Before Chief Justice Roberts read the unanimous decision of the Court in Halo Electronics, Inc. v. Pulse Electronics, Inc., he joked that it was one of the few intellectual property cases that everyone could follow. The issue before the Court—whether the Federal Circuit’sSeagate test for finding treble damages ran afoul of the Patent Act—attracted a multitude of amicus briefs raising public policy concerns, including a possible chilling effect on patent innovation and an increase in patent “trolls.” But on June 13, 2016, the Court rejected these arguments and expanded judges’ discretion to award treble damages in these cases.
The Old Standard
In 2007, the Federal Circuit adopted the Seagate test to decide whether “damages up to three times the amount found” were appropriate under section 284 of the Patent Act. The two-prong test required that a patent owner show by “clear and convincing evidence” that: (1) “the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent” and (2) the risk of infringement was “either known or so obvious that it should have been known to the accused infringer.”
If a decision applying the Seagate test was appealed, tripartite review was required. The objective recklessness prong was reviewed de novo, the subjective knowledge prong was reviewed for substantial evidence, and the ultimate decision of whether enhanced damages were appropriate was reviewed for abuse of discretion.
Halo Electronics, Inc. v. Pulse Electronics, Inc.
The Court’s decision in Halo highlights three primary issues with the Seagate test. The first issue regards the requirement of objective recklessness. Under the Seagate test, the district court could not consider treble damages, regardless of the overwhelming evidence of subjective intent, if there was no finding of objective recklessness. This finding can be particularly difficult when creative attorneys can construct an objectively reasonable defense after the fact. Turning to the statute, the Court explains that section 284 states that courts “may” grant enhanced damages. Because of the clear language and lack of authority that would constrain a judge’s discretion, the Court holds that the objectively reckless requirement of Seagate is “unduly rigid.”
Second, the Court notes the paucity of statutory authority and historic practice of implementing a burden of proof of clear and convincing evidence in infringement cases, and thus, the preponderance of the evidence standard is appropriate for enhanced damages.
Third, the Court rejects the tripartite review of Seagate appeals and replaces it with a review for abuse of discretion. The Court reasons that reviewing for abuse of discretion follows naturally from the decisions to give greater discretion to district courts.
The go-forward implications are not entirely clear. Trial courts may award treble damages if a judge finds, by a preponderance of the evidence, that enhanced damages are warranted because of the culpable behavior of the patent infringer in the particular circumstances. While this significantly expands trial courts’ discretion, the Court cautions that “such punishment should generally be reserved for egregious cases typified by willful misconduct.”
With the median damages award for a patent-infringement case well exceeding $5 million and the most extreme awards going for hundreds of millions of dollars, the impact of Halo on the patent community could be significant. Generally, with increased discretion comes greater inconsistency and lower predictability. The greater potential for treble damages may spur an increase in the number of patent-infringement suits, especially suits brought by patent “trolls”—individuals or companies that buy patents to use as a tool to sue or threaten other patent holders for alleged infringement.
As major technology companies cited in their amicus briefs, greater discretion may have a pervasive chilling effect on innovation. The threat of treble damages alone may curb many innovators, particularly small-scale businesses, from challenging questionable patents or investing in specific technologies.
The patent community will also likely see an increased vigilance around the development of new technologies and the use of existing patents. Although the Patent Act specifies that a lack of advice of counsel cannot be used to prove willful infringement, many developers may increase their reliance on legal experts’ opinions to protect themselves.
Keywords: litigation, corporate counsel, treble damages, Halo Electronics, Seagate, patent infringement