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Supreme Court Overturns Seagate Test for Enhanced Damages

The Supreme Court on June 13, 2016, unanimously overturned the Federal Circuit’s test under In re Seagate Technology, LLC, 497 F. 3d 1360 for awarding enhanced damages, finding it is inconsistent with the discretionary standard set out in 35 U.S.C. §284. Halo Electronics, Inc. v. Pulse Electronics, Inc., U.S., No. 14-1513, 6/13/2016; Stryker Corp. v. Zimmer, U.S., No. 14-1520, 6/13/2016.

According to the Court, the Seagate requirement that district courts considering enhanced damages must find “objective recklessness” in every case is “unduly rigid” and impermissibly limits of district court discretion. The Court also held that the burden of proving an egregious circumstance warranting enhanced damages is a preponderance of the evidence rather than clear and convincing evidence, and that the standard for appellate review for such awards is abuse of discretion. In a concurring opinion (joined by Justices Kennedy and Alito), Justice Breyer