On June 13, 2016, the Supreme Court issued a unanimous opinion in two consolidated cases (Halo Electronics v. Pulse Electronics and Stryker Corp. v. Zimmer) effectively lowering the standard for obtaining enhanced damages in patent infringement lawsuits under 35 U.S.C. §284.[i] In a significant win for patent holders, the Supreme Court rejected the two-part test established by the Federal Circuit in its 2007 In re Seagate decision. Under Seagate, the patent holder was required to prove – by clear and convincing evidence – (i) that the defendant’s infringement was objectively reckless and (ii) that the infringer subjectively knew its conduct was infringing. The objectively reckless prong required the patent holder to establish that the defendant had no reasonable defense to the infringement claim. This requirement provided defendants with a mechanism to defeat a willfulness allegation as a matter of law on summary judgment or through trial motions, and served as a significant barrier to the ability of patent holders to obtain enhanced damages. The Supreme Court has now rejected the requirement for objective recklessness, stating that “subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.”

Relying on the language of Section 284, the Supreme Court held that district courts are granted “the discretion to award enhanced damages against those guilty of patent infringement.” Though holding that there was no “precise rule or formula” for the exercise of discretion by the district court, the Supreme Court was clear that this discretion is not unbounded. Enhanced damages are not appropriate in “garden-variety” cases. Rather, trial courts have discretion to award enhanced damages in “egregious cases of misconduct beyond typical infringement.”

The Supreme Court not only rejected the objectively reckless requirement, it also lowered the burden of proof necessary to establish a basis for enhanced damages. Whereas Seagate required proof by clear and convincing evidence, the Supreme Court lowered the burden of proof to a preponderance of the evidence (i.e., more likely than not).

The district court’s increased discretion, the lower burden of proof, and the demand for a more fact-intensive inquiry under this new standard will make motions for summary judgment seeking to defeat enhanced damages more difficult to win, will make it easier for patent holders to reach trial with a claim for enhanced damages, and will provide plaintiffs with added leverage in settlement discussions. As a result of this decision, we will also likely see an increase in pre-suit demand letters by patent holders and the greater consideration and use of opinions of counsel by accused infringers.

The Supreme Court Rejects the Federal Circuit’s Two-Prong Seagate Standard as Overly “Rigid”

Since the Federal Circuit’s In re Seagate decision in 2007,[ii] federal courts have applied a two-part test when analyzing a claim for enhanced damages based on willful infringement under § 284.  Under the Seagate test, which the lower courts in both Halo and Stryker applied, the patent holder was required to prove (i) that there was an objectively high likelihood of infringement, and (ii) that the defendant acted with subjective indifference to the high risk of infringement.

While acknowledging the rationale behind this rule, the Supreme Court rejected the Seagate test as “unduly rigid” and an impermissible encumbrance on the “statutory grant of discretion to district courts.” The decision explicitly follows the analysis applied in the Supreme Court’s 2014 ruling in Octane Fitness, LLC v. ICON Health & Fitness, Inc., which rejected a similarly rigid rule for prevailing party attorney fee awards that had been adopted by the Federal Circuit. As in Octane, the Supreme Court found the Federal Circuit’s Seagate test inconsistent with statutory language dedicating the decision to the trial court’s discretion.

Trial courts will now have discretion to award enhanced damages, though the Supreme Court confirmed that the lower court’s discretion cannot be exercised on a “whim.” According to the Court, “[n]early two centuries of exercising discretion in awarding enhanced damages in patent cases … has given substance to the notion that there are limits to [the trial court’s] discretion.” The Court did not attempt to prescribe a “precise rule or formula” establishing the bounds of trial court discretion. Instead, it noted that decisions over the “past 180 years establish that” enhanced damages “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.” According to the Court, the type of conduct warranting enhanced damages has been described “as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or – indeed – characteristic of a pirate.”

