IP Law Daily Supreme Court strikes ‘rigid’ Seagate enhanced damages standard
Monday, June 13, 2016

Supreme Court strikes ‘rigid’ Seagate enhanced damages standard

By Cheryl Beise, J.D.

A unanimous Supreme Court has rejected the Federal Circuit’s Seagate test for determining whether to award enhanced damages under Section 284 of the Patent Act as "unduly rigid" and impermissibly encumbering district courts’ discretion. While there is no precise rule or formula for awarding enhanced damages under Section 284, "they are not to be meted out in a typical infringement case, but are instead designed as a sanction for egregious infringement behavior," the Court explained (Halo Electronics, Inc. v. Pulse Electronics, Inc., together with Stryker Corp. v. Zimmer, Inc., June 13, 2016, Roberts, J.). The majority opinion was written by Chief Justice Roberts. Justice Breyer, joined by Justices Kennedy and Alito, filed a concurring opinion.

The Supreme Court in this appeal consolidated two petitions (Dkt. Nos. 14-1513 and 14-1520) filed by patent owners challenging the Federal Circuit’s two-partSeagate test for awarding enhanced infringement damages under Section 284. Medical device manufacturer Stryker Corporation and electronic components supplier Halo Electronics each prevailed against competitors in jury trials. In Halo’s case, the Federal Circuit affirmed the district court’s denial of enhanced damages on the ground that competing supplier Pulse Electronics’ infringement was not "willful" because it reasonably relied on an obviousness defense. In Stryker’s case, the district court’s award of enhanced damages was vacated by the Federal Circuit, because competing device manufacturer Zimmer had had presented reasonable defenses and, therefore, had not acted recklessly. Both petitioners argued that the Federal Circuit’s Seagate test ran afoul of the standard the Supreme Court adopted in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under a similarly-worded provision of the Patent Act.

Section 284. Enhanced damages have been contemplated by U.S. patent law since its inception, the Court noted. The Patent Act of 1783 mandated an award of treble damages for infringement. In 1836, Congress made enhanced damages discretionary "according to the circumstances of the case." Congress added Section 284 to the Patent Act in 1952. Section 284 provides that, in a case of infringement, courts "may increase the damages up to three times the amount found or assessed." 35 U.S.C. §284.

Seagate standard. In In re Seagate Technology, LLC, 497 F. 3d 1360, 1371 (2007) (en banc), the Federal Circuit adopted a two-part test for determining when a district court may increase damages pursuant to Section 284. Under Seagate, a patent owner must establish that the infringer’s action was "willful" by providing clear and convincing evidence that: (1) "the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent" (the objective reckless prong reviewed on appeal de novo) and (2) the risk of infringement "was either known or so obvious that it should have been known to the accused infringer" (the subjective prong reviewed on appeal for abuse of discretion). When both steps are satisfied, a district court may exercise its discretion (reviewed on appeal for abuse of discretion) to award damages.

The Supreme Court held that the Seagate test is not consistent with Section 284. First, the statute does not place any explicit limit or condition on when enhanced damages are appropriate, the Court observed. In addition, the Court previously has clearly indicated that use of the word "may" in a statutory grant of authority to district courts clearly connotes discretion.

"District courts enjoy discretion in deciding whether to award enhanced damages, and in what amount," the Court said. However, the Court also emphasized that jurisprudence over the past 180 has made clear that enhanced damages under the Patent Act "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 type of conduct variously described by courts as "as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate."

According to the Court, 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. In Octane Fitness—which addressed the standard for determining when a case is exceptional for purposes of awarding attorney fees under § 285 of the Patent Act—the Court similarity rejected the Federal Circuit’s imposition of an objective reasonableness requirement. Just as "subjective bad faith" alone could "warrant a fee award," a patent infringer’s "subjective willfulness, whether intentional or knowing, may warrant enhanced damages," the Court said.

The Seagate test also erred by making dispositive the ability of the infringer to muster a reasonable defense at trial, even if he did not act on the basis of that defense or was even aware of it. Culpability, however, is generally measured against the actor’s knowledge at the time of the challenged conduct, the Court explained.

The Federal Circuit further erred in applying a heightened standard proof under § 284. In Octane Fitness, the Court rejected the Federal Circuit’s adoption of a clear and convincing standard of proof for awards of attorney fees under § 285 of the Patent Act. Yet neither provision supplies a basis for imposing such a heightened standard of proof. While the patent owner bears the burden of proof for establishing egregious infringement, a preponderance of the evidence standard is appropriate, according to the Court.

Lastly, the Court rejected the Federal Circuit’s "tripartite appellate review framework." In Octane Fitness, as well as in Highmark Inc. v. Allcare Health Management System, Inc., 572 U. S. (2014), the Court rejected a similar multipart standard of review in favor of abuse of discretion review. "Because § 284 ‘commits the determination’ whether enhanced damages are appropriate to the district court’s discretion, ‘that decision is to be reviewed on appeal for abuse of discretion,’" the Court said.

The Court was not persuaded by the respondents’ 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. "Nearly two centuries of exercising discretion in awarding enhanced damages in patent cases … has given substance to the notion that there are limits" to district court discretion, the Court said.

The Federal Circuit’s judgments under Section 284 were vacated and both cases remanded for reconsideration in light of the Court’s opinion.

Concurring opinion. Justice Breyer, joined by Justices Kennedy and Alito, wrote separately to clarify limitations on enhanced damage awards under Section 284 in order to ensure that they produce uniformity, maintain consistency with the basic objectives of patent law, and "only target cases of egregious misconduct."

Justice Breyer first explained that the Court’s references to "willful misconduct" do not mean that a court may award enhanced damages based solely upon an infringer’s knowledge of a patent and nothing more. Second, Justice Breyer clarified that an infringer’s failure to obtain advice of counsel cannot be used to prove willful infringement. Third, according to Justice Breyer, enhanced damages may not "serve to compensate patentees" for infringement-related costs or litigation expenses.

The case is Dkt. Nos. 14-1513 and 14-1520.

Attorneys: Craig Earl Countryman (Fish & Richardson, P.C.) for Halo Electronics, Inc. Mark Lee Hogge (Dentons US LLP) and Carter G. Phillips (Sidley Austin LLP) for Pulse Electronics, Inc. Jeffrey B. Wall (Sullivan & Cromwell LLP) and Sharon Ann Hwang (McAndrews, Held & Malloy, Ltd.) for Stryker Corp. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) and Donald R. Dunner (Finnegan Henderson Farabow Garrett & Dunner LLP) for Zimmer, Inc., and Zimmer Surgical, Inc.

Companies: Halo Electronics, Inc.; Pulse Electronics, Inc.; Stryker Corp.; Zimmer, Inc.; Zimmer Surgical, Inc.

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