In Halo Electronics, Inc. v. Pulse Electronics, Inc., et al., No. 14-1513, a unanimous opinion by Chief Justice John Roberts, the Supreme Court today overturned the two-part test for willful infringement that the Federal Circuit established in 2007 in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc).  The Supreme Court held that the lower court’s test was too rigid and unfairly protected infringers that had willfully infringed the patent rights of others.  Importantly, today’s holding establishes that district courts have broad discretion to evaluate whether a party has willfully infringed a patent such that it should be liable for enhanced damages under the Patent Act.

Upon a finding of infringement, a district court “shall” award a successful plaintiff in an action for patent infringement “damages adequate to compensate for the infringement.”  35 U.S.C. § 284.  In addition, the district court “may increase the damages up to three times the amount found or assessed.”  Case law interpreting § 284 has long held that enhanced damages may be available in cases of “willful” infringement.

The law of enhanced damages under § 284 has been the subject of some controversy over the years.  Soon after it was established, the Federal Circuit established an “affirmative duty of due care” that effectively required accused infringers to present an opinion of counsel in order to successfully defeat a willfulness claim.  See Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F. 2d 1380 (1983).  The “affirmative duty of due care” foreseeably created tension with respect to the attorney-client privilege.  Twenty years later, the Federal Circuit changed the law in ways that represented a significant pendulum swing in the opposite direction. 

In 2007, abandoning the “affirmative duty of due care” standard, the Federal Circuit established a two-part test to be used to determine when it would be appropriate to enhance damages under § 284 for willful infringement.  See In re Seagate, supra.  The first step of the willfulness inquiry required the plaintiff to prove by clear and convincing evidence that “the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.”  The second step required the plaintiff to demonstrate by clear and convincing evidence that the “objectively-defined risk . . . was either known or so obvious that it should have been known to the accused infringer.”  In practice, an infringer that made a showing that a “reasonable” defense existed (or, in other words, raised a “substantial question” as to validity or noninfringement) could defeat a willfulness claim at step one, and few cases proceeded to step two. 

Today’s Supreme Court opinion held that the Seagate test was not consistent with § 284.  The Supreme Court reviewed two willfulness decisions from the Federal Circuit.  In the first case, Halo Electronics had sued Pulse Electronics for patent infringement.  A jury found Pulse liable for infringement, and that there was a high probability Pulse had done so willfully.  However, the district court declined to award enhanced damages under § 284 because it determined Halo could not show objective recklessness under the first step of Seagate.  The basis for the court’s finding was that Pulse had presented at trial a defense that “was not objectively baseless, or a ‘sham.’”  The Federal Circuit affirmed. 

In the second case, a jury found that Zimmer had willfully infringed Stryker’s patents.  The district court awarded treble damages under § 284, noting the enhancement was appropriate “[g]iven the one-sidedness of the case and the flagrancy and scope of Zimmer’s infringement.”  The Federal Circuit vacated the award of treble damages, concluding that enhanced damages were unavailable because Zimmer had asserted “reasonable defenses” at trial.

The Supreme Court vacated the judgments of these two Federal Circuit cases and remanded them for further proceedings.  The Supreme Court came to three important conclusions.  First, the Supreme Court rejected the idea that an independent showing of “objective recklessness” should be a prerequisite to enhanced damages.  The opinion held that an infringer’s subjective willfulness may warrant enhanced damages without regard to whether its infringement was objectively reckless.  Culpability is generally measured against an actor’s knowledge at the time of the challenged conduct.  The Federal Circuit’s Seagate framework erroneously made dispositive the ability of the infringer to muster a reasonable defense at trial, even if it did not act on the basis of that defense, or was even aware of it. 

Second, the Supreme Court rejected the Federal Circuit’s requirement that recklessness be proved by clear and convincing evidence, and held § 284 is governed by the preponderance of the evidence standard.  The Supreme Court noted that Congress erected a higher standard of proof elsewhere in the Patent Act, but not in § 284. 

Third, the Supreme Court held that the district court’s determination on whether enhanced damages are appropriate is to be reviewed on appeal for abuse of discretion.  In doing so, the Supreme Court rejected the Federal Circuit’s tripartite appellate review framework, which required reviewing the first step – objective recklessness – de novo, the second step – subjective knowledge – for substantial evidence, and the ultimate decision – whether to award enhanced damages – for abuse of discretion.

Today’s decision reflects the continuing trend of the Supreme Court’s correction of the Federal Circuit’s interpretation of the Patent Act.  It will also be considered a win for patent owners, many of whom view recent decisions from the Supreme Court and the Federal Circuit as tipping the balance against patent holders.  Nevertheless, the Supreme Court emphasized that enhanced damages remain reserved for egregious cases typified by willful misconduct.  Elimination of the Federal Circuit’s Seagate test reestablishes that it is the “over nearly two centuries of application and interpretation of the Patent Act” that again guides district courts in applying § 284.