The Pendulum Swings: US Supreme Court Makes it Easier to Obtain Patent Enhanced Damages

Is the U.S. Supreme Court pro-patent or anti-patent?  One of my favorite books on patent reform is by economists Adam B. Jaffe and Josh Lerner titled, "Innovation and its Discontents: How Our Broken Patent System is Endangering Innovation and Progress and What to do About It," published in 2004 by Princeton University Press.  One of the insights from the book is the recognition of how patent legal protection moves like a pendulum throughout history.  Notably, we tend to swing either too far in favor of protection or too far away from protection.  We have trouble finding the middle way.  On June 13, 2016, the U.S. Supreme Court in Halo Electronics v. Pulse Electronics and Stryker Corp. v. Zimmer (Halo) made it easier to obtain enhanced damages for willful infringement in patent infringement cases.

In Halo, Chief Justice Roberts in a unanimous opinion rejects the Federal Circuit's standard for obtaining enhanced damages for willful infringement.  The Federal Circuit's standard is essentially its interpretation of section 284 of the 1952 Patent Act which states, "courts 'may increase the damages up to three times the amount found or assessed.'"  The Federal Circuit's standard included two parts: 1) "a patent owner must first 'show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,' 'without regard to the state of mind of the infringer," and 2) "the patentee must demonstrate, again by clear and convincing evidence, that the risk of infringement 'was either known or so obvious that it should have been known to the infringer.'"  Notably, under the first step objective recklessness is not found if a substantial question about noninfringment or invalidity is raised by the alleged infringer--even if they didn't know about that question at the time of infringement.

"Rigid rules are not always the right answer."

The Supreme Court ultimately rejected the Federal Circuit's standard as inconsistent with the historical understanding of prior iterations of the statutory section at issue and the language of the current statute.  First, the Supreme Court pointed to court decisions that explained enhanced damages are available for willful or egregious conduct and "not where the defendant 'appeared in truth to be ignorant of the existence of the patent right, and did not intend any infringement."  As in other cases, the Supreme Court paid close attention to the statutory language noting that it did not include any limiting language similar to the objective recklessness prong and rejected the Federal Circuit's desire to create a "rigid rule."  The "rigid rule" effectively made it too easy for willful infringers to escape awards for enhanced damages.

The Supreme Court further rejected the clear and convincing evidence standard for awarding enhanced damages because it does not find support in the statute.  For similar reasons, it also rejected the Federal Circuit's review standards and now requires the abuse of discretion standard.

The majority opinion addressed the policy behind the creation of the Federal Circuit's test.  The Supreme Court noted that concerns with impeding innovation "as companies steer well clear of any possible interference with patent rights" and the "embold[ing] of trolls" because of district court's "unlimited discretion to award up to treble damages" are not justified based on the discretion in the statute.

Justice Breyer author of
"The Uneasy Case for Copyright:
 A Study of Copyright in Books,
Photocopies and Computer Programs"
 Harvard Law Review 1970

Importantly, Justice Breyer in a concurring opinion notes that the decision does not "mean that a court may award enhanced damages simply because the evidence shows that the infringer knew about the patent and nothing more."  Further, he notes that the decision is consistent with statutory language that a failure to obtain an opinion letter from counsel does not mean enhanced damages should be awarded.  Justice Breyer expresses concern with the costs of such letters for small businesses. Justice Breyer also addresses the "patent troll" issue:

"Consider that the U.S. Patent and Trademark Office estimates that more than 2,500,000 patents are currently in force.  Moreover, Members of the Court have noted that some "firms use patents . . . primarily [to] obtai[n] licensing fees." eBay Inc. v. MercExchange, L.L.C. (2006) (KENNEDY, J., concurring).  Amici explain that some of those firms generate revenue by sending letters to "'tens of thousands of people asking for a license or settlement'" on a patent "'that may in fact not be warranted.'"  . . . How is a growing business to react to the arrival of such a letter, particularly if that letter carries with it a serious risk of treble damages?  Does the letter put the company "on notice" of the patent?  Will a jury find that the company behaved "recklessly," simply for failing to spend considerable time, effort, and money obtaining expert views about whether some or all of the patents described in the letter apply to its activities (and whether those patents are even valid)?  These investigative activities can be costly.  Hence, the risk of treble damages can encourage the company to settle, or even abandon any challenged activity.  To say this is to point to a risk: The more that businesses, laboratories, hospitals and individuals adopt this approach, the more often a patent will reach beyond its lawful scope to discourage lawful activity, and the more often patent-related demands will frustrate, rather than "promote," the "Progress of Science and useful Arts." . . . Thus, in the context of enhanced damages, there are patent-related risks on both sides of the equation.  That fact argues, not for abandonment of enhanced damages, but for their careful application, to ensure that they only target cases of egregious misconduct."

 My understanding is that fear of enhanced damages often led counsel advising clients not to do extensive and detailed patent searches.  Is this the incentive we want to create?  The case could signal a course correction against the perception that there is a general anti-patent sentiment at the U.S. Supreme Court.  Notably, the case is a unanimous decision. The Supreme Court issued Couzzo Speed Technologies on June 20, 2016, which pushes back the other way.  What message should the Federal Circuit receive?