Willful Infringement and Enhanced Damages, following Halo

In Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. ___ (2016), the United States Supreme Court held that the Federal Circuit’s standard for determining whether damages may be increased pursuant to 35 U.S.C. § 284 (so-called “treble damages” test under In re Seagate Technology, LLC, 497 F.3d 1360) is not consistent with § 284.

Background

Section 284 of the Patent Act states that when infringement damages are found (i.e., in favor of a patent owner) “the court may increase the damages up to three times the amount found or assessed.”

Before Halo, the Federal Circuit had held that a plaintiff seeking enhanced damages under § 284 must show that the infringement was “willful,” and “willfulness” was demonstrated using a two-pronged test.

First, the patent owner had to “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.”

Second, the patent owner had to show, also by clear and convincing evidence, that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.”

The Supreme Court’s Halo Decision

The Supreme Court found, in Halo, that the Federal Circuit’s Seagate test “is unduly rigid” and “can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages.”

Following Halo, the subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.

The Court rejected the “objective recklessness” prong of Seagate, noting that “requiring an objective recklessness finding in every case … excludes from discretionary punishment many of the most culpable offenders.” The Court noted that if an infringer can muster a reasonable defense at trial, then even if that defense is unsuccessful the mere existence of such defense “insulates the infringer from enhanced damages, even if he did not act on the basis of the defense or was even aware of it.”

Rather, the Court noted, “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.” Thus, the Court concluded that “courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount … free from the inelastic constraints of the Seagate test.”

The Court also rejected the “clear and convincing” standard of proof, pointing out that “patent-infringement litigation has always been governed by a preponderance of the evidence standard.” The Supreme Court found that nothing in § 284 imposes any “specific evidentiary burden, much less such a high one.”

Finally, the Court rejected the Federal Circuit’s three-pronged appellate review framework for findings of willful infringement, under which the first step of Seagate—objective recklessness—was reviewed de novo, the second—subjective knowledge—was reviewed for substantial evidence, and the ultimate decision—whether to award enhanced damages—was reviewed for abuse of discretion. Instead, the Court concluded that all should be reviewed for simple “abuse of discretion.”

Strategies after Halo

Following the Supreme Court’s Halo decision, patent owners will be more likely to pursue claims of willful infringement and enhanced damages. Accused infringers cannot rely solely on the existence of objectively reasonable defenses to defeat a claim of willful infringement.

If a patentee can show that the accused infringer had knowledge at the time of the challenged conduct—e.g., knowing or having reason to know of facts which would lead a reasonable man to realize his actions were unreasonably risky—the court may find willful infringement even if the infringer’s defenses at trial are objectively reasonable. Worse, for defendants, determinations of willfulness will likely be made by juries, whose members will have little experience with patent cases when compared to most judges.

In view of Halo’s emphasis on subjective willfulness, potential infringers must consider building a record demonstrating that they did not act in bad faith. For example, a company may become aware of possible conflict between its activities and the patent rights of another, but reasonably decide not to take a license. To demonstrate that it is not acting in bad faith, the company should build its record showing the reasonableness of that decision.

Opinion letters from counsel, regarding non-infringement or invalidity, are an important and useful device in this regard. In the wake of Halo, they are even more important for defeating a willful infringement claim if raised in litigation.