Should patentees have to show that defendants willfully infringed their patents to receive enhanced damages?
In this consolidated case, the Supreme Court must determine the correct interpretation of 35 U.S.C. § 284, which provides enhanced damages in patent infringement cases. Currently, plaintiffs must show that defendants “willfully infringed” to obtain enhanced damages. Courts employ a two-prong test, with subjective and objective elements. The objective element requires plaintiffs to show “by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted” patent infringement. In separate actions, petitioners Halo Electronics Inc. and Stryker Corp. sued respondents Pulse Electronics Inc. and Zimmer Inc. respectively for patent infringement. In each case, the U.S. Court of Appeals for the Federal Circuit found that Halo and Stryker failed to satisfy the objective prong of the willfulness test. But Halo and Stryker argue that the Federal Circuit’s interpretation of objective willfulness is unfairly burdensome and should be replaced by a totality-of-the-circumstances standard. Pulse and Zimmer contend that the objective willfulness standard properly allows only culpable infringers to pay punitive damages, in accord with the historical purpose of punitive damages. The Court’s decision may affect how plaintiffs prove infringement, and whether culpable infringers escape liability.
Questions as Framed for the Court by the Parties
Did the Federal Circuit err by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285?
Halo Electronics Inc. (“Halo”) and Pulse Electronics Inc. (“Pulse”) make surface mount transformers, a component in electronic devices such as internet routers.See Halo Electronics Inc. v. Pulse Electronics Inc., 769 F.3d 1371, 1374–75 (Fed. Cir. 2014). Prior to the 1990s, surface mount transformers would often overheat and crack, causing the device to fail. SeeBrief for Petitioner, Halo at 3. In 1995, Halo designed and patented a solution that involved an “open construction,” rather than the “rigid construction” previously used. See id. at 3. As early as 1998, Pulse obtained a copy of the design. See Halo, 769 F.3d at 1376. Pulse manufactured a similar component in Asia and distributed it around the world. See id. at 1375. In 2002, Halo contacted Pulse about signing a licensing agreement, but Pulse determined that Halo’s patents were invalid because of “prior Pulse products.” See id. at 1376. “In 2007, Halo sued Pulse for patent infringement.” See id.Pulse “denied infringement and challenged the validity of the Halo patents based on obviousness and other grounds.” See id.
Pulse moved for partial summary judgment, claiming that it did not “directly infringe” Halo patents by selling products outside of the United States. See Halo, 769 F.3d at 1376. The district court granted summary judgment on that issue. See id.At jury trial, Halo and Pulse argued two issues: whether Pulse’s products that shipped into the United States infringed Halo’s patents; and whether Pulse induced infringement by shipping products outside the United States, which were “incorporated into end products that were ultimately imported into the United States.” See id.
The jury held that Pulse willfully infringed Halo’s patents for products sold in the United States, and awarded heightened damages under 35 U.S.C. § 284 (“section 284”). See Halo, 769 F.3d at 1376. The district court, however, found that Pulse’s infringement was not willful, currently a requirement for heightened damages. The test for willfulness involves two prongs: subjective and objective. Under the objective prong, patentees “must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted” patent infringement. See id. at 1382 (internal quotation omitted). The court determined Halo had not satisfied this prong because Pulse had presented an “obviousness defense” that was not “objectively baseless.” See id. at 1376-1377.
Halo appealed to the U.S. Court of Appeals for the Federal Circuit. See id. The Federal Circuit affirmed the district court’s ruling. See id. at 1374.
Halo petitioned the U.S. Supreme Court for writ of certiorari. The Supreme Court granted certiorari on October 19, 2015. SeeBrief for Petitioner at 1.
Stryker presents similar facts. See Stryker Corp. v. Zimmer, Inc., 782 F.3d 649, 653 (Fed. Cir. 2015).Stryker Corp. and Zimmer, Inc. produce pulsed lavage devices. See id. at 653.In 1993, Stryker began producing battery-powered, handheld-pulsed lavage devices and filed for the relevant patents. See id.at 653.The patents were issued in 2000. See id. at 653.Zimmer began producing a similar device in 1996. See id. at 653.In 2010, Stryker sued Zimmer for patent infringement. See id. at 653.The jury found that Zimmer had willfully infringed and awarded treble damages. See id. at 653.On appeal, the Federal Circuit reversed the finding of willfulness on the grounds that Zimmer did not deliberately violate Stryker’s patents. See id. at 662.Stryker petitioned for certiorari, which the Court granted on October 19, 2015. SeeBrief for Petitioner, Stryker Corporation at 1. The Court then consolidatedHalo and Stryker.
