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IP Alert: Supreme Court Relaxes Standards for Enhancing Damages for Willful Infringement

June 13, 2016

This morning, in a unanimous opinion in Halo Electronics, Inc. v. Pulse Electronics, Inc., the U.S. Supreme Court relaxed the Federal Circuit’s Seagate test for determining when a district court may increase damages under 35 U.S.C. § 284. The Court further held that a district court’s decision whether to increase damages is discretionary (within limits) and that appellate review of the district court’s decision is under the abuse of discretion standard. Today’s decision follows the 2014 Supreme Court decisions in Octane Fitness LLC v. ICON Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Management System, Inc., discussed here, which reached similar conclusions relating to the award of attorney’s fees under 35 U.S.C. § 285.

Under the Federal Circuit’s en banc 2007 decision In re Seagate, a plaintiff seeking enhanced damages must show that the infringement was “willful,” under which the patentee must show by clear and convincing evidence that the infringer acted despite “an objectively high likelihood that its action constituted infringement of a valid patent.” After establishing objective recklessness of this regard, the patentee has been required to show that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” Only if these steps have been satisfied can the district court exercise its discretion to award enhanced damages.

Rejecting this test, the Court today held that the Seagate’s framework “is unduly rigid, and impermissibly encumbers the statutory grant of discretion to district courts” (quoting Octane Fitness). In particular, the Court held, this test “can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages.” The Court found that the principal problem with the test is that it requires a finding of objective recklessness, which the Court found to be inconsistent with normal tests for culpability. To make “objective recklessness” the standard, reasoned the Court, could lead to the conclusion where “someone who plunders a patent—infringing it without any reasons to suppose his conduct is arguably defensible—can nevertheless escape any comeuppance under § 284 solely on the strength of his attorney’s ingenuity.”

Instead of requiring “objective recklessness,” the Court held, the patent statute “permits district court to exercise their discretion in a manner free from the inelastic constraints of the Seagate test.” As with attorney’s fees under Octane Fitness, the Court held that there is “no precise rule or formula” for awarding damages under § 284. Instead, a district court’s “discretion should be exercised in light of the considerations” underlying the grant of that discretion. The Court went on to state, “The Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under § 284 only in egregious cases” (emphasis added). The Court declined to require enhanced damages even in egregious cases, leaving the matter to the discretion of the district courts.

The Court reached two additional conclusions. First, the Court rejected the “clear and convincing” standard for proof of recklessness. Reasoning that patent infringement litigation has always been governed by a preponderance standard, the Court determined that enhanced damages are not excepted from this standard. Second, Seagate had required different standards of appellant review for each prong of the Seagate willfulness test. The Court rejected this appellate framework, instead determining that the decision to award enhanced damages is reviewable for abuse of discretion.

While the opinion was unanimous, three justices, in an opinion authored by Justice Breyer, wrote a separate concurring opinion to state their understanding of the limits of a district court’s discretion to award enhanced damages. Justice Breyer emphasized his views that enhanced damages should be available only in egregious cases (compared to the Court’s opinion stating that such damages are “generally” available for egregious misconduct). Justice Breyer further emphasized that failure to obtain an opinion of counsel remains a factor that may not be used to prove willfulness.

Fitch Even attorneys are studying the opinion and will provide further comments in an updated alert. If you have immediate questions regarding the Court’s decision, please contact Allen E. Hoover, author of this alert.

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