Enhanced Patent Damages: the "halo Effect"

• Jurisdiction: United States,Federal
• Citation: Vol. 41 No. 3
• Publication year: 2016
• Author: Robert W. Payne
• topic: Patent law,Intellectual Property,Federal,Civil Procedure

Enhanced Patent Damages: The "Halo Effect"

Robert W. Payne

Payne IP Law

Few areas in intellectual property law have suffered more ninety-degree turns than the subject of enhanced patent damages. On June 13, 2016, the U.S. Supreme Court set the newest course in a dramatic fashion - in Halo Electronics, Inc. v. Pulse Electronics, Inc.¹ and its companion case, Stryker Corp. v. Zimmer, Inc.² Federal Circuit bright-line authority was rejected.

If found liable in a patent infringement case, an infringer may be enjoined from activity, and may also be liable for damages. Damages may be actual damages proved by the plaintiff, but in no case may they be less than a reasonable royalty.³ Under certain circumstances, the Court may enhance damages up to a trebling of the underlying damage amount.⁴ This is set forth in 35 U.S.C. § 284, which provides:

Upon a finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.... [¶] [T]he court may increase the damages up to three times the amount found or assessed.

Notably, the statute gives no guidelines for exercise of the court's discretion. That issue was left to develop through case law, which the Federal Circuit set out to provide promptly upon its founding. We look first at the Underwater Devices case.⁵

THE UNDERWATER DEVICES CASE

Prior to Seagate,⁶ the standard for willfulness decisions for enhanced damages purposes was set by the Underwater Devices⁷ opinion. Underwater Devices was decided in the first year of the Federal Circuit's existence. At the time, perceived widespread disregard for patent rights had prompted the formation of the new Circuit.

Recognizing that deliberate, willful patent infringement was a danger to be tamed, the court in Underwater Devices essentially imposed a presumption of willful infringement. The court held that, to avoid a finding of willfulness, a confirmed infringer had to show that it took reasonable steps to avoid liability, including seeking and obtaining an opinion from competent legal counsel before engaging in infringing activity.⁸ This imposed an affirmative duty of due care on the defendant to refrain from infringing a third party's patent once the infringer was put on notice of the owner's claimed patent rights. A cottage industry of litigation over reliance on advice of counsel and the associated attorney-client privilege and work product doctrines blossomed.

Thus, the Federal Circuit in Underwater Devices viewed willfulness to be a question of fact, and it was for a jury to decide whether the defendant's asserted defenses to infringement were "reasonable." The evidentiary burden was preponderance of the evidence. Appellate review operated under the substantial evidentiary support standard.

Then, in 2007, came In re Seagate Technology, LLC.⁹

SEAGATE, POWELL, AND BARD

In Seagate, the Federal Circuit expressly overturned its own decision in Underwater Devices. It viewed the Underwater Devices standard as unworkable, especially with regard to the reliance of advice of counsel issues.

The court looked at the treatment of "willfulness" in other contexts and by other circuits, and explained that applying a negligence standard under a duty of due care was inappropriate.¹⁰ Instead, the court's analysis equated willfulness more with a measure of recklessness.¹¹

The court declared a new two-prong test for willfulness. First, the plaintiff had the burden of showing that the defendant engaged in the activity despite an objectively high likelihood that the defendant's actions constituted infringement of a valid patent.¹² The second prong required plaintiff to show "subjective" recklessness - that the defendant actually knew or should have known of that risk of infringement.¹³ If the first prong was not satisfied, the jury would not be asked to evaluate the second prong. The plaintiff was required to prove all this by clear and convincing evidence, rather than the previous standard of preponderance of evidence.¹⁴

Of course, this more restrictive approach had a signal effect on the imposition of enhanced damages in patent cases. Trial courts applying the Seagate standard were often ruling that the objective test for willfulness had not been satisfied, and not permitting a jury to consider any remaining issue.¹⁵

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After Seagate, two later Federal Circuit opinions resolved lingering issues. It is useful to explore their treatment of these issues, for they serve to highlight potential implications of the Supreme Court's holding in Halo Electronics.

In Powell v. Home Depot, Inc.,¹⁶ the court held that the objective prong could be decided by the district court as a matter of law if founded on a legal issue, such as claim construction.¹⁷ On the other hand, if the objective view of defendant's belief turned on factual questions, such as non-infringement itself, the objective prong was still to be decided by the jury.

Resolution of the objective prong by determination of recklessness is often a mixed question, involving evaluation of issues of both fact and law. In Bard Peripheral Vascular, Inc. v. W. L. Gore & Associates, Inc.,¹⁸ the court clarified that those mixed questions of law and fact would not interfere with the district court's objective determination of recklessness as a matter of law.¹⁹ The court stated that the district court was in the best position to determine reasonableness.

Making the district court judge the effective gatekeeper on the objective prong had a significant procedural impact in patent cases, and summary judgment became a more potent defensive tool. While the Seagate, Powell, and Bard holdings did not affect the issue of infringement or various liability defenses per se, a district court judge could now more readily throw out the issue of enhanced damages on partial summary judgment because of the objective prong requirement. As a result, the settlement value of the case would appreciably drop.

More subtly, even though this trio of cases largely favored defendants because it made enhanced damages more difficult to obtain, the defendant suffered in one sense as well. The objective/matter of law paradigm affected a defendant's tactical utilization of defenses. A "kitchen sink" approach to arguing all possible defenses, however remotely appropriate, could influence the district court judge's view of how reasonable the defendant's conduct was. Relying on unreasonable defenses suggested recklessness, and hence willfulness, and therefore no partial summary judgment for the defendant on enhanced damages.

In addition, because so much of the evaluation of defendant's conduct was to be resolved as a matter of law, a profound shift occurred in post-trial and appellate review procedure as well. Post-trial, the district judge's hand was...