Stryker and Halo argue that the rigid two-part test for willfulness directly contradicts the plain language of section 284, and was rejected by the Court in two recent decisions regarding a related patent provision. See Brief for Petitioner, Stryker at 45–47; seeBrief for Petitioner, Halo at 12–13. They urge the Court to restore a flexible standard by which courts can consider the totality of circumstances to determine whether enhanced damages are appropriate.See Brief for Petitioner, Stryker at 14; seeBrief for Petitioner, Halo at 19. But Pulse and Zimmer argue that Congress enacted section 284 with the willfulness requirement in mind, and that it reflects common law and due process requirements for increasing damages. See Brief for Respondent, Pulse at 9–10, 12–13; Brief for Respondents, Stryker Corp. et al. at 34–45. Pulse and Zimmer claim that a flexible standard is too lenient, and will stifle innovation and promote undesirable behavior. See Brief for Respondent, Pulse at 42–43; Brief for Respondents, Stryker at 45–48.
DID THE FEDERAL CIRCUIT ERR IN ADOPTING A TWO-PRONG WILLFULNESS TEST?
Stryker contends that the rigid two-part willfulness test finds no basis in the language of section 284. See Brief for Petitioner, Stryker at I, 14. Looking to similar patent law provisions, Stryker argues that two recent Court decisions—Octane Fitness, LLC v. ICON Health & Fitness and Highmark Inc. v. Allcare Health Mgmt. Sys., Inc.—rejected the Federal Circuit’s use of a two-part test in 35 U.S.C. §285 (“section 285”), which deals with the award of attorneys’ fees. See id. at 15. Stryker explains that the Court found the two-part test overly rigid. The Court reasoned the test impermissibly cabined district courts’ statutory grant of discretion under section 285. See id. at 15-16. Stryker argues that the Federal Circuit’s two-prong standard for section 284 is as equally rigid as the section 285 standard, and by analogy it is equally impermissible. See id. at 14.
Halo claims that the Federal Circuit has “compounded” the two-part test’s problems by ruling that plaintiffs fail to meet the objective prong if defendants assert a “non-sham” defense to willfulness—“even one developed only after years of bad behavior that forces a patentee to file a law suit.” See Brief for Petitioner, Haloat 24. Halo argues that these subsequent decisions depart significantly from the Court’s precedent, by forcing district courts to “ignore a defendant’s real world acts,” treating them as applicable only to the subjective prong. This lets a willful infringer evade culpability by “rais[ing] a reasonable but unsuccessful defense at trial.” See id.
Nevertheless, Pulse and Zimmer maintain that the two-prong test is appropriate. See Brief for Respondent, Pulse at 12–13; Brief for Respondents, Stryker at 11–26. Pulse asserts that when Congress enacted section 284, Congress understood the statutory history and case law to mean that increased damages were a punitive remedy. Subsequently, courts only awarded increased damages after plaintiffs demonstrated proof of willful patent infringement. Congress has not chosen to alter courts’ analysis by legislation. See Brief for Respondent, Pulse at 12–13. Additionally, Pulse argues that the two-prong test provides a clear, dependable standard for increased damages in patent infringement cases, and mirrors willfulness requirements in copyright law and other civil law areas. See id. at 33-34. Furthermore, Pulse contends that section 284 and section 285 are fundamentally unrelated; and that the two-prong test does not contradict the Court’s holdings in Octane and Highmark because neither opinion addresses increased damages under the Patent Act. See id. at 50.
IF THE COURT REJECTS THE TWO-PRONG TEST, WHAT SHOULD THE TEST BE?
Stryker asserts that section 284 grants district courts the discretion to enhance damages, without imposing any threshold determination. Accordingly, the new standard should be a flexible inquiry into the totality of circumstances. See Brief for Petitioner, Stryker at 17. Additionally, Stryker contends that the plain language of section 284 does not impose an explicit evidentiary burden. Hence, the preponderance of the evidence standard—widely used in patent litigation—should apply. See id. at 23. Given district courts’ discretion under section 284, Stryker concludes that district court decisions about enhanced damages should only be reviewed for abuse of discretion. See id. at 24.
Halo urges a similar standard. Section 284’s language, “the court may increase the damages up to three times the amount found or assessed,” is inherently flexible. SeeBrief for Petitioner, Halo at 12. Halo contends that this broad language gives courts the discretion to assess all pertinent factors, such as a defendant’s copying or a defendant’s affirmative steps to avoid infringement. Seeid. at 27. Halo argues that no one factor should be dispositive in the district court’s determination; rather, courts should consider and balance every factor. Seeid. at 27–28.
But Pulse and Zimmer contend that Stryker and Halo’s flexible standard is ambiguous and threatens to make awards of increased damages widely available and highly unpredictable. See Brief for Respondent, Pulse at 47–48; Brief for Respondents, Stryker at 45–48. The totality-of-the-circumstances approach lowers the bar for increased damages. A willfulness approach is a well-defined, if not somewhat high, standard. See Brief for Respondent, Pulse at48–50. Pulse and Zimmer argue that the flexible standard would deter innovation and competition, because of the uncertainty surrounding increased damages. See Brief for Respondents, Strykerat 45–48. It may also increase litigation by non-practicing entities, which try to extort “unjustified settlements and licensing fees from those who actually develop, make, and sell products.” See Brief for Respondent, Pulse at12.
