1) New Hope for Patent Owners:
Supreme Court Eases the Path to
Enhanced Damages
CLIENT ALERT | June 14, 2016
Maia H. Harris | harrismh@pepperlaw.com
Bradley T. Lennie | lennieb@pepperlaw.com
UNDER THE NEW STANDARD, DISTRICT COURTS WILL HAVE CONSIDERABLY MORE
DISCRETION TO FIND THAT AN ACCUSED INFRINGER ACTED WILLFULLY AND ENHANCE
DAMAGES UP TO THREE TIMES THE AMOUNT OF COMPENSATORY DAMAGES.
On June 13, in Halo Electronics, Inc. v. Pulse Electronics, Inc. (available at http://www.
supremecourt.gov/opinions/15pdf/14-1513_db8e.pdf), No. 14-1513 (U.S. June 13, 2016),
the U.S. Supreme Court established a new standard for determining when a district court
may award enhanced damages in patent infringement cases. The decision followed the
same approach adopted in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S.
Ct. 1749 (2014), where the Court concluded that the broad statutory language governing
when a court may award attorney’s fees was at odds with the U.S. Court of Appeals
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2) for the Federal Circuit’s more narrow test for awarding attorney’s fees. Under the new
standard for enhanced damages in patent cases, district courts will have considerably
more discretion to find that an accused infringer acted willfully and enhance damages up
to three times the amount of compensatory damages.
The Court’s Analysis
Similar to the section governing the award of attorney’s fees, the patent statute provides
no guidance as to when enhanced damages are appropriate and, instead, simply states
that district courts “may increase the damages up to three times the amount found or
assessed.” 35 U.S.C. § 284. The Supreme Court’s unanimous opinion, authored by Chief
Justice Roberts, began by summarizing the long history of awarding enhanced damages
in patent infringement cases in the United States where the defendant’s infringement was
“wanton,” “malicious,” “intentional” or “in bad faith.” Halo, No. 14-1513, slip op. at 2-4. In
contrast to compensatory damages, enhanced damages have previously been described
as “vindictive and punitive” and were permitted under earlier versions of the patent statute
“according to the circumstances of the case.” Id. at 3 (internal quotations omitted). The
Supreme Court’s recent decision explained that lower courts had consistently awarded
enhanced damages when they determined that the accused infringer acted deliberately,
willfully or in bad faith.
The question presented to the Court in Halo and the companion case, Stryker Corp. v.
Zimmer, Inc., No. 14-1520, was whether the Federal Circuit erred in applying a rigid twopart test for deciding when enhanced damages are appropriate under 35 U.S.C. § 284.
In both cases, the Federal Circuit found that enhanced damages were not appropriate,
relying on the test it articulated in its 2007 en banc decision in In re Seagate Technology,
LLC, 497 F.3d 1360 (2007). Under the Seagate test, enhanced damages could only
be awarded when a patent owner showed, by clear and convincing evidence, that the
accused infringer “acted despite an objectively high likelihood that its actions constituted
infringement of a valid patent” and that the risk of infringement “was either known or so
obvious that it should have been known to the accused infringer.” Halo, No. 14-1513,
slip op. at 5. The Court concluded the Seagate test was inconsistent with the language
of the patent statute (which provides district courts with discretion to award enhanced
damages), as well as 180 years of cases establishing that enhanced damages should be
awarded when there is “egregious infringement behavior.” Id. at 8-9.
As a matter of substance, the Court first took issue with the requirement under
Seagate of finding “objective recklessness” in addition to a subjective element that
the infringer acted despite the fact that the infringer knew or should have known of
such an infringement risk. Id. at 9-10 (emphasis added). Under Seagate, an accused
3) infringer could avoid enhanced damages if they were able to develop an objectively
sound noninfringement or invalidity defense even after litigation ensued, for example.
Additionally, an infringer could avoid enhanced damages even if such a defense was not
known to the accused infringer at the time it was infringing and regardless of whether
the defense was ultimately successful. Id. The Court criticized the Seagate test because
it could “insulate[] the infringer from enhanced damages, even if he did not act on the
basis of the defense or was even aware of it.” Id. at 10. Instead, the Court stated, the test
for enhanced damages should focus on culpability for egregious behavior “measured
against the knowledge of the actor at the time of the challenged conduct.” Id. The opinion
stressed that the language of the statute itself provided the district court with discretion
on the issue of enhanced damages. Thus, while a finding of “egregious conduct” is not
a prerequisite to awarding enhanced damages, “such punishment should generally be
reserved for egregious cases typified by willful misconduct” and not for “garden variety
cases.” Id. at 11.
The Court also rejected the requirement under Seagate of proving willfulness by clear
and convincing evidence. Id. at 12. Consistent with the Court’s follow-on decision to
Octane Fitness in Highmark Inc. v. Allcare Health Management System, Inc., 134 S.
Ct. 1744 (2014) (addressing the appellate review standard for an award of attorney’s
fees), the Court noted that there is no basis for requiring a heightened standard of proof
for enhanced damages. Citing its reasoning in Octane, the Court again reiterated that
“patent-infringement litigation has always been governed by a preponderance of the
evidence standard.” Halo, No. 14-1513, slip op. at 12.
Finally, the Court rejected the Federal Circuit’s standard of appellate review on the
issue of enhanced damages. Id. at 12-13. Again relying on its reasoning in Octane and
Highmark, the Court rejected the Federal Circuit’s “tripartite framework” of review under
the Seagate standard, in which the determination of objective recklessness was reviewed
de novo, the determination of subjective knowledge was reviewed for substantial
evidence, and the ultimate determination on enhancement was reviewed for abuse of
discretion. Id. The Supreme Court held that the district court’s discretion on whether or
not to enhance damages should be reviewed on appeal for abuse of discretion.
Concurring Opinion
Several amici who submitted briefs in the case were concerned with the effect that
loosening the standards for willfulness may have on innovation and competitiveness.
A concurring opinion authored by Justice Breyer and joined by Justices Kennedy and
Alito addresses many of these concerns. The concurring opinion notes, for example,
that there are many scenarios where a business owner may elect not to respond or act
on a notice letter from a patent owner, who may never intend to enforce its patents in
4) litigation. That business owner may not be engaging in reckless behavior justifying an
award of enhanced damages. Id., slip op. at 4 (Breyer, J., concurring). Further, Justice
Breyer notes that not all small businesses may be able to afford obtaining an opinion of
counsel and that a failure to obtain an opinion need not prescribe a finding of enhanced
damages. Id. at 2-3 (“an owner of a small firm, or a scientist, engineer, or technician
working there, might, without being ‘wanton’ or ‘reckless,’ reasonably determine that its
product does not infringe a particular patent, or that that patent is probably invalid.”). The
concurrence also notes that, due to the Federal Circuit’s expertise on patent issues, there
may be instances where a district court improperly awards enhanced damages because
it erroneously misapprehended the reasonableness of a patent defense. Id. at 5. In such
a case, the Federal Circuit would be within its purview to find an abuse of discretion. Id.
Justice Breyer’s concurrence may provide accused infringers with some comfort in its
observation that enhanced damages should be not be abandoned, but rather carefully
applied “to ensure that they only target cases of egregious misconduct.” Id. at 5.
Given the new standard articulated in Halo, the task will largely fall on the district
courts to sort out what behavior will be deemed “egregious,” warranting enhanced
damages, and what behavior will be characterized as merely routine or “garden variety”
infringement.
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