In 2005, the multinational corporations asked the Supreme Court to prevent permanent injunctions in patent litigation even after the patent owner had established that there was ongoing infringement and the patent survived every challenge mounted by the infringer. The Supreme Court complied and that significantly tilted the balance away from patent owners and toward infringers. Without a realistic fear of a permanent injunction facing them large corporations largely started ignoring patent rights. But still the problem of the villainous patent owner continued.
In 2007, the United States Court of Appeals for the Federal Circuit, issued a ruling in In re Seagate Technology, which created a new standard for establishing willful infringement and enhanced damages. The Seagate standard has made it virtually impossible to demonstrate willful infringement, and virtually impossible to obtain treble damages. Many consider this a good thing since prior to this ruling willful infringement was alleged in virtually all patent litigations, with the plaintiff seeking triple damages. Regardless of your point of few there is little debate that Seagate again substantially shifted the playing field away from patent owners and toward infringers. Still the problem of the villainous patent owner continued. (source)
That decision created the so-called “Seagate test” for proving willfulness. Now, in the case Halo Electronics Inc. v. Pulse Electronics Inc., a unanimous U.S. Supreme Court has rejected the Federal Circuit’s Seagate test as inconsistent with the controlling statute, 35 U.S.C. § 284. The Supreme Court has instead given greater latitude to district court judges and juries to decide the willfulness question, and, accordingly, when a victorious patentee may be awarded enhanced damages, while still cautioning that such a finding should be made only in egregious cases.
The court’s decision will undoubtedly have a significant impact on patent cases going forward. The new test provides precious little guidance to district courts beyond “you should know an egregious case when you see it.” Until the Federal Circuit and district courts apply the new Supreme Court test in the context of case-specific fact patterns, the question of willful infringement is now harder to gauge and therefore a more difficult one on which to advise clients.
Background Regarding Willful Infringement
While patent infringement is a form of strict liability tort, the nature of a defendant’s actions may be relevant to the question of willful infringement. In the absence of any statute defining what constitutes willful infringement, courts historically equated willful infringement with bad faith or wanton and malicious conduct. A finding of willful infringement is significant because it opens the door to a patentee being awarded enhanced damages pursuant to 35 U.S.C. § 284.
Prior to the formation of the Federal Circuit, a “widespread disregard of patent rights was undermining the national innovation incentive.” The judicial system’s inability or refusal to enforce patent rights was seen as a disincentive to scientists to continue to innovate, as unscrupulous infringers were allowed to take the fruits of the inventors’ labor without any adverse consequences. One of the purposes in creating the Federal Circuit was to “promote greater uniformity” in the area of patent law.
Out of this backdrop came the Federal Circuit’s Underwater Devices decision. In that case, the court was confronted with a not-atypical fact pattern: A competitor of the patentee was advised that it should not be overly concerned about its competitor’s patent rights because “courts, in recent years, have — in patent infringement cases — found [asserted patents] invalid in approximately 80% of the cases.” Disapproving of this disregard of patents, the Federal Circuit established its original test for determining willful infringement: “where … a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing.” This “duty of due care standard” included “the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.” This resulted in the “advice of counsel defense” to a charge of willful infringement. “Under this defense, an accused willful infringer aims to establish that due to reasonable reliance on advice from counsel, its continued accused activities were done in good faith.” For years thereafter, Federal Circuit case law imposed an “adverse inference” on defendants who failed to produce an opinion of counsel in defense to a willfulness charge: “[A defendant’s] silence on the subject, in alleged reliance on the attorney-client privilege, would warrant the conclusion that it either obtained no advice of counsel or did so and was advised that its [activities] would be an infringement of valid U.S. patents.”
Whether the Underwater Devices test and application of the adverse inference was necessary at one time to curb an apparent widespread disregard for patents is debatable. What is clear, however, is that by the end of the 1990s the duty of due care standard had facilitated “opportunities for abusive gamesmanship” by patentees. Patent holders would send a copy of the patent in question to large numbers of potential defendants and demand that the companies take a license to the patent without providing any analysis or other rationale. The resulting “knowledge” of the patentee’s rights, satisfying the notice requirement, exposed the recipients to an increased threat of willful infringement under the duty of due care standard.
