Monday, June 13, 2016

U.S. Supreme Court Opinion in Halo v. Pulse, Stryker v. Zimmer: Analysis

As I reported earlier this morning, the U.S. Supreme Court today vacated the Federal Circuit opinions in Halo and Stryker, the two cases in which the Supreme Court had granted cert to determine the standards for awarding enhanced damages for patent infringement under section 284 of the U.S. Patent Act.  Opinion is here.  (For previous coverage on this blog, see, e.g., here).  Chief Justice Roberts writes for the unanimous Court, with a separate concurrence by Justice Breyer (joined by Justices Kennedy and Alito).

1.  Chief Justice Roberts begins his opinion with a discussion of the predecessor statutes and cases leading up to the enactment of section 284 in 1952, concluding that "It is against this backdrop that Congress, in the 1952 codification of the Patent Act, enacted §284. 'The stated purpose' of the 1952 revision 'was merely reorganizationin language to clarify the statement of the statutes.' Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U. S. 476, 505, n. 20 (1964) (internal quotation marks omitted). This Court accordingly described §284—consistent with the history of enhanced damages under the Patent Act—as providing that 'punitive or "increased" damages' could be recovered 'in a case of willful or bad-faith infringement.” Id., at 508 . . .'" (p.4).  The Court then explains the standards the Federal Circuit had superimposed on the statute:
Under Seagate, a plaintiff seeking enhanced damages must show that the infringement of his patent was “willful.” 497 F.3d, at 1368. The Federal Circuit announced a two-part test to establish such willfulness: First, “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,”without regard to “[t]he state of mind of the accused infringer.” Id., at 1371. This objectively defined risk is to be“determined by the record developed in the infringement proceedings.” Ibid. “Objective recklessness will not befound” at this first step if the accused infringer, during the infringement proceedings, “raise[s] a ‘substantial question’ as to the validity or noninfringement of the patent.” Bard Peripheral Vascular, Inc. v. W. L. Gore & Assoc., Inc., 776 F.3d 837, 844 (CA Fed. 2015). That categorical bar applies even if the defendant was unaware of the arguable defense when he acted. . . .
Second, after establishing objective recklessness, a patentee must show—again by clear and convincing evidence—that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” Seagate, 497 F. 3d, at 1371. Only when both steps have been satisfied can the district court proceed to consider whether to exercise its discretion to award enhanced damages. Ibid.
Under Federal Circuit precedent, an award of enhanced damages is subject to trifurcated appellate review. The first step of Seagate—objective recklessness—is reviewed de novo; the second—subjective knowledge—for substantial evidence; and the ultimate decision—whether to award enhanced damages—for abuse of discretion. See Bard Peripheral Vascular, Inc. v. W. L. Gore & Assoc., Inc., 682 F. 3d 1003, 1005, 1008 (CA Fed. 2012); Spectralytics, Inc. v. Cordis Corp., 649 F. 3d 1336, 1347 (CA Fed. 2011) (pp. 5-6).
2.  The Court then recites the facts of Halo and Stryker, before turning to its discussion of what it views as the correct standard:
The pertinent text of §284 provides simply that “the court may increase the damages up to three times the amount found or assessed.” 35 U. S. C. §284. That language contains no explicit limit or condition, and we haveemphasized that the “word ‘may’ clearly connotes discretion.” Martin v. Franklin Capital Corp., 546 U. S. 132, 136 (2005) (quoting Fogerty v. Fantasy, Inc., 510 U. S. 517, 533 (1994)).
At the same time, “[d]iscretion is not whim.” Martin, 546 U. S., at 139. . . . Thus, although there is “no precise rule or formula”for awarding damages under §284, a district court’s “discretion should be exercised in light of the considerations” underlying the grant of that discretion. Octane Fitness, 572 U. S., at ___ (slip op., at 8) (quoting Fogerty, 510 U. S., at 534).
Awards of enhanced damages under the Patent Act over the past 180 years establish that they are not to be meted out in a typical infringement case, but are instead designed as a “punitive” or “vindictive” sanction for egregious infringement behavior. The sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate. See supra, at 2–5. District courts enjoy discretion in deciding whether to award enhanced damages, and in what amount. But through nearly two centuries of discretionary awards and review by appellate tribunals,“the channel of discretion ha[s] narrowed,” Friendly, Indiscretion About Discretion, 31 Emory L. J. 747, 772 (1982), so that such damages are generally reserved for egregious cases of culpable behavior (pp. 7-9).
3.  The Court then notes that Seagate reflects some of these concerns, but (surprise!) it is "unduly rigid":
The principal problem with Seagate’s two-part test is that it requires a finding of objective recklessness in every case before district courts may award enhanced damages. Such a threshold requirement excludes from discretionary punishment many of the most culpable offenders, such as the “wanton and malicious pirate” who intentionally infringes another’s patent—with no doubts about its validity or any notion of a defense—for no purpose other than to steal the patentee’s business. Seymour, 16 How., at 488. . . .
The Seagate test aggravates the problem by making dispositive the ability of the infringer to muster a reasonable (even though unsuccessful) defense at the infringement trial. The existence of such a defense insulates the infringer from enhanced damages, even if he did not act on the basis of the defense or was even aware of it. . . .
But culpability is generally measured against the knowledge of the actor at the time of the challenged conduct. . .(pp. 9-10).
4.  On the other hand, a finding of willfulness doesn't necessarily mean that the court must award enhanced damages:
Section 284 allows district courts to punish the full range of culpable behavior. Yet none of this is to say that enhanced damages must follow a finding of egregious misconduct. As with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount. Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test. Consistent with nearly two centuries of enhanced damages under patent law, however, such punishment should generally be reserved for egregious cases typified by willful misconduct (p.11).
Editorial comment here:  Although this paragraph helpfully points out that enhanced damages are not required in every case of willful infringement, it also doesn't provide any guidance for exercising that discretion (though presumably the Read v. Portec factors will still apply); and that word "generally" in the last clause might give rise to problems, as plaintiffs will seek to show why their case, in which the infringement may not have been egregious, nevertheless is different from the norm and deserves an enhancement.

