Tuesday, February 23, 2016

Halo & Stryker Oral Argument

Today's oral argument in these two cases involving the standard for awarding enhanced damages for patent infringement began with Jeffrey Wall arguing on behalf of both petitioners, Halo and Stryker.  He began by characterizing the Federal Circuit's standard as "rigid" (a characterization the Supreme Court has made about other disfavored Federal Standards!),  a departure from historical practice insofar as it is "all about recklessness rather than also intent" and "judges recklessness based on legal defenses developed in litigation rather than the facts at the time of the infringement," and similar to the standard for awarding attorneys' fees that the Court rejected in Octane Fitness and Highmark.  In its place, Mr. Wall says, the court should require a totality-of-the-circumstances, discretionary standard. Under that standard, if the plaintiff prevails on liability, the court should hear the "competing narratives" about whether the defendant had a good faith belief the patent was invalid or noninfringing.  After a few preliminary questions from some of the justices, Justice Breyer asked a detailed question highlighting the expense a small company may face if it is burdened with having to obtain an opinion of counsel upon receipt of a cease-and-desist letter; at p.13 he posed the possibility that perhaps a big company and small company should react differently when served with such a letter, with the big company undertaking a formal investigation.  Justice Sotomayor suggested that even if the ultimate standard is a discretionary one, district courts need some guidelines on how to exercise that discretion.  Mr. Wall's response was that "I think what you would say is that in judging  whether a reasonable person would have thought that there was a really high risk, you've got to take account of both the strength of the notice, what kind of notice were they on of the patent, and what would have been commercially reasonable in the industry as it exists."  Justice Alito asked whether courts are "going to be able to assess the state of mind of the infringer at the time of the infringer's conduct without getting into communications with the--with the company's attorneys," and how one could show that the infringer lacked a good faith belief at the time its began infringing.  Mr. Wall reiterated that what is reasonable will depend on the nature of the claim letter and of the recipient.

Next up was Assistant SG Ramon Martinez, who summarized the government's view that "the Federal Circuit is wrong to categorically bar such damages whenever an infringer presents an objectively reasonable defense at trial. That role creates an arbitrary loophole that allows some of the most egregious infringers to escape enhanced damages."  Mr. Martinez would have the court consider the infringer's subjective state of mind to some degree, stating that what the Federal Circuit is "essentially doing is taking the reasonable man and giving him the benefit of omniscience, giving him the benefit of hindsight and saying, what facts do we know at the time of trial?"  Justice Breyer responded by stating "I didn't think they were doing that. I thought what they were doing was saying, we are not going to allow punitive damages in a case where the patent is so weak" (to which I would note that, well, the patent turned out not to be "so weak" because by hypothesis the plaintiff won!), and suggested that maybe it makes sense to leave the standard to the expertise of the Federal Circuit.  To this, Mr. Martinez argued that the Seagate standard is not consistent with historical practice, and that negative consequences that are of concern to Justice Breyer could be dealt with within a traditional recklessness standard.  Mr. Martinez then elaborated that in the government's view there could be three types of cases meriting enhancements:  (1) cases where the defendant intentionally infringed a patent believing it to be valid; (2) cases where the defendant's conduct was reckless based on the facts and circumstances known to the defendant at the time it engaged in the conduct; and (3) cases involving other misconduct by the defendant.  All of these types of conduct could be classified as "willful," if it is necessary to use that term.  In addition, there could be cases where enhancements would serve a purely compensatory purpose (Mr. Martinez didn't elaborate).  Eventually Justice Kagan asked what the correct standard would be as a matter of policy, and Mr. Martinez said it would be the same standard he had been advocated, which would ensure deterrence and punishment.

Carter Phillips then argued on behalf of the respondents and had an extended (but on my reading rather inconclusive) colloquy with Justice Breyer about whether there was empirical evidence about people asserting weak patents.  Justice Sotomayor asked "if you come up with something, any defense whatsoever in the litigation that's not frivolous, that that gets you out of enhanced damages," to which Mr. Phillips answered "Objective reasonableness is the requirement that the Federal Circuit has looked at, and I think that's more than simply the ability to satisfy Rule 11. I think there has to be a substantial defense. And substantial defenses were put forward in both of these cases. Indeed these were, in both instances, close cases. So I would hope that that's where the Court would would focus its attention."  Chief Justice Roberts, however, noted that the statutory text is bare--"'The Court may increase the damages up to three times the amount found or assessed.' Period." and suggested that the Federal Circuit's construction of an "elaborate standard" based on this language was "surprising."  Mr. Phillips noted, however, that Congress didn't amend the Federal Circuit's standard when it enacted the America Invents Act, and indeed mentioned in section 298 that defendants are not obligated to obtain opinions of counsel.  Justice Kagan responded, however, that there's nothing to indicate that Congress approved of the Federal Circuit's specific definition of "willfulness."  Justice Ginsburg asked "Can we at least peel off the clear and convincing evidence that seems to come out of nowhere and the the the standard is de novo review rather than abuse of discretion?"  Mr. Phillips argued against abandoning de novo review of what he characterized as a question of law (whether there is "an objectively reasonable basis for what's been done here?" After some further questioning from Justice Alito and Justice Breyer about whether there are any good analogies in other bodies of tort law, Justice Kennedy asked "Is there any way to allow some consideration for a subjective intent to infringe in an egregious case, as an additional element for--as an additional way to define willfulness without completely wrecking the Seagate standard?"  (Justice Kagan helpfully restated the question as a hypothetical:  someone intentionally infringes, his lawyers comes up with a reasonable but ultimately unsuccessful invalidity or noninfringement argument, and it seems wrong that the defendant's subjective bad faith is irrelevant.)  Mr. Phillips responded that the defendant will have to pay compensatory damages and (on the premised facts) attorneys' fees.  Toward the end of his argument, he made the following policy argument:  "Now, I understand the desire to to have enhanced damages against that particular bad actor. That's why I say in a lot of ways, this case comes down to what do you worry about more, pirates or trolls? My assessment of this, and I think it's borne out by the way the Federal Circuit has looked at this problem, is that there are not that there are not very many pirates out there. And if you keep a rule that is designed simply to get the one in a million pirates I would call them unicorns but one in a million pirates, you'd end up with a rule that will allow the trolls to go after every legitimate producer of products and services in this country. And that's the price you'd have to pay to get at the at the really bad actor."  Whether that sways the Court remains to be seen.

In rebuttal, Mr. Wall stated that "reasonable, good-faith arguments to--to challenge patents are not going to result in enhanced damages," and that "Our approach incentivizes good, commercially reasonable behavior under the full set of circumstances at the discretion of the district court. Their approach is incentivizing good litigation."  He also argued that there is no basis for a clear-and-convincing burden of proof or de novo review.

It's always hard to read the tea leaves, but for now I'm guessing (though it is just a guess, and I may revise my opinion after I've though about it some more) the Court will restate "willfulness" as the standard, but say that willfulness should not be easy to prove (though it will allow some evidence of subjective intent to factor in independently of objective considerations); abandon clear-and-convincing; and maybe say something like the reasonableness of the defendant's arguments regarding validity and infringement can be a factor to consider in determining whether the district court abused its discretion in awarding a damages enhancement.    

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