A Review of Post-Halo Decisions on Enhanced Damages

August 12, 2016

In the two months since the Supreme Court rejected the “Seagate Test” for enhanced patent damages (Halo Electronics v. Pulse Electronics, 136 S. Ct. 1923 (2016) (“Halo”), the Court of Appeals for the Federal Circuit (“CAFC”) has rendered three decisions under Halo.

  1. WBIP LLC v. Kohler Co, 119 U.S.P.Q.2d (Fed. Cir. July 19, 2016);

  2. Halo Electronics, Inc. v. Pulse Electronics, Inc, Case No. 2013-1472 (Fed. Cir. August 5, 2016); and

  3. Innovation Toys, LLC v. MGA Entertainment, Inc., Case No. 2014-1731 (Fed. Cir. August 5, 2016) (nonprecedential).

I review these decisions and several recent district court decisions to see how the courts are responding to Halo.  This is too small a sample to determine the impact of Halo on the courts' inclination to award enhanced damages.  But these decisions at least reveal the process under Halo:  The jury will first determine the infringer's knowledge and intent (i.e., subjective willfulness).  If the jury finds willful infringement, the court will then assess the egregiousness of the infringer's conduct in view of the "Read Factors" from Read v. Portec Inc., 970 F.2d 816 (Fed. Cir. 1992). The infringer’s state of mind at the time of infringement is thus once again a gating factor for determining liability for enhanced damages.

 

A.      CAFC Decisions Post Halo

 

In the first of its post-Halo decisions, the CAFC noted that the Supreme Court “chose not to decide” the question of whether the parties have a right to a jury on issues of the infringer’s willful intent (a question that was briefed for the Court).  WBIP LLC v. Kohler Co, 119 U.S.P.Q.2d (Fed. Cir. July 19, 2016).    The CAFC therefore concluded: “this leaves in place our prior precedent that there is a right to a jury trial on the willfulness question.” (Id. at 15).

 

All three of the CAFC’s post-Halo decisions therefore analyze enhanced damages in two distinct stages:  First, they consider the jury’s finding of the infringer’s intent (subjective willfulness), which the CAFC reviews for substantial evidence; then—if substantial evidence supports a jury finding of willfulness—the enhancement inquiry “moves [] to the stage at which the district court exercises its discretion” (which the CAFC reviews under the highly deferential “abuse of discretion” standard).  Innovation Toys, LLC v. MGA Entertainment, Inc., Case No. 2014-1731 (Fed. Cir. August 5, 2016).  

 

In WBIB, the CAFC concluded that substantial evidence supported the jury’s finding that Kohler’s infringement was willful.  This “move[d] the inquiry” to the Judges discretion.  The appellate judges deferred to the trial judge’s decision to enhance damages by 50%, stating - “we cannot say that the district court abused its discretion.” (WBIB at 16).

 

In affirming the trial court’s decision, the CAFC dismissed Kohler’s arguments regarding the closeness of the case and the reasonableness of Kohler’s failed trial defenses, noting that “proof of an objectively reasonable litigation-inspired defense to infringement is no longer a defense to willful infringement.” (Id. at 14 – 15).  The CAFC said that under Halo, “an infringer’s subjective bad faith alone may support an award of enhanced damages,” and that “the appropriate time frame for considering culpability is by assessing the infringer’s knowledge at the time of the challenged conduct.”

 

A few weeks later the CAFC ruled on the remand of the Innovation Toys case, and on the Halo case itself.  In both cases, the Court left undisturbed the jury findings of willfulness, but remanded the cases back to the trial judges for reconsideration in view of Halo.

 

In Innovation Toys, the trial judge had previously awarded enhanced damages, but the CAFC did not re-instate the award as it had just two weeks earlier in the Kohler case.  Instead, it sent the case back to the trial judge, instructing him to reconsider his discretion in view of Halo’s emphasis on “egregiousness” (specifically noting however that the outcome need not be any different):

 

Halo does not require that we now affirm the district court’s award of enhanced damages and fees. Instead, we conclude, Halo warrants a vacatur of those rulings and a remand for reconsideration. Through its emphasis on egregiousness and otherwise, Halo clarifies the policies affecting whether to enhance damages. The district court should revisit its exercise of discretion to enhance the damages in this case in light of that clarification. … . In so concluding, we do not suggest that the district court should reach results different from its pre-appeal rulings on enhancement and fees. (Innovation Toys at 3 – 4).