This unintended consequences of the duty of due care standard was highlighted in 2003, when the Federal Trade Commission reported that companies were wary of investigating what patents existed in their industries for fear of later being charged with willful infringement. The FTC concluded that this fear stifled, rather than encouraged, innovation. Thus, in the 20 years following Underwater Devices, the pendulum had swung from a concern over a lack of respect for patents, to a concern over patent abuse.
The Federal Circuit looked to curb this misuse of patent rights. In 2004, the court issued its en banc Knorre-Bremse decision, wherein the court recognized that the adverse inference imposed “inappropriate burdens on the attorney-client relationship” and held that maintaining the attorney-client privilege for opinions of counsel would not give rise to an adverse inference. The court also stated that an accused infringer’s failure to obtain legal advice would likewise not give rise to an adverse inference. This was followed in 2007 by the Seagate decision.
In Seagate, the Federal Circuit abrogated the duty of due standard and attempted to align the willfulness test with other areas of the law having a “willful” component, which the Supreme Court had long held required a finding of “reckless behavior.” The duty of due care standard, in contrast, “sets a lower threshold for willful infringement that is more akin to negligence. This standard fails to comport with the general understanding of willfulness in the civil context.” Further, the court emphasized that there is no affirmative obligation to obtain opinion of counsel.
The Seagate court also set forth the by now well-known two-part test for determining willful infringement. First, a patentee was required to show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. Of particular note, “the state of mind of the accused infringer is not relevant to this objective inquiry.” Second, if the threshold objective standard was met, the patentee also needed to demonstrate 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. In other words, not only was a patentee required to show that the defendant was objectively reckless in its conduct, it also had to prove that the defendant either knew it was acting recklessly or clearly should have known its actions were reckless. In 2012, the Federal Circuit further held that the threshold determination of objective recklessness under the Seagate standard was a question of law to be decided solely by the judge, not a jury.
The Federal Circuit’s decision in Seagate was an attempt by the court to conform the standard for willful infringement to other areas of the law that defined “willful” behavior. It also removed what was frequently the centerpiece of a patentee’s willfulness arguments — whether the defendant has obtained a valid opinion of counsel — and focused the attention on whether the defendant engaged in reckless behavior and/or recklessly showed a disregard of the law. In 2012, as part of the America Invents Act, Congress went so far as to prohibit a patentee from using an accused infringer’s failure to obtain or to present evidence of advice of counsel in order to prove willful infringement or inducement to infringe.
The Aftermath of the Seagate Decision
Perhaps the biggest impact the Seagate decision has had since 2007 is the willingness of district courts to find no willful infringement as a matter of law, either at the summary judgment or judgment as a matter of law stages of the case. Prior to Seagate, parties would seldom move for summary judgment on the issue of willfulness, and courts would even less frequently grant these motions. Likewise, district courts tended not to upset jury findings of willful infringement. Since Seagate, courts have frequently granted these motions, finding no willful infringement as a matter of law. And some courts have favored removing claims of willful infringement early in a case by granting a motion to dismiss such claims, particularly when the patentee did not allege pre-filing notice of the patents.
The Seagate decision thus served its purpose, in that it addressed the concerns pre-Seagate that willful infringement allegations were overwhelming patent litigation. The end result was that the Seagate test made it harder to prove willful infringement. This, in turn, meant that a patentee’s ability to obtain enhanced damages in a successful patent case was curtailed. Pursuant to the patent damages statute, 35 U.S.C. § 284, “a court may increase the damages [awarded by a jury or the court] up to three times the amount found or assessed.” Since its formation, the Federal Circuit had essentially made a finding of willful infringement a prerequisite to an award of enhanced damages. Patentees, meanwhile, complained that the Federal Circuit’s requirement unduly restricted district courts from applying § 284, which on its face provided courts with broad discretion in determining whether to award enhanced damages (“a court may increase the damages”).