5.  The Court also doesn't approve of the Federal Circuit's standard of proof and standard of appellate review:
The Seagate test is also inconsistent with §284 because it requires clear and convincing evidence to prove recklessness. On this point Octane Fitness is again instructive. There too the Federal Circuit had adopted a clear and convincing standard of proof, for awards of attorney’sfees under §285 of the Patent Act. Because that provision supplied no basis for imposing such a heightened standard of proof, we rejected it. See Octane Fitness, 572 U. S., at ___ (slip op., at 11). We do so here as well. . . .
Finally, because we eschew any rigid formula for awarding enhanced damages under §284, we likewise reject the Federal Circuit’s tripartite framework for appellate review (p.12).
The Chief rejects the argument that Congress approved of the Seagate standard in enacting the America Invents Act in 2011 (pp. 13-14).

6.  Finally, the Court gets to policy, but doesn't find it dispositive:
At the end of the day, respondents’ main argument for retaining the Seagate test comes down to a matter of policy. Respondents and their amici are concerned that allowing district courts unlimited discretion to award upto treble damages in infringement cases will impede innovation as companies steer well clear of any possible interference with patent rights. They also worry that the ready availability of such damages will embolden “trolls.” Trolls, in the patois of the patent community, are entities that hold patents for the primary purpose of enforcing them against alleged infringers, often exacting outsized licensing fees on threat of litigation.
Respondents are correct that patent law reflects “a careful balance between the need to promote innovation” through patent protection, and the importance of facilitating the “imitation and refinement through imitation” that are “necessary to invention itself and the very lifeblood of   a competitive economy.” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U. S. 141, 146 (1989). That balance can indeed be disrupted if enhanced damages are awarded in garden-variety cases. As we have explained, however, they should not be. The seriousness of respondents’ policy concerns cannot justify imposing an artificial construct such as the Seagate test on the discretion conferred under § 284 (pp. 14-15).
7.  In his concurring opinion, Justice Breyer notes three important caveats,  before himself turning to policy:
First, the Court’s references to “willful misconduct” do not mean that a court may award enhanced damages simply because the evidence shows that the infringer knew about the patent and nothing more. . . .
Second, the Court writes against a statutory background specifying that the “failure of an infringer to obtain the advice of counsel . . . may not be used to prove that the accused infringer wilfully infringed.” §298. The Court does not weaken this rule through its interpretation of § 284. . . .
Third, as the Court explains, enhanced damages may not “serve to compensate patentees” for infringement-related costs or litigation expenses. Ante, at 3–4. . . .
I describe these limitations on enhanced damages awards for a reason. Patent infringement, of course, is a highly undesirable and unlawful activity. But stopping infringement is a means to patent law’s ends. Through a complex system of incentive-based laws, patent law helps to encourage the development of, disseminate knowledge about, and permit others to benefit from useful inventions. Enhanced damages have a role to play in achieving those objectives, but, as described above, that role is limited.
. . . Amici explain that some of those firms generate revenue by sending letters to “‘tens of thousands of people asking for a license or settlement’” on a patent “‘that may in fact not be warranted.’” Brief for Internet Companies as Amici Curiae 12; cf. Letter to Dr. Thomas Cooper (Jan. 16, 1814), in 6 Writings of Thomas Jefferson 295 (H. Washington ed. 1854) (lamenting “abuse of the frivolous patents”). How is a growing business to react to the arrival of such a letter, particularly if that letter carries with it a serious risk of treble damages? Does the letter put the company “on notice” of the patent? Will a jury find that the company behaved “recklessly,” simply for failing to spend considerable time, effort, and money obtaining expert views about whether some or all of the patents described in the letter apply to its activities (and whether those patents are even valid)? These investigative activities can be costly. Hence, the risk of treble damages can encourage the company to settle, or even abandon any challenged activity.
To say this is to point to a risk: The more that businesses, laboratories, hospitals, and individuals adopt this approach, the more often a patent will reach beyond its lawful scope to discourage lawful activity, and the more often patent-related demands will frustrate, rather than “promote,” the “Progress of Science and useful Arts.” . . . Thus, in the context of enhanced damages, there are patent-related risks on both sides of the equation.That fact argues, not for abandonment of enhanced damages, but for their careful application, to ensure that they only target cases of egregious misconduct.
One final point: The Court holds that awards of enhanced damages should be reviewed for an abuse of discretion. Ante, at 12–13. I agree. But I also believe that, in applying that 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. See ante, at 9. And any error on such a question would be an abuse of discretion. . . . 