The Supreme Court also rejected the Seagate requirement that the patent owner establish willful infringement by clear and convincing evidence. The Court again referred to its earlier Octane decision and, as in that case, rejected the higher evidentiary standard because the relevant statute supplies “no basis for imposing such a heightened standard of proof.”

Finally, the Supreme Court rejected what it called Seagate’s “tripartite” appellate review process with different standards of review applying to different aspects of the enhanced damages analysis (i.e., de novo review of the objective recklessness prong; substantial evidence review for the subjective prong; and abuse of discretion for the ultimate decision whether to award enhanced damages). The Court replaced this approach with review for abuse of discretion.

The Supreme Court’s New Rule for Enhanced Damages Will Have a Significant and Immediate Impact on Patent Litigation

Under the new Halo/Stryker standard, accused infringers will no longer be able to avoid enhanced damages, as a matter of law, by simply identifying a reasonable defense. The Seagate test provided defendants a straightforward legal argument for summary judgment to exclude enhanced damages before trial (or through trial motions). The new standard is fact-intensive: the accused infringer must try to establish that a particular case is “garden-variety” while the patent holder tries to show that the infringement was “egregious.” Such fact-intensive disputes make summary judgment much more difficult, as does lowering the burden of proof from clear and convincing evidence to a mere preponderance. We can also expect the fact-intensive nature of the new test to lead to more discovery searching into issues of who knew what and when.

The Supreme Court’s new standard grants the trial judge broad discretion to award enhanced damages and limits appellate review to simply considering whether the lower court abused its discretion. This change makes the choice of venue even more important than it already is. There has been a fair amount of public complaint about the “forum shopping” that already occurs in patent infringement cases. The Halo/Stryker decision will add fuel to that fire. The Supreme Court did not directly address a wrinkle that may also fit into the venue selection process – that is, the jury’s role (if any) in determining whether an infringer’s conduct was “egregious.” Does the jury decide whether conduct is “egregious” and, if so, the judge has the discretion to award enhanced damages? Or does the judge do it all? The Federal Circuit will no doubt be asked to resolve this question before long.

The Supreme Court’s new standard for obtaining enhanced damages is expressly based on “nearly two centuries” of precedent, suggesting that common law legal arguments comparing the facts of a given case to the facts and holdings in prior cases will now be much more important. The result will not only be more discovery, but also potentially wider ranging legal research and argument – a more expensive proposition for plaintiffs and defendants alike.

The new standard should also encourage patent holders to send more notice letters announcing to suspected infringers that the relevant patent exists, and in turn more accused infringers will seek formal opinions of counsel to build a record of proper conduct. There will still be no presumption of willfulness for failing to obtain advice of counsel as there was in the pre-Seagate period – Congress adopted that aspect of Seagate in the America Invents Act – but the accused infringer will have to consider the risk of ending up at trial without specific evidence showing that its conduct was “garden variety” rather than “egregious.” And the accused infringer will no longer be able to wait to develop a reasonable defense after being sued. Along with rejecting the objectively reckless requirement, the Supreme Court rejected the notion that a later-developed defense would absolve earlier misconduct. Instead, culpability will be “measured against the knowledge of the actor at the time of the challenged conduct.” Thus, accused infringers will need to consider the costs and benefits of obtaining a formal opinion of counsel whenever they are put on notice of a patent they may arguably infringe.

The Supreme Court decision in Halo/Stryker clearly rejected the two-prong test of Seagate and replaced it with a broad, discretionary standard leaving the decision almost entirely to the trial judge. What remains unclear are the outer bounds applicable to trial court decisions, and it will likely take the Federal Circuit and lower courts years to find those outer bounds. There is no question however that, as the lower courts apply the new standard, patent owners will enjoy added leverage in licensing and settlement negotiations both because the risk of enhanced damages is substantially increased under the new standard and because in most cases the question of enhanced damages will be decided only after trial. The Halo/Stryker decision is a major win for patent holders.