Supreme Court Rejects Seagate Test for Willful Patent Infringement; Trial Court Has Full Discretion To Award Enhanced Damages

June 20, 2016

The Supreme Court recently ruled that enhanced damages for patent infringement (35 U.S.C §284) are a matter for the trial court’s discretion that will be reviewed on appeal only for an abuse of discretion.  Halo Electronics v. Pulse Electronics, Case No. 14-1513 (June 13, 2016).  The Justices thus rejected the “Seagate Test” for “willful infringement” adopted nine years ago by the Federal Circuit, holding that Seagate:

 

  • “impermissibly encumbers” a district court’s discretion to award enhanced damages; and

  • imposes a higher evidentiary standard of proof (clear and convincing evidence) than the standard Congress intended (preponderance of the evidence).

 

Specifically, the High Court ruled that “the pertinent text of §284 provides simply that the court may increase damages up to three times the amount found or assessed,” and thus places “no limit or condition” on the district courts’ discretion (slip op. at 7-8).  The opinion cautioned that the district court’s authority is not boundless, but concluded that Seagate unduly restricts the lower courts’ power “to punish the full range of culpable behavior” (slip op. at 8, 11):

 

The principal problem with Seagate’s two-part test is that it requires a finding of objective recklessness in every case before the district court may award enhanced damages.  Such a threshold requirement excludes for discretionary punishment many of those culpable offenders, such as the wanton and malicious pirate, who intentionally infringes another’s patent – with no doubts as to its validity or any notion of a defense – for no purpose other than to steal the patentee’s business.” (slip op. at 9).

 

The Supreme Court said “there is no precise rule or formula" for awarding damages under 284, but urged district courts to “take into account the particular circumstances of each case” and certain “considerations” identified by the Supreme Court. (Id. at 8, 11, 13).  For example, the Court advised that because enhanced damages are punitive and vindictive, they should “generally be reserved for egregious cases typified by willful misconduct,” such as “deliberate,” “conscious,” “willful” or “bad faith” infringement.  

 

The Court further instructed district courts to focus on an infringer’s knowledge at the time of infringement, stating: “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct”—not on after-the-fact excuses as in the rejected Seagate Test:

 

The Seagate test aggravates the problem by making dispositive the ability of the infringer to muster a reasonable (even though unsuccessful) defense at the infringement trial. The existence of such a 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. Under that standard, someone who plunders a patent—infringing it without any reason to suppose his conduct is arguably defensible—can nevertheless escape any comeuppance under §284 solely on the strength of his attorney’s ingenuity.  But culpability is generally measured against the knowledge of the actor at the time of the challenged conduct. (slip op. at 10).

 

The Court added that an infringer’s subjective bad faith or culpable intent can be sufficient to justify enhanced damages, regardless of whether the infringement is “objectively reckless;” in other words, regardless of the quality of any later identified defenses to the patent (Id. at 10).

 

Finally, the Court also rejected the clear and convincing standard of proof required by Seagate; it reasoned that §284 “imposes no specific evidentiary burden, much less a high one.  And the fact that Congress expressly erected a higher standard elsewhere in the Patent Act, but not in §284 is telling.” (Id. at 12).  Moreover, “patent infringement litigation has always been governed by a preponderance of the evidence standard.  Enhanced damages are no exception.” (Id.).

 

A concurring opinion written by Justice Breyer and joined by Justices Kennedy and Alito proposes some additional “considerations” (or “limits”) for the district courts to weigh when exercising their discretion. First, it states that mere knowledge of the patent and “nothing more” will not justify enhanced damages: “it is ‘circumstance’ that transforms simple knowledge into such egregious behavior, and that makes all the difference.” (concurring op. at 2).  Next, Justice Breyer reiterates the concerns he raised during oral argument regarding the cost of seeking the advice of counsel to assess a patent threat, and a related risk that small firms unable to afford such guidance might refrain from innovation out of fear of punitive damages.  He first notes that the Court does not want to weaken the statutory rule in §298 that an infringer’s failure to seek advice of counsel may not be used to prove willful infringement.  This rule properly protects small businesses to allow them to get “up and running.” For these types of firms, Breyers proposes that a scientist or engineer could make a determination of non-infringement or patent invalidity, and this determination could be sufficient to demonstrate the absence of “wanton” or “reckless” infringement. (concurring op. at 2 – 3).  But he follows this proposal by noting the benefits of seeking legal counsel:

 

I do not say that a lawyer’s informed opinion would be unhelpful.   To the contrary, consulting counsel may help draw the line between infringing and non-infringing uses. (concurring op. at 3).

 

Breyer concludes that Congress has chosen not to “insist” that companies seek the advice of counsel, and instead “has left it to the potential infringer to decide whether to consult counsel.” (concurring op. at 3).

 

So how should a company now react when confronted by a patent threat?  Timely identifying a good-faith defense clearly helps mitigate the risk of enhanced damages because, in the words of Halo, “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.”   Although the company has no obligation to seek legal advice and cannot be criticized for failing to do so, it can reduce the risk of enhanced damages by voluntarily examining the merits of a patent assertion and identifying a good faith defense.  The company should therefore use its own judgment in deciding whether a patent threat deserves some professional analysis and in choosing the scope of that analysis.  Factors to consider include the specificity and ostensible merit of the threat on its face, as well as economic considerations such as the amount at stake and the company’s financial resources.  Obviously a detailed infringement assertion that specifically targets a high volume product merits more attention than a bald assertion from an industry-wide form letter. 

 

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