and of itself, is not enough to establish a case for enhanced damages," and (2) "with respect to how the recklessness inquiry is supposed to happen."  The problem with the latter is because the analysis is from the reasonable man with "the benefit of omniscience, giving him the benefit of hindsight and saying, what facts do we know at the time of trial?"

In what seemed uncharacteristic, Justice Breyer basically said that we should trust the Federal Circuit, because "we're not leaving it up to the 475 trial judges [] because those 475 trial judges don't see patent cases very much."  Justice Breyer again made his concern clear, this time speaking in the shoes of the Federal Circuit:  "And we are afraid that if we do not use this objective standard, what we will see is a major effect discouraging invention because of fear that if we try to invent, we'll get one of these letters and we can't afford $100,000 for an opinion."            

Respondant

Carter Phillips, counsel for Pulse Electronics, argued on behalf of the Respondents in this case.  For their part, Mr. Phillips argued to maintain the status quo.  In fact, Mr. Phillips highlighted two areas that he did not think should change:  (1) the de novo standard of review, and (2) the clear and convincing evidence standard.  Specifically, Mr. Phillips did not want to see discretion afforded to the lower court's decisions.  His reason was that whether there is an objectively reasonable basis for what has been done is basically a question of law.  With regard to maintaining the clear and convincing evidence standard, he provided two reasons.  First, the standard was in existence in 1985, and Congress didn't modify it with the America Invents Act.  Second, Mr. Phillips pointed out that they are talking about punitive damages, which should have a higher standard.

Justice Sotomayor took the counterpoint to Justice Breyer during Mr. Phillips argument.  After noting that "there's a whole lot of worry articulated by Justice Breyer," she went on to note that "there's not a whole lot of worry about protecting the patent owner."  She continued:

I can't forgot that historically enhanced damages were automatic, and they were automatic because of a policy judgment that owning a patent entitled you to not have people infringe willfully or not willfully.  And I accept that at some point there was a different judgment made that -- that good-faith infringers should be treated differently than other infringers, willful infringers.

But I don't know that that swung so far the other way that it can only be that, if you come up with something, any defense whatsoever in the litigation that's not frivolous, that that gets you out of enhanced damages.

It will clearly be the difference in this policy consideration will be determinative of how the Court will decide -- will the Court favor the pirates or the trolls.

Alexander Hamilton

On a final note, Justice Breyer attempted to provide a historical example:

[T]here was a company.  And the company made, I think, cotton goods.  And an individual thought that he could make a lot of money by taking those cotton goods and the machinery that they were used and selling it all over the United States.  And so he did it.  I think it was Alexander Hamilton.

Even though it is not clear that Justice Breyer had the correct historical figure in mind, it was a nice shout-out to Lin-Manual Miranda and his blockbuster hit on Broadway.  In fact, Justice Breyer is on record as being a fan of the show.  It was only too bad that Mr. Miranda didn't include a song about Thomas Jefferson helping to create the original patent system in his musical score.

Comments

[A Rational Person]

"We have decided to patent tens of thousands of software products and similar things where hardly anyone knows what the patent's really about."

And, yet, according to Justice Kennedy, any 2nd year engineering student would be able to create a software program to implement the claims of these patents over a weekend.

See, Alice v. CLS Bank oral argument

http://www.supremecourt.gov/oral_arguments/argument_transcripts/13-298_869d.pdf

Does anyone know why Justice Kennedy has not made his 2nd year engineering student available to Justice Breyer to explain what these "tens of thousands of software products" are about?

:-)