Patent Pirates Beware: Enhanced Damages after Halo

Posted by David Breiner on Thursday, August 18, 2016

This blog post was written by BrownWinick's summer law clerk Colin Hendricks; edited by BrownWinick attorney David Breiner

In June 2016, the Supreme Court decided Halo Electronics, Inc. v. Pulse Electronics, Inc. and fired a broadside attack at persons who purposefully infringe upon a valid patent (so-called “patent pirates”). The Supreme Court gave courts greater discretion to punish “willful” patent infringement by multiplying the damages owed to patent holders up to three times (“enhanced damages”) if the patent holder can prove that the infringement was purposeful.  Although courts now have greater freedom to award enhanced damages, the Supreme Court made it clear that the cannonball of enhanced damages should only be fired at egregious and deliberate patent infringers and not at run-of-the-mill patent infringement cases.

In patent cases, U.S. courts must determine whether an individual infringed upon another’s patent. For nearly 170 years, if a U.S. court found “willful” patent infringement, the court had the discretion to triple the damages owed to the patent holder. For 170 years, the definition of willful was determined by the court after considering several different factors. The factors included:

  1. Whether the infringer deliberately copied;
  2. Whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed;
  3. The infringer’s behavior as a party to the litigation;
  4. Defendant’s size and financial condition;
  5. Closeness of the case;
  6. Duration of the defendant’s misconduct;
  7. Remedial action, if any, taken by the defendant;
  8. Defendant’s motivation for the harm; and
  9. Whether defendant attempted to conceal its misconduct.

In In re Seagate Technology, LLC, a 2007 case, the Federal Circuit Court of Appeals (the court that hears all patent appeals) replaced this discretion with a two-part test, dubbed the Seagate test, in an attempt to define a “willful” patent infringement.

The first prong of the Seagate test asked whether the infringer acted “despite an objectively high likelihood that its actions constituted infringement of a valid patent.” The Seagate test did not consider the infringer’s state of mind at the time of his decision to infringe, thus, the infringer could escape enhanced damages by crafting a defense raising a “substantial question” as to the validity of the patent or the noninfringement of the patent. Stated differently, the infringer could purposefully copy a patent holder’s design and then, when sued, scramble to come up with a defense for why enhanced damages were not appropriate. If the first prong was met, the second prong of the Seagate test asked whether the risk of infringement was “either known or so obvious that it should have been known to the accused infringer.”  According to Seagate, courts could only award enhanced damages if the patent holder proved both prongs of the test by clear and convincing evidence (a heightened evidentiary standard).

In Halo, the Supreme Court eliminated the rigid Seagate test and reauthorized lower courts to award enhanced damages according to the court’s discretion. The Court reasoned that the plain language of the relevant statute, 35 U.S.C. § 284, gives courts the discretion to award enhanced damages without needing to pass a rigid two-part test. The relevant part of the statute reads, “[T]he court may increase the damages up to three times the amount found or assessed.”

The Court was most critical of the first prong of the Seagate test. The Court felt that Seagate allowed patent pirates to avoid “walking the plank” of enhanced damages after choosing to purposefully infringe on a valid patent. In non-pirate talk, the Court was frustrated that the Seagate test allowed deliberate patent infringers to avoid paying enhanced damages by coming up with defenses for their wrongful conduct long after the deed was already done. The Supreme Court was abundantly clear that courts may award enhanced damages, without any additional reasoning, if the patent holder can prove that the infringer copied his design on purpose. The Court also lowered the patent holder’s burden of proof from the clear and convincing standard to the normal preponderance of the evidence standard.

The Court did not create a new legal test for the definition of “willful” patent infringement, rather, the Court directed lower courts to use the “sound legal principles” developed throughout patent law’s history to determine whether enhanced damages are appropriate, given the facts of the case. Presumably, this means that the factors mentioned above will once again shape patent litigation.

The Supreme Court’s marked shift has real world implications for businesses. Patent courts will now look to the accused infringer’s thinking at the time of the supposed infringement (that is, the moment when the infringer made the decision to design or release the infringing product). This shift makes it much more important for businesses to have its engineers or decision makers record the businesses’ thought process when designing its products. If an accused infringer can show that it believed that its product was an original design (or at least why the product did not infringe upon a current patent), enhanced damages are much less likely to be awarded. Patent opinions, although not required by the Court, also help to establish non-willfulness.

Contact BrownWinick’s intellectual property team to discuss the best practices for protecting your business after the Halo decision or to inquire about a competitor’s infringement on your business’ patents.