June 15, 2016

Supreme Court Unanimously Overturns Rigid Seagate Test in Favor of a Discretionary Test for Awarding Enhanced Damages

On June 13, 2016, in a unanimous decision delivered by Chief Justice John Roberts in Halo Electronics, Inc. v. Pulse Electronics, Inc., the U.S. Supreme Court rejected the rigid two-part test adopted by the U.S. Court of Appeals for the Federal Circuit in In re Seagate Technology, LLC for awarding enhanced damages in patent infringement cases, finding it inconsistent with the discretionary standard set out in 35 U.S.C. § 284. 

Section 284 of The Patent Act provides that in a case of infringement, courts “may increase the damages up to three times the amount found or assessed.” Under Seagate, to be entitled to enhanced damages under § 284, a patent owner was required to show that infringement of his patent was willful by establishing with 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) this objectively defined risk of infringement was either known or so obvious that it should have been known to the accused infringer.

Rejecting the Seagate test, the Supreme Court stated that it is “unduly rigid” and not consistent with the Patent Act, which contains no explicit limit or condition on when enhanced damages are appropriate. Chief Justice Roberts emphasized that the statute’s use of the word “may” is evidence that discretion should be given to the district courts to increase damages. Although district courts are to be given discretion, the decision cautioned that enhanced damages are not to be awarded in typical infringement cases, or on a whim, but are designed as a “punitive” or “vindictive” sanction for egregious infringement behavior, such as conduct that is “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant or—indeed—characteristic of a pirate.”

The Court also found Seagate’s requirement that recklessness be proved by clear and convincing evidence inconsistent with § 284. The Court noted there is no basis for a heightened standard of proof for enhancing damages, as it did for attorney fee awards in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014). According to the Court, § 284 imposes no specific evidentiary burden, much less a high one, adding that Congress erected a higher standard of proof elsewhere in the Patent Act, but did not do so in § 284. Accordingly, the Court determined that review of a district court’s decision to enhance damages would be for abuse of discretion.

Likely Impacts:

Under Halo, patent owners may find enhanced damages awards for willful infringement easier to obtain because the Court has lowered the burden of proof. In addition, Halo removes a defendant’s ability to remain insulated from enhanced damages by merely raising a substantial question as to the validity or non-infringement of a patent at trial, and eliminating the ability for a defendant to argue that enhanced damages are not appropriate based upon defenses that the defendant had not actually considered at the time it acted. The new standard may encourage parties with notice of potentially applicable patents to obtain written opinions of counsel that the patent is not infringed or is invalid.

In addition, accused infringers may find it more difficult to prevail during summary judgment proceedings under Halo’s new discretionary test for enhanced damages. While under Seagate, defendants could utilize a straightforward legal argument to exclude willfulness before trial, the new discretionary test will likely be more fact-intensive and require more extensive discovery.