Seagate washes up: enhanced damages after Halo

Chief Justice Roberts, writing for a unanimous Court, overruled the Federal Circuit’s test in In re Seagate for awarding enhanced damages under 35 U.S.C. § 284. Halo Elecs. v. Pulse Elecs., 579 U.S. ___ (2016). Under 35 U.S.C. § 284, a district court may increase actual damages for patent infringement up to three times the actual damages amount found by a jury or assessed by the court. Now, under Halo, a district court may use its discretion to enhance damages up to three times the actual amount, which is reviewed for an abuse of discretion. Justice Breyer, joined by Justices Kennedy and Alito, wrote separately to emphasize his understanding of the limits of the ruling.

On appeal was the Federal Circuit’s strict test for awarding enhanced damages, as set forth in In re Seagate Tech., LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007). Under the In re Seagate framework, there must be a finding of willful infringement to sustain an enhanced damages award. Id. at 1368. To satisfy this finding, the patent owner must prove by clear and convincing evidence that (1) the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent and (2) that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer. Id. at 1371. The first question is answered by the court and is reviewed de novo; the second question is answered by the jury and is reviewed for substantial evidence. SSL Servs., LLC v. Citrix Sys., Inc., 769 F.3d 1073, 1090–91 (Fed. Cir. 2014); Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 682 F.3d 1003, 1007 (Fed. Cir. 2012). The ultimate decision of whether to award enhanced damages is reviewed for an abuse of discretion. Spectralytics, Inc. v. Cordis Corp., 649 F. 3d 1336, 1347 (Fed. Cir. 2011). The Halo court swept this complicated framework away.

Justice Roberts observed that the statutory language contained “no explicit limit or condition,” and clearly connotes discretion. Slip op. at 8 (internal quotes and modifications omitted throughout). But, at the same time, that discretion is not unlimited. Id. Guided by nearly two centuries of application and interpretation of the Patent Act, district courts should enhance damages as a punitive or vindictive sanction in cases of egregious infringement behavior, typified by willful misconduct. Id.at 8, 11, 15. Justice Roberts was careful to note, however, that a finding of egregious conduct does not require an enhanced damages award. Id. at 11.

The Court also rejected Seagate’s clear and convincing standard of proof. Because the statute imposes no specific evidentiary burden, much less such a high one, the appropriate standard of proof is the preponderance of the evidence standard. Id. at 12.

Justice Roberts criticized Seagate’s “objective recklessness” prong as permitting egregious conduct—willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or piratical—to escape unpunished if a clever lawyer can craft a plausible but ultimately unsuccessful defense at trial, even if the infringer never knew or relied upon that defense at the time of the infringement. Id. at 8, 10. This, he noted, is inconsistent with the concept of culpability in tort law, which is generally measured against the knowledge of the actor at the time of the challenged conduct. Id. at 10.

Justice Roberts was receptive to the policy concerns that weighed against loosening the Seagate standard. He acknowledged concerns that allowing district courts unlimited discretion would impede rather than promote innovation and would embolden patent licensing companies to seek outsized fees. Id. at 14. But rather than justify an artificial limit on a district court’s discretion, these concerns underscore the need to reserve enhanced damages for the most egregious cases. See id.

Writing in concurrence, Justice Breyer expressed his own understanding of the limits imposed by the enhanced damages statute. First, the Court’s references to “willful misconduct” do not mean that a court may award enhanced damages “simply because the infringer knew about the patent and nothing more.” Concurrence, slip op. at 1. Second, Halo does nothing to weaken the provision in § 298 that an infringer’s failure to obtain the advice of counsel cannot be used to prove that the accused infringer willfully infringed. Id. at 2. Third, enhanced damages are for punitive purposes only, and cannot serve to compensate patentees for infringement-related losses or for attorney fees. Id. at 3.

Justice Breyer described these limitations in light of his concerns about how allegations of patent infringement may hamper, rather than promote, the “Progress of science and useful Arts.” Id. at 4 (citing U.S. Const., Art. I, § 8, cl. 8). Faced with a threat of infringement and possible treble damages on one hand, and significant costs for investigating and avoiding infringement on the other, a growing business may choose to abandon any challenged activity, which impedes technological progress. Id. To avoid this outcome, enhanced damages should be carefully applied to target only cases of egregious misconduct. Id. at 5.

After Halo, conduct that under Seagate could be shielded by the later development of a plausible invalidity or noninfringement defense is now fair game. District courts will likely focus more on what an infringer actually knew at the time infringement began, and carefully consider what an infringer did upon learning about the patent and an allegation of infringement. A company that receives a letter alleging infringement may wish to consider, in its response, articulating its bases for noninfringement or invalidity, or alternatively, internally document why it believes its conduct is not prohibited. These steps, even if short of a formal opinion of counsel, may help establish that the company acted in good faith and not with egregious disregard for a patent owner’s rights.

Further, a company that receives an invitation to license a patent may consider requesting an agreement from the patent owner that any disclosure that occurs in the course of any licensing talks cannot be considered notice of infringement.