The Court’s decision in this case may inhibit plaintiffs’ ability to prove infringement, and increase infringers’ ability to avoid liability.
IS THE OBJECTIVE WILLFULNESS STANDARD FAIR TO PLAINTIFFS?
Nokia Technologies Oy and Nokia USA Inc. (collectively, “Nokia”) claim that the current standard, which requires plaintiffs to show willful infringement by “clear and convincing evidence,” imposes an unreasonable burden on plaintiffs, and is contrary to legislative intent. See Brief of Amici Curiae Nokia Technologies Oy and Nokia USA Inc. (“Nokia”), in Support of Petitioners at 8, 24–25. Nokia explains that heightened evidentiary standards, such as clear and convincing evidence, show “a preference for one [litigant’s] interest[s]” and thus should be applied carefully. See id.at 24 (internal quotation omitted). But the heightened damages statute, section 284, does not contain a “willfulness” element, suggesting Congress did not intend to impose an additional burden on plaintiffs. Moreover, the current two-part test may encourage free riding and discourage innovation. See id. at 19–20, 23. Under the objective willfulness standard, the consequences of infringement are lessened because the standard is hard to meet; accordingly, infringers will continue to infringe. See id. at 20–22. The heightened burden hurts small inventors hardest, some amici argue. When small inventors approach large companies about licensing the inventors’ patented products, large companies “can now largely ignore legitimate patent holders” without worrying about big infringement damages. See Brief of Amici Curiae Small Inventors, in Support of Petitioners at 13–16 (internal quotation omitted).
Other amici suggest that the objective standard is the best means of fairly evaluating an infringer’s culpability. See Brief of Amici Curiae Dell, et. al., in Support of Respondents at 10-11. Dell contends that the standard ensures that only knowing infringers will pay treble damages, rather than simply inadvertent infringers. See id. EMC Corporation argues that an objective standard reins in frivolous cases that take advantage of large, successful companies, without chilling meritorious cases. See Brief of Amicus Curiae EMC Corporation, in Support of Respondents at 9–11, 13. Andcertain members of Congress suggest that Congress chose not to significantly amend section 284, because it approved of the current standard. See Brief of Certain Members of Congress as Amici Curiae, in Support of Respondents at 7–10.
SHOULD A TOTALITY-OF-THE-CIRCUMSTANCES STANDARD GOVERN SECTION 284?
Halo and Stryker contend that the Court should impose a “totality-of-the-circumstances” test to determine if heightened damages are appropriate. SeeBrief for Petitioner, Stryker Corporation at 14.Innovention Toys LLC claims that the totality-of-the-circumstances test will prevent the Federal Circuit from improperly substituting its own judgment on appeal in lieu of the trial court’s judgment. See Brief of Amicus Curiae Innovention Toys, LLC, in Support of Petitioners at 9. Other amici add that there are various metrics available to help judges determine if heightened damages are appropriate, and thus a lower evidentiary standard will not be abused. See Brief of Small Inventors at 17–21.
But some suggest that the totality standard is too weak. Google and other technology companies suggest that the totality standard is no different than a negligence standard, which looks at the alleged infringer’s knowledge and actions when she learned of a plaintiff’s patent rights. The companies argue that alleged infringers looking to satisfy this standard would have to seek legal counsel on all questions of infringement. See Brief of Amici Curiae Google et. al, in Support of Respondents at 13–15. They contend this requirement is tremendously costly and burdensome, in particular for large companies who continually receive notice of new patents from competitors. See id. at 17-18. Moreover, the requirement may force companies to waive attorney-client privilege to prove their due diligence. Introducing evidence of legal advice on infringement waives privilege for all other communications regarding the same subject matter. See id. at 15-16. The standard may also encourage baseless infringement suits in the hopes of coercing settlements. See id. at 17.
The Court will decide whether a two-part willfulness test is appropriate for awarding enhanced damages under section 284. The Court may also change the standard by which district courts enhance damages in patent infringement cases. SeeBrief for Petitioner, Halo at 12. Halo and Stryker argue that the willfulness test departs from the statutory language and historical implementation of 35 U.S.C. section 284. See Brief for Petitioner, Halo at 12-13; see Brief for Petitioner, Stryker at 26-29. Accordingly, Halo and Stryker contend that the test should be set aside in favor of a flexible standard. SeeBrief for Petitioner, Halo at 27;see Brief for Petitioner, Stryker at 17-18. But Pulse and Zimmer assert that the two-prong test would be too unpredictable and undermine the punitive purpose of increased damages. See Brief for Respondent, Pulse at 33, 43.
Robert H. Fischer and Whitney L. Meier, The Supreme Court Grants Certiorari to Review the Standards for Recovery of Enhanced Patent Damages, Fitzpatrick, Cella, Harper & Scinto (Oct. 20, 2015).
Joe Mullin, Supreme Court Takes 1st Patent Case of Term, and Plaintiffs Could Benefit, Ars Technica (Oct. 20, 2015).