The complaints intensified following the Supreme Court’s 2014 Octane Fitness and Highmark decisions. In those decisions, the Supreme Court rejected the Federal Circuit’s test for determining when to award attorneys’ fees to prevailing parties in patent cases pursuant to 35 U.S.C. § 285. Prior to the Supreme Court’s decision, the Federal Circuit had required a party seeking fees to prove by clear and convincing evidence both that the litigation was objectively baseless and conducted in bad faith. The Federal Circuit also reviewed de novo a district court’s decision whether a litigation was “objectively baseless.” But in Octane and Highmark, the Supreme Court held that a district court, when deciding whether to award fees pursuant to § 285, could consider the totality of the circumstances based on a preponderance of the evidence. The court further held that a district court’s decision would be reviewed on appeal for abuse of discretion.
The issue of whether the Federal Circuit’s standard for awarding enhanced damages to successful patentees reached its tipping point with the court’s Halo and Stryker decisions. In Halo, a jury had found willful infringement based on facts showing that Halo had put Pulse on notice that it believed its’ patents were being infringed years before the lawsuit was filed. The district court granted Pulse’s motion for judgment as a matter of law of no willfulness, finding that Pulse had raised an objectively reasonable invalidity defense during the course of the case. The Federal Circuit affirmed, holding that “although Pulse was ultimately unsuccessful in challenging the validity of the Halo patents, Pulse did raise a substantial question as to the obviousness of the Halo patents.” In Stryker, a jury found Zimmer liable for willfully infringing three patents-in-suit. The district court trebled the damages awarded by the jury, finding that the “jury heard testimony” that Zimmer “all but instructed its design team to copy Stryker’s products.” On appeal, the Federal Circuit reversed the finding of willfulness and vacated the award of enhanced damages, holding that Zimmer’s “defenses to the infringement of each patent claim that Stryker asserted were not objectively unreasonable, and, therefore, it did not act recklessly.”
Stryker and Halo both petitioned the Supreme Court to review the Federal Circuit’s standard for awarding enhanced damages, arguing that the Federal Circuit’s application of the Seagate test as a prerequisite to a finding of enhanced damages was contrary to both the plain language of 35 U.S.C. § 284 and the Supreme Court’s holdings in Octane and Highmark. On Oct. 19, 2015, the Supreme Court granted the petitions and consolidated the cases for consideration. The court issued its decision on Monday.
The Supreme Court’s Decision
In Halo, Chief Justice John Roberts, writing for the unanimous court, agreed that the Seagate test was not consistent with § 284, which provides that “a court may increase the damages up to three times” the amount awarded. This statute “contains no explicit limit or condition,” and, by use of the word “may,” clearly connotes discretion on the part of the trial court. In contrast to the broad discretion afforded by the statute, the court held (echoing its decision in Octane Fitness) that the Seagate test “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”
In particular, the court was concerned that the Seagate test “can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages.” The court provided as an example a situation where a defendant, before the lawsuit was filed, had full knowledge of its infringing activities, no reason to doubt the patent’s validity, and nonetheless continued with its infringing acts in the hopes of stealing the patentee’s business. According to the court, the “objectively reckless” portion of the Seagate test gave such a “wanton and malicious pirate” an escape hatch from a willfulness finding by mustering a reasonable defense at trial. This could be true even if the infringer “did not act on the basis of the defense or was even aware of it.” The court rejected the proposition that such a defendant should be able to “escape any come-uppance under § 284 solely on the strength of his attorney’s ingenuity.” Consistent with other areas of the law involving a party’s intent, culpability for willful infringement purposes should be “measured against the knowledge of the actor at the time of the challenged conduct,” and not against knowledge of a defense conjured after-the-fact.
