Supreme Court Considers Standard For Enhanced Infringement Damages

Last week the Supreme Court heard arguments in two consolidated cases addressing the issue of how much discretion a court should have to award a patent holder enhanced damages for infringement.[1]

The statute in question, 35 U.S.C. § 284, states that when patent infringement has been found, the court or jury shall award the patent holder damages amounting to at least a reasonable royalty, plus any interest and costs determined by the court.  The statute also states that “the court may increase the damages up to three times the amount found or assessed.”  The statute provides no guidance about when such enhanced damages would be appropriate.

However, in In re Seagate, the Federal Circuit established a 2-prong test for enhanced damages under which “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” and “must also demonstrate that this objectively-defined risk […] was either known or so obvious that it should have been known to the accused infringer.”[2]

In both of the cases before the Supreme Court last week, the Federal Circuit below found that the infringer’s activities did not meet the Seagate standard for enhanced damages, despite jury verdicts of willful infringement.  In particular, the Court found that the first prong of the test was not met because the defendants had presented “non-frivolous” invalidity arguments at trial, which prevented a finding of an “objectively high likelihood that its actions constituted infringement of a valid patent.”

On appeal, the patent owners, Halo Electronics and Stryker, Inc. (Petitioners), are asking the Supreme Court to reject the “narrow, rigid framework” of Seagate in favor of a more flexible, discretionary standard.  Jeffrey Wall, counsel for the Petitioners, argued that enhanced damages should be based on an assessment of the infringer’s intent at the time of the infringing activity, rather than any “after-the-fact defenses” prepared in the course of litigation.[3]  Under the rigid Seagate standard, Mr. Wall argued that there is “almost a per se bar” against awarding enhanced damages, because “[e]ven if [the infringer] acted intentionally at the time […] what the Federal Circuit says is, if you can hire good lawyers and come up with defenses in litigation, you’ll be off the hook.”[4]  This position is supported by the Department of Justice, which presented oral arguments to the Court and filed an amicus brief in support of the Petitioners.

On the other side of the argument is the concern about the harm to innovation that could arise if the burden for enhanced damages is set too low.  Carter Phillips, arguing on behalf of the Respondents, Pulse Electronics and Zimmer, Inc. warned that:
if we don’t have a strong enough standard of recklessness and willfulness and an objective standard that can be examined by us independently, the downside risks and the harm to the economy is very substantial.[5]

A key issue in this debate is the whether the failure to obtain an opinion of counsel before embarking on potentially infringing conduct is evidence of willfulness.  The Seagate court held that there is no affirmative duty to obtain an opinion of counsel.  Justice Breyer echoed the Respondents’ concerns that overturning the Seagate framework would place a disproportionate burden on small companies operating in patent-rich industries to obtain patent opinions:

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 startup, 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.  You start saying, little company, you must pay $10,000 to $100,000 to get a letter, lest you get willful damages against you should your bet be wrong.[6]

Justice Sotomayor indicated that she doesn’t think that the Seagate test is appropriate, but asked Respondents’ counsel, Carter Phillips, how he would properly balance the concerns about innovation and small businesses, against the interests of patentees to prevent willful infringement of their patent rights.[7]

Mr. Phillips recast this question of opposing interests as “what do you worry about more, pirates or trolls?”[8]  The Respondents argue that pirates (i.e., blatant, bad-faith infringers) are much less common than trolls (i.e., parties that abusively enforce patents which may be of questionable validity), and therefore it is better to err on the side of the pirates by making the burden of proving willfulness high.  This position is supported by a significant number of amicus curiae briefs filed by representatives of the software and technology industry, including Google, Dell and Intel, among others.  Furthermore, Mr. Phillips pointed out that the Seagate rule requires an objectively reasonable belief that the patent would be found valid and infringed, and not merely a non-frivolous argument, so avoiding enhanced damages under Seagate still requires the defendant to present a substantial defense.

Justice Roberts appeared to side with the Petitioners in suggestion that the Seagate standard is overly restrictive, pointing out that the body of case law interpreting §284 before Seagate “wears a channel which kind of confines the exercise of discretion.  But to erect this fairly elaborate standard on the basis of that language I think is surprising.”[9]

The outcome of this case will be of significance to companies that operate in patent-rich environments, such as those in the biotechnology, pharmaceutical and high-tech industries.  Should the Court overturn the Seagate framework, start-ups trying to break into these industries may be forced to seek formal legal opinions and/or patent licenses much earlier in the commercial process than is currently required under the Seagate standard.  Likewise, if the standard for enhanced damages is loosened, patent holders may find an increased financial incentive to pursue infringement actions where there is evidence of willful conduct.

[1] Halo Electronics v. Pulse Electronics (Docket No. 14-1513) and Stryker Corp. v. Zimmer, Inc. (Docket No. 14-1520)
[2] In re Seagate Technology, LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007).
[3] Argument Transcript, 6:1-5.
[4] Id., 9:6-9.
[5] Id., 42:3-7
[6] p. 10:15-24
[7] Id., 38:16-18
[8] Id., 53:15-16
[9] Id., 41:9-13