The enhancement dance

Experts cast their early views on the combined Halo Electronics v Pulse Electronics and Stryker Corp v Zimmer cases, which reviewed the test for enhanced damages

The US Supreme Court’s eagerly anticipated decision in the combined Halo Electronics v Pulse Electronics and Stryker Corp v Zimmer cases has just been handed down, with the two-part test for determining whether damages may be increased being tossed out.

In its opinion on 13 June, the Supreme Court ruled that the two-part test applied by the Court of Appeals for the Federal Circuit was not consistent with Section 284 of the Patent Act and “impermissibly encumbers” the statutory grant of discretion to district courts.

Section 284 of the Patent Act allows courts to increase damages up to three times the amount found or assessed if the infringement is willful.

The Federal Circuit’s two-part test required a patent owner to show, by clear and convincing evidence, that the infringer acted despite an objectively high likelihood that its actions constituted infringement, and that the risk of infringement was either known or so obvious that it should have been known to the accused infringer.

The Supreme Court heavily cited its 2014 Octane Fitness v ICON Health & Fitness ruling (see boxout), which said that an ‘exceptional’ case in which a petitioner may be liable for attorney fees is simply one that stands out from others with respect to the substantive strength of a party’s litigating position, or the unreasonable manner in which the case was litigated.

The Federal Circuit had previously required a district court, after the 2007 Seagate decision, to determine both that the litigation is objectively baseless and that the petitioner brought it in subjective bad faith.

“But a case presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself apart from mine-run cases to warrant a fee award,” the Supreme Court explained in Octane Fitness.

In its 13 June opinion on enhanced damages, the Supreme Court said “Octane Fitness arose in a different context but is instructive here”, particularly as Seagate was also the source of the Federal Circuit’s two-part test for determining enhanced damages.

“There, a two-part test for determining when a case was ‘exceptional’—and therefore eligible for an award of attorneys’ fees—was rejected because a claim of ‘subjective bad faith’ alone could ‘warrant a fee award.’,” the Supreme Court explained. So too here: “A patent infringer’s subjective willfulness, whether intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.”

“The [Federal Circuit’s] test further errs by making dispositive the ability of the infringer to muster a reasonable defence at trial, even if he did not act on the basis of that defence or was even aware of it. Culpability, however, is generally measured against the actor’s knowledge at the time of the challenged conduct.”

It concluded: “In sum, Section 284 allows district courts to punish the full range of culpable behaviour. In so doing, they should take into account the particular circumstances of each case and reserve punishment for egregious cases typified by willful misconduct.”

Partner Michael Sandonato, chair of Fitzpatrick, Cella, Harper & Scinto’s electronic and computer technologies practice group, succinctly explained: “This decision was of course widely expected, since the Supreme Court’s decisions in Octane Fitness v Icon Health & Fitness and Highmark v Allcare Health Management abrogated a two-part test for recovering attorney fees, that was considered to be analogous to the two past tests for obtaining enhanced damages. The importance here is that the new framework puts the state of mind of the accused infringers front and centre, by eliminating the ability to argue that enhanced damages are not appropriate based upon defences that they did not actually consider.”

“As Justice John Roberts colourfully put it, infringers no longer can ‘escape any Section 284 comeuppance solely on the strength of his attorney’s ingenuity’.”

Joe Patino, patent litigator at Foley & Lardner, added that, “as expected”, the Supreme Court’s decision in Halo “abandoned the structured test in Seagate for enhanced damages, but has not replaced that test with a distinct standard”.

He said: “Instead, the trial courts are reminded that they have discretion under Section 284 of the Patent Act. Though that discretion is not without limits, including having to reserve enhanced damages for ‘egregious conduct’ that is worse than the conduct of an alleged infringer in the ‘typical’ infringement case, the same ‘ingenious attorneys’ who were helping alleged infringers defend against charges of willful infringement will now turn their attention to highlighting the lack of typicality of the conduct, and the reasons the conduct is not egregious.”

According to Dan Bagatell, chair of the Federal Circuit patent appeals practice at Perkins Coie: “As a practical matter, it’s hard, although not impossible, for a defendant to win summary judgement on an issue of subjective intent.”

Bagatell continued: “And although district courts will retain plenty of discretion to deny enhancement, I suspect that in most cases they will wait until after trial to make that determination.”

He explained: “That means that more juries are likely to see juicy documents arguably suggesting that the defendant (or at least a rogue employee) was a scornful, malicious ‘pirate’, to use the Supreme Court’s terminology, and those documents may affect liability findings as well as willfulness determinations. That risk of taint, plus the prospect of trebling, will likely pressure more defendants to settle—perhaps as much as the risk of attorneys’ fees awards has dissuaded patentees and contingency-fee lawyers from pressing forward.”

Mike Turner, partner in the intellectual property and technology transactions practice at Neal Gerber & Eisenberg, argued the Halo decision returned the question of willfulness to the district court, “where it belongs”.

He said: “It is the district court that hears the evidence, measures witness credibility, and can best determine when a case is of an ‘egregious’ nature. Seagate required district courts to ignore a defendant’s egregious acts so long as the defendant’s counsel was able to eventually conjure a reasonable defence. By unanimously setting the evidence threshold at a preponderance, and calling for review based on abuse of discretion, the Supreme Court allows courts to weigh the evidence free of the mental gymnastics Seagate and its progeny came to require.”

“Halo marks a return to awarding plaintiffs enhanced damages in cases where they are warranted, which is a very small percentage of all cases. But it lifts the additional burdens imposed by Seagate that prevented willfulness in almost all cases. If 5 percent of cases warranted enhanced damages before Seagate, [it would] probably would allow those damages to be awarded in about 5 percent of that 5 percent.”

“All one had to do was hire a decent attorney to come up with a reasonable claim construction question, which can almost always be done. The ability to avoid willfulness via that tactic is gone.”
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