In addition to repudiating the Federal Circuit’s two-part Seagate test, the Supreme Court also significantly relaxed the evidentiary burden for proving willful infringement. Whereas Seagate required proof of willfulness by clear and convincing evidence, the Supreme Court held that “patent-infringement litigation has always been governed by a preponderance of the evidence standard,” and “enhanced damages [pursuant to § 284] are no exception.” On this issue, the court noted that “the fact that Congress expressly erected a higher standard of proof elsewhere in the Patent Act … but not in § 284, is telling.” The court also rejected the Federal Circuit’s “tripartite framework” for appellate review of willful infringement verdicts. Instead, because § 284 gives courts discretion in deciding to award enhanced damages, the decision of the district court should be reviewed for abuse of discretion.
Perhaps recognizing that its decision could result in a return to the pre-Seagate days when willful infringement allegations were routinely asserted (and too often successfully) in garden-variety cases, the court repeatedly stressed that an enhanced damages award “should generally be reserved for egregious cases typified by willful misconduct.” Put another way, enhanced damages are only appropriate in “egregious cases of misconduct beyond typical infringement” and should not be awarded in “garden-variety cases.” Moreover, even in cases of egregious misconduct, an award of enhanced damages is not mandatory, but rather lies with the discretion of the court. The court also acknowledged the concern that district courts may “award enhanced damages too readily, and distort the balance between the protection of patent rights and the interest in technological innovation.” According to the court, this concern may be addressed by recognizing that “there are limits” to a court’s discretion, and the Federal Circuit should review a district court’s award of enhanced damages in light of the Supreme Court’s “longstanding considerations” of what truly constitutes egregious misconduct.
These concerns prompted Justice Stephen Breyer to write a concurrence (joined by Justices Anthony Kennedy and Samuel Alito), stressing the limits of the new test for willful infringement. Justice Breyer first emphasized that willful misconduct does not mean that a court “may award enhanced damages simply because the evidence shows that the infringer knew about the patent and nothing more.” Instead, it is the factual circumstances that transform “simple knowledge” into “egregious behavior,” which, according to Justice Breyer, “makes all the difference.”
Justice Breyer also wrote to point out that the court’s decision does not weaken 35 U.S.C. § 298, which prevents a patentee from using the fact that a defendant did not get a legal opinion as proof of willful infringement. Noting the great expense associated with obtaining legal opinions, and the risk of discouraging lawful innovation, Justice Breyer wrote that “Congress has thus left it the potential infringer to decide whether to consult counsel — without the threat of treble damages influencing that decision.” Justice Breyer further emphasized that, while awards of enhanced damages will be reviewed for abuse of discretion, the Federal Circuit will play an important role in enforcing the court’s admonishment that enhanced damages be limited to instances of egregious misconduct: “in applying [the abuse of discretion] standard, the Federal Circuit may take advantage of its own experience and expertise in patent law. Whether, for example, an infringer truly had ‘no doubts about [the] validity’ of a patent may require an assessment of the reasonableness of a defense that may be apparent from the face of that patent. … [A]ny error on such a question would be an abuse of discretion.”
The elimination of the Seagate standard and its replacement with a much more amorphous “egregious misconduct” test is unfortunate because it introduces a great amount of uncertainty going forward for patent defendants. Companies can expect a return to the pre-Seagate days when nonassertion entities routinely sent out presuit letters identifying patents and relied on those letters during later litigation as proof of willful misconduct. While 35 U.S.C. § 298 at least removes the requirement that companies receiving such letters must get opinions of counsel, the uncertainty and risk that a garden-variety infringement case may be distorted by aggressive patentees into one demonstrating egregious misconduct, particularly in patentee-friendly forums, is acute. We may see an increase in such companies deciding to settle such cases rather than face the risk of an unwarranted willful infringement verdict and associated enhanced damages. If so, innovation will suffer and the patent laws will again frustrate, rather than promote, the progress of science. It will be up to the Federal Circuit to prevent this outcome by vigorously enforcing the Supreme Court’s warning that only instances of true egregious misconduct merit enhanced damages awards.
—By Brian E. Ferguson, Weil Gotshal & Manges LLP
Brian Ferguson is a partner in Weil’s Washington, D.C., office and co-chairman of the firm’s nationwide patent litigation practice. In 2007, he represented Seagate before the Federal Circuit in In re Seagate Technology LLC, the case that established the Seagate test for proving willful infringement.