Kaminski_Jeffri_LRJeffri A. Kaminski, Venable LLP

The U.S. Supreme Court’s recent Halo Electronics, Inc v. Pulse Electronics, Inc. decision changes the standard for awarding enhanced damages in patent litigation. The ruling reversed a 2015 U.S. Court of Appeals for the Federal Circuit decision that maintained that court’s longstanding approach to awarding enhanced damages.

In Halo, the Court altered the law on enhanced damages in three ways: 1) it eliminated the requirement to show objective recklessness; 2) it lowered the standard of proof from “clear and convincing evidence” to “preponderance of the evidence;” and 3) it adopted an abuse-of-discretion standard for the Federal Circuit’s review of a district court’s decision to grant enhanced damages.

These changes make it easier for patent owners to obtain an award for enhanced damages and for that award to be upheld on appeal.  Halo also follows the trend set by the Supreme Court in the 2014 Octane Fitness decision and the 2016 Kirtsaeng decision in making it easier to obtain fees and damages awards in exception cases.  Octane Fitness reduced patent litigants’ burden when pursuing attorneys’ fees in “exceptional” cases; Kirtsaeng gave judges broad discretion in awarding attorneys’ fees in copyright cases.  The Court held in Kirtsaeng that “objective reasonableness” of a party’s position is one factor—not the controlling factor—in determining an amount of attorneys’ fees.  Other factors relevant to granting attorneys’ fees must also be taken into account and a totality of the circumstances test controls the fee award analysis.

Below are some thoughts on each of the three law changes arising from Halo:

  1.  Eliminating objective recklessness test and focusing on a subjective basis

Previously, to obtain enhanced patent damages, patent owners were required to show that the infringer took action despite an objectively high likelihood that its actions constituted infringement of a valid patent. Courts made this determination without considering the infringer’s state of mind.  The infringer could defeat this test by raising a “substantial question” regarding validity or infringement of the patent during litigation.

The Supreme Court determined that the objective recklessness test is problematic, stating that the 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.  Under that standard, someone who plunders a patent–infringing it without any reason to suppose his conduct is arguably defensible–can nevertheless escape any comeuppance under §284 solely on the strength of his attorney’s ingenuity.

The Court held that the inquiry should instead focus on what the infringer knew at the time of infringement, not ‘facts that the defendant neither knew or had reason to know at the time he acted.’  The district court should take into account the particular circumstances and exercise its discretion to determine an award of enhanced damages ‘in a manner free from the inelastic constraints of the Seagate test.’

The Court’s elimination of the “objective recklessness” test focuses the fee analysis on the infringer’s knowledge at the time of the infringing conduct, not on whether reasonable defenses are developed during litigation.  This focus requires patent owners and accused infringers to consider different pre-litigation strategies. Patent owners may now more frequently send demand letters, putting accused infringers on notice of relevant patents and potential infringement. In response, accused infringers may more frequently seek out invalidity or non-infringement opinions as a shield to enhanced damages.

However, such opinions should not be a requirement.  Justice Breyer noted in a concurrence joined by Justices Alito and Kennedy that the patent statute precludes the failure to obtain such an opinion as evidence to prove willful infringement (see 35 U.S.C. § 298).  The concurrence also noted that opinions of counsel may be expensive and may not be necessary under the circumstances of a particular case. Even so, all accusations of patent infringement should be given careful and comprehensive documented consideration.

  1. Lowering the patent owner’s burden of proof from “clear and convincing evidence” to “preponderance of the evidence”

The Court again referred to Octane Fitness for guidance as to the proper burden of proof. The Federal Circuit’s 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’s fees under §285 of the Patent Act.  Because that provision supplied no basis for imposing such a heightened standard of proof, we rejected it. … We do so here as well.  Like §285, §284 ‘imposes no specific evidentiary burden, much less such a high one.’ …  And the fact that Congress expressly erected a higher standard of proof elsewhere in the Patent Act, see 35 U.S.C. §273(b), not in §284, is telling.  Furthermore, nothing in historical practice supports a heightened standard.  As we explained in Octane Fitness, ‘patent-infringement litigation has always been governed by a preponderance of the evidence standard.’  Enhanced damages are no exception.

  1. Adopting the “abuse of discretion” standard of review

Again following its Octane Fitness rulings on attorneys’ fees in exceptional cases, the Supreme Court determined that the district court’s decision on enhancing damages should be reviewed using the abuse of discretion standard:

That [abuse of discretion] standard allows for review of district court decisions informed by ‘the considerations we have identified.’ … The appellate review framework adopted by the Federal Circuit reflects a 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, however, has given substance to the notion that there are limits to that discretion.  The Federal Circuit should review such exercises of discretion in light of the longstanding considerations we have identified as having guided both Congress and the courts.

Such “discretionary” decisions are difficult to overturn on appeal to the Federal Circuit, because the standard of review is quite high.  In considering the ramifications of its decision, patent trolls, defined by the Court as “entities that hold patents for the primary purpose of enforcing them against alleged infringers, often exacting outsized licensing fees on threat of litigation,” received a special mention.  Justice Breyer noted that the decision should not empower patent trolls.  Under Halo, enhanced damages are not available whenever the defendant knew of the patent in question, but only in egregious cases. In addition, enhanced damages should not be used to compensate patentees for infringement-related costs or litigation expenses.  Enhanced damages are only appropriate for “egregious cases of misconduct beyond typical infringement” and should not apply to “garden-variety cases.”  As such, a typical patent troll case, where the defendant is accused of infringing a patent it previously did not know existed, should not result in enhanced damages. 

To borrow a term from copyright law, Halo appears to be a transformative decision.  The extent of its actual impact, however, will play out over the next several years in federal district courts, as trial judges apply Halo’s principles to various factual situations, as well as in the Federal Circuit, to which damages-paying litigants will appeal their losses.