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My initial take:  the result is not a surprise in light of the Court's patent cases over the past decade, in which it routinely castigates the Federal Circuit for its "rigid" bright-line rules.  I actually think some bright (or brightish) line rules are not a bad idea, particularly when it comes to calculating damages--as I discuss in my paper (soon, I hope, to be on ssrn) Patent Damages Heuristics.  Moreover, while I am happy that the Court seems to recognize the potential abuses that may follow from having too open-ended a standard for awarding enhanced damages, I am less sanguine that the standard the Court adopts will be up to the task of eliminating those abuses.  (If knowledge of a plausible defense at the time of the infringement is now relevant, for example, how does that apply when the infringement is ongoing?  Does the infringement go from being willful to nonwillful if the defense seems more sound, though ultimately unsuccessful, later in time?) 

For my part, as a matter of policy I believe that enhanced damages serve a legitimate purpose only in a few narrowly circumscribed cases, such as when compensatory damages alone (1) would leave the plaintiff worse off than it would have been but for the infringement (perhaps because certain harms are not susceptible to quantification); or (2) would leave the defendant in a better position than a willing licensee (perhaps because the infringer avoids certain risks that a licensee normally would shoulder); or (3) would be necessary to achieve adequate deterrence (perhaps because the infringing act was of a type that often would go undetected, or the defendant has deliberately driven up litigation costs to discourage an impecunious patentee from filing suit). On the other hand, I would be more generous in awarding the prevailing party its attorney fees, and I believe courts should always award the prevailing patentee postjudgment interest, compounded, to enable full compensation.

Depending on how the new standard evolves, I suppose it is conceivable that Congress may amend the statute to recalibrate the balance in some regard , though I wouldn't hold my breath.


  1. As I read it, the main substantive change found in II.B.1 slip op p 9-11, is to do away with the objective prong of the Seagate test, with the result that enhanced damages are now available for infringement that is egregious in a purely subjective sense. I’ve read the passage, but I’m still not really sure what the Court thinks is wrong with an objective requirement. The Court says it would be wrong to shield a “‘wanton and malicious pirate’ who intentionally infringes another’s patent—with no doubts about its validity or any notion of a defense—for no purpose other than to steal the patentee’s business.” Who bears the burden of proof? If the infringer has to prove subjective good faith, this will be tantamount to a requirement to actually carry out due diligence, or at least formally express your subjective intent to someone at the time. That seems awfully hard on the small business that Breyer is concerned about. The objective prong as a hurdle seems to me to be a good heuristic relating to subjective intent – if there was a good objective argument that the patent was invalid or not infringed, then it seems reasonable to impute a subjective belief to the same effect to the infringer, given the difficulties of proving subjective intent. On the other hand, if the patentee has to prove subjective wilfulness, enhanced damages will be difficult to obtain absent some smoking gun.

    (And that aside from what the subjective intent requirement actually is – the Court lists “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant” as if they all mean the same thing, even though on the face of it they can be quite different.)

    1. That's a good question about the burden of proof. I'd guess that the patent owner has to put on some evidence that the infringement was (at least) intentional and knowing, at which point the burden shifts to the defendant to show that at the time he began infringing he either wasn't aware of the patent or believed (with good reason) that it was invalid or not infringed. I suppose it would be worthwhile to see how the courts handled the subjective prong after Seagate, in the cases that got past the objective prong; maybe the Federal Circuit will use that as a template for crafting the new procedure. I suspect the Court was persuaded in part by the spectre of someone who knowingly infringed and didn't care whether the patent was valid or not, and only later came up with a plausible though ultimately unsuccessful validity argument. But why any of these subjective state-of-mind concerns should be relevant, as a matter of policy, to the question of whether or not to enhance damages eludes me.

    2. Agreed. I don't really see why the Court was so concerned about that scenario - and it is even harder to see how it could be worth giving up the certainty that was abandoned by rejecting the objective prong of Seagate. The USSC really seems to hate bright line rules for some reason. I wonder if that is a general phenomenon, or just in patent law?

    3. I don't know; it would be interesting to compare other bodies of law. In the Court's defense, it may be that a majority of them feel bound by the text and history of the statute at issue here to reject a bright-line test, even if policy suggests otherwise.