 

The CAFC did not mention why it approved the trial judge’s decision in WBIB, but remanded the Innovation Toys case for consideration of the egregiousness of the infringer's conduct.   The likely explanation is that in WBIB, the trial judge had found that the infringer’s defenses were objectively unreasonable, thereby indicating that he considered the infringement egregious.

 

The CAFC gave similar instructions to the trial court when remanding the Halo case, inviting the judge to revisit the infringer’s culpability in view of 1) “what Pulse knew or had reason to know at the time of the infringement of the Halo patents,” and 2) the jury’s finding that Pulse’s infringement had been subjectively willful.

 

             B.      District Court Decisions Post Halo

 

Several post-Halo district court decisions used the “Read Factors” (from a pre-Seagate Federal Circuit decision in Read v. Portec) when accessing the “egregiousness” of an infringer’s behavior.  Finjan, Inc. v. Blue Coat Systems, Inc., 2016 U.S. Dist. LEXIS 93267 (N.D. CA. July 18, 2016); Boston University v. Everlight Electronics CO. LTD., 2016 U.S. Dist. LEXIS 96045 (D. MA. July 22, 2016).

 

The Federal Circuit decision in Read v. Portec applied a “totality of the circumstances” test for enhanced damages (long before Seagate) that seems essentially the same as the Supreme Court’s Halo test:

 

The paramount determination in deciding to grant enhancement and the amount thereof is the egregiousness of the defendant’s conduct based on all the facts and circumstances. The court must consider factors that render defendants conduct more culpable, as well as factors that are mitigating or ameliorating. Read v. Portec Inc., 970 F.2d 816,825 (Fed. Cir. 1992).

 

In Finjan, the Northern District of California said the Read Factors are useful “guideposts” for assessing the egregiousness of the infringers conduct per Halo:

 

In light of Halo, which clearly stated that district courts are not bound by any rigid formula or set of factors, the Read factors are now one set of guidelines courts can use to evaluate alleged misconduct, but are no longer the sole set of criteria. This Court finds the Read factors present useful guideposts in determining the egregious of the defendant's conduct. (Finjan at 14).

 

In the words of the District of Massachusetts, “the Read Factors remain helpful to this Court's analysis,” but “the touchstone for awarding enhanced damages after Halo is egregiousness.”

 

Of the nine “Read Factors” (below), the second requires a special caveat in view of Congress’s mandate in 35 U.S.C §298 that companies are no longer obligated to obtain an opinion of counsel, and cannot be criticized for failure to do so:

 

  1. Whether infringer deliberately copied;

  2. Whether the infringer, when he knew of the other’s patent, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed;

  3. The infringer’s behavior as a party to the litigation;

  4. Infringer’s size and financial condition;

  5. Closeness of the case;

  6. Duration of the infringer’s misconduct;

  7. Remedial action by the infringer;

  8. Infringer’s motivation for harm; and

  9. Infringer’s attempt to conceal its misconduct.

 

While an infringer’s failure to obtain a legal opinion identifying a good faith defense cannot be mentioned at trial or cited as evidence of malice, Halo and its recent progeny suggest that if such an opinion exists, it is evidence of the infringer’s good faith at the time of the opinion.  For example, in the BU case, the court mentioned evidence that the infringer had “hired two law firms to provide infringement opinions” when the court ruled that “BU has not proven by a preponderance of evidence that the defendants engaged in the type of egregious conduct necessary for an award of enhanced damages pursuant to §284 under the standard articulated in Halo.” (BU at 4).

 

                     C.  Conclusion

 

Recent cases applying the new Halo standard indicate that the jury must decide whether the infringer, at the time of infringement, was aware of the patent and willfully infringed.  Based on these findings, the trial court must use its discretion to award enhanced damages considering the egregiousness of the infringer’s behavior.  The Read Factors remain useful guideposts for these inquiries, including the second Read Factor  - whether the infringer timely identified a good-faith defense.  The infringer’s state of mind at the time of infringement is thus once again a gating factor for determining liability for enhanced damages; and thoughtful guidance from counsel is persuasive evidence of good faith.

 

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