A New Test for Willful Infringement from the Supreme Court and the Increased Importance of Patent Opinions

By Mitchell S. Feller

On June 13, 2016, the U.S. Supreme Court issued its decision in Halo Electronics, Inc. v. Pulse Electronics, Inc. This decision makes it easier for courts to award enhanced damages for patent infringement in cases where the infringement is egregious or there is other willful misconduct. Rejecting the more stringent ‘Seagate’ test that has been in effect since 2007, the Court’s decision allows trial courts to consider if the infringer had a reasonable infringement defense at the time of the infringement, as opposed to at the time of the trial. As a result of the decision and the focus on pre-trial state of mind, it has become more important for companies to obtain opinions addressing non-infringement and/or invalidity of patents of specific concern in order to establish a good faith basis for proceeding in face of those patents.

Under 35 U.S.C. § 284, a court can “increase the damages up to three times the amount found or assessed” when there is a finding of patent infringement. The statute leaves unstated when a court can increase the damages. Historically, increased damages have been awarded in cases of willful or deliberate infringement or where there were other indicators of egregious actions or bad faith. Under the Federal Circuit’s 1983 Underwater Devices, Inc. v. Morrison-Knudsen Co., decision, potential infringers who received notice of a patent had an affirmative duty to exercise due care to avoid infringement.  717 F.2d 1380, 1390-91 (Fed. Cir. 1983). A typical way to show due care was to have in-house or outside counsel analyze the patents. However, an unexpected result of the ‘due care’ standard was that companies would avoid reviewing patents so they did not accidentally trigger a due-care obligation for a given patent and increase the risk of a willful infringement finding at a later time.

In 2007, mindful of the concerns about the ‘due care’ standard, the Federal Circuit in In re Seagate Technology LLC replaced this with a two-part objective recklessness test. 497 F. 3d 1360 (2007) (en banc). Under Seagate, to be awarded enhanced damages, a patentee first had 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. This evaluation is made “without regard to the state of mind of the accused infringer. Second, after establishing objective reckless, the patentee then had to show that the risk of infringement was either known or so obvious it should have been known to the infringer.

In the Halo Electronics decision, the Supreme Court held that the Seagate test was too narrow and rigid. The Court explained that the objective recklessness test of Seagate would allow a “wanton and malicious pirate … who intentionally infringes another’s patent—with no doubts about its validity or any notion of a defense” to avoid enhanced damages as long as the party presented a reasonable (but unsuccessful) defense at trial. The Court replaced the strict Seagate test with a more flexible and expansive one where a court can provide enhanced damages where it finds “egregious infringement behavior” that goes beyond what is found in a typical patent case. The Court also expressly stated that culpability is measured based on the infringer’s knowledge “at the time of the challenged conduct.”

Procedurally, the Court rejected the high ‘clear and convincing evidence’ standard that applied to the two parts of the Seagate test and instead applied a preponderance of the evidence standard. The court also simplified the review of enhanced damages decisions on appeal, holding that a trial court’s decision on enhanced damages should be reviewed under an abuse of discretion standard. As a result, it will be easier for patentees to meet their burden of proof in seeking enhanced infringement damages and more difficult to difficult to reverse a decision on enhanced damages appeal.

The Court’s decision reiterates that that enhanced damages should only be granted in egregious cases. Justice Breyer’s concurrence emphasizes this, further noting that companies often receive patent notice letters and that opinions of counsel are not costless. Nevertheless, shifting the analysis from defenses presented at trial back to the infringer’s state of mind at the time of the infringement increases the importance of having an opinion of counsel which should be obtained at the time of possible infringement, not at the time of litigation. While companies do not need to seek opinions for every patent of which they become aware, they cannot simply ignore patents of specific concern, such as core patents owned by direct competitors, and hope to avoid enhanced damages by presenting an after-the-fact defense at trial. Under 35 U.S.C. § 298, failure to present a non-infringement / invalidity opinion may not be used by a patentee to show willful infringement. However, the reverse is not true. Having an opinion continues to be a strong way to show that at the time of the alleged infringement, a company had a basis to believe a patent was invalid or not infringed.