The Supreme Court recently vacated and remanded the Federal Circuit’s decision in Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371, 1374–75 (C.A. Fed. 2014), in which the court denied enhanced damages for the patentee under the two-part test developed in In re Seagate Technology, LLC, 497 F.3d 1360 (2007) (en banc). See Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14-1513 (U.S. June 13, 2016). The first part of the Seagate test requires patentees to show by clear and convincing evidence that an alleged infringer’s behavior is objectively reckless. Id. at 5. “Objective recklessness” will not be found if the accused infringer “raise[s] a ‘substantial question’ as to the validity or noninfringement of the patent,” even if the defender did not act on the basis of the arguable defense. Id. The second part requires patentees to show by clear and convincing evidence that the alleged infringer had subjective knowledge. Id.In a unanimous decision, the Supreme Court eschewed the rigid formula and held that § 284 gives district courts the discretion to award enhanced damages. In applying this discretion, district courts are “to be guided by the sound legal principles” developed over nearly two centuries of application and interpretation of the Patent Act. Id. at 15. In so holding, the Supreme Court noted that following the previous approach will “exclude from discretionary punishment many of the most culpable offenders, including the ‘wanton and malicious pirate’ who intentionally infringes a patent.” Id. at 9.
Various blogs have provided thorough analyses of the case and its implications. SCOTUSblog provides an overview of the case. Dennis Crouch penned a thorough analysis of the decision. Chase Means raised the possibility that the decision will incentivize patent trolls, entities that hold patents for challenging alleged infringers and charging license fees.
In Halo, petitioner Halo alleged that respondent Pulse infringed its patents. Halo sent Pulse two letters in 2002 offering to license Halo’s patents, but Pulse continued the alleged infringement after concluding that Halo’s patents were invalid. In 2007, Halo sued Pulse. Though the jury found that Pulse had infringed Halo’s patents and that there was a high probability it had done so willfully, the District Court declined to award enhanced damages because Pulse presented a defense that “was not objectively baseless,” and the court concluded the objective recklessness requirement was not met. Id. at 6. The Federal Circuit affirmed. Halo filed a petition for writ of certiorari. The Supreme Court granted the petition and consolidated the case with Stryker Corp. et al. v. Zimmer, Inc., et al., in which the Federal Circuit rejected awarding enhanced damages in a similar scenario for the same reasons.
The Supreme Court found that the word “may” in the statutory language of § 284 connotes discretion for district courts. Id. at 8. It found the threshold requirement of objective recklessness in the Seagate test problematic. See id. at 9. Instead, it held that the subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages. Id. at 10. The Court criticized the categorical bar as well, holding that “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.” Id. Furthermore, the Court replaced the clear and convincing standard of proof with the preponderance of the evidence standard. Consequently, the Supreme Court rejected the trifurcate framework for appellate review. Id. at 12.
Respondents and amici expressed concerns about patent trolls. Out of this consideration, Justice Breyer suggested some limitations to this new approach in his concurring opinion, including that the court should look to more than mere knowledge of the patent in deciding awards and that enhanced damages should not be used to compensate for litigation costs. Id. at 12 (Breyer, J., concurring). The majority acknowledged this possibility while specifically holding that enhanced damages should not be awarded in garden-variety cases. Id. at 15. The Halo opinion will likely greatly impact the balance between “the need to promote innovation through patent protection” and “the importance of facilitating the ‘imitation and refinement through imitation’ that is ‘necessary to invention itself and the very lifeblood of a competitive economy.’” Id. at 14–15.