The Patent Act permits a court to award damages to a successful plaintiff in an amount up to three times the actual damages suffered plus the plaintiff’s attorneys’ fees. These “enhanced damages” under Section 284 of the Act have been part of U.S. patent law since its inception, but the standard for awarding them has shifted over time. Enhanced damages were originally mandatory, but Congress later ordained a discretionary award in the belief that a defendant who acted out of ignorance of the law or with a good faith belief that no infringement was occurring should not punished in the same manner as a “wanton and malicious pirate.”
In re Seagate Technology, LLC (2007) announced the Federal Circuit’s strict two-prong test for patentees seeking enhanced damages. The first prong required the patentee to “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” If the infringer made a reasonable invalidity or non-infringement argument during the litigation, the patentee could not meet this “objective” prong. If the objective prong was met, the second Seagate prong required the patentee to show (also 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.”
In 2015, the Supreme Court agreed to hear two cases—Halo Electronics, Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer Inc.—in order to decide if the Seagate test was consistent with the language of § 284. Earlier this month, the court disapproved the Seagate approach, giving renewed leverage to patentees who sue for infringement.
Both cases illustrated how high Seagate had set the bar. In Stryker, the jury awarded Stryker $70 million in lost profits for Zimmer’s willful infringement, based in part on testimony that Zimmer had “all but instructed its design team to copy Stryker’s products.” The district court applied its discretion under § 284 to triple Stryker’s damages award. However, on appeal, the Federal Circuit threw out the award of enhanced damages because Zimmer had, in the court’s view, asserted reasonable defenses at trial.
Similarly, Halo alleged that Pulse was aware of its patents long before the lawsuit began and that Pulse’s pre-suit diligence consisted solely of a cursory review by a single engineer. Nonetheless, the district court refused to award enhanced damages because Pulse presented at trial a reasonable defense that was neither objectively baseless nor a “sham.” The Federal Circuit affirmed, stating that the objectively baseless standard of Seagate had not been met.
In its unanimous decision, the Supreme Court reversed the Federal Circuit’s rulings in both cases, holding that there is “no precise rule or formula for awarding damages under § 284.” Instead, “[d]istrict courts enjoy discretion in deciding whether to award enhanced damages.” However, this discretion is not unfettered because years of case precedent have narrowed the district court’s discretion to “egregious cases” involving behavior that was “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.”
In reversing the Federal Circuit’s Seagate decision, the Supreme Court observed that the first part of the Seagate test made it trivially easy for a bad-faith infringer to escape scot-free: All he had to do was come up with a single objectively reasonable defense to present at trial. Seagate’s test, said the Supreme Court, permits “someone who plunders a patent … [to] nevertheless escape any comeuppance under § 284 solely on the strength of his attorney’s ingenuity.” Lastly, the Court lowered Seagate’s “clear and convincing” standard of proof for enhanced damages, holding that patentees need only meet a “preponderance of the evidence” standard.
The Supreme Court’s decision will allow many more patent owners to recover enhanced damages for infringing conduct. By the same token, companies that worry about third-party patents might do well to obtain an opinion of counsel regarding the validity and applicability of those patents before launching a new product or service, particularly in light of the Supreme Court’s emphasis that the infringer’s culpability should be measured at the time the infringing behavior begins. And for patentees, it will be important to send notice letters to potential infringers before filing suit in order to bolster future arguments for enhanced damages. On the other hand, these notice letters must be drafted carefully to avoid enabling an infringer to preemptively file a declaratory judgment action.