Patent holders were recently dealt some good news by the nation’s highest court, which has lowered the standard for awarding triple damages in patent infringement cases.
The U.S. Supreme Court ruled on Monday that the test used by the U.S. Court of Appeals for the Federal Circuit to determine whether victims of patent infringement could be awarded enhanced damages was too strict. According to the Court, the current test improperly protected some of the worst patent infringers.
A unanimous court overturned the standard employed by the Federal Circuit for awarding damages under Section 284 of the Patent Act. The Act allows for enhanced damages up to three times actual damages. However, the Court held that, under the current standard, the test for proving triple damages was too difficult for patent holders to meet.
Two separate cases were under review by the Supreme Court. In Halo Electronics, Inc. v. Pulse Electronics, Inc., Halo, an electronic component supplier, held patents for transformers mounted on printed circuit boards and offered to license them to Pulse Electronics. Pulse decided that Halo’s patents were invalid, rejected the licenses, and continued to sell components that infringed on Halo’s patents. Halo sued Pulse for patent infringement, and a jury held that Pulse engaged in willful infringement. However, under the current standard employed by the courts, Halo was denied enhanced damages because it could not show that Pulse’s defenses were a sham or objectively baseless.
In Stryker Corp. v. Zimmer, Inc., Stryker sued Zimmer for infringing on its patents for certain orthopedic devices. The district court found that Zimmer’s infringement was willful and awarded triple damages in the amount of $228 million. However, on appeal, the Federal Circuit vacated the enhanced damages award, holding that they were not allowed because Zimmer asserted “reasonable defenses.”
Both cases were appealed to the Supreme Court.
The Prior Standard
In 2007, the Federal Circuit in In re Seagate Technology, LLC set forth a two-part test for awarding enhanced damages for a showing of willful patent infringement. The standard for meeting the test was clear and convincing evidence.
Under the first part of the test, the patent holder had to show that the infringer was “objectively reckless” in its actions. The infringer could defeat a claim by raising a “substantial question” as to whether the patent was valid. Under the second part of the Seagate test, the patent holder was required to show that the infringer knew there was a risk of infringement, or the risk of infringement was so obvious that it should have been known.
In its decision on Monday, the Supreme Court rejected the “objective recklessness” standard adopted by the Federal Circuit. Writing for the majority, Chief Justice Roberts noted that such a standard would allow the most egregious offenders, those who willfully infringe on patents without any thought that their actions are defensible, to later avoid enhanced damages because of creative defenses crafted by their attorneys.
The problem with “objective recklessness,” the Court found, was that a willful infringer could avoid triple damages by mustering any reasonable defense, even if the infringer did not rely on that defense or was unaware of the defense at the time of its willful infringement. According to the Court, the focus should instead be on an infringer’s conduct in a particular case and whether there is a subjective basis for enhancing damages—namely, what the infringer knew at the time of the infringement and whether the actions were above and beyond those seen in typical patent infringement cases.
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The Court also rejected the “clear and convincing evidence” standard, noting that Section 284 did not call for such a heightened standard of proof. Instead, the Court found that a lower “preponderance of the evidence” standard, the standard generally applied in patent infringement cases, was appropriate. The ruling also adopted an “abuse of discretion” standard of review for the Federal Circuit, meaning that it is required to be more deferential to a district court’s ruling on enhanced damages.
However, the Court was careful to state that the recent ruling was not intended to allow for enhanced damages in “garden-variety cases,” and should “generally be reserved for egregious cases typified by willful misconduct.” Limiting enhanced damages to egregious cases would ideally strike a balance that would encourage innovation through patent protection, while also allowing refinement through imitation, something the Court found to be important.
Both cases were remanded to the Federal Circuit for reconsideration of enhanced damages under the new standard.
The ruling allows for possible increases in the Federal Circuit’s awards of $70 million to Stryker and $1.5 million to Halo in the underlying cases.
Patent attorneys are viewing the ruling as a major victory for patent holders. The new standard is an easier test for patent holders to meet, allowing for the possibility of larger damages when willfulness is present.
Some experts warn against reading the Supreme Court’s decision as opening the floodgates to enhanced damages and willful infringement claims. Commenters do seem to agree, however, that the new ruling will allow more cases to get to a jury, because winning summary judgment on a question of subjective intent is very difficult.
Either way, patent holders, including those interesting in buying some of the 3,000 patents that Yahoo is putting up for auction, will be keeping an eager eye on how the courts treat enhanced damages in the future. At the very least, companies may now think twice before engaging in willful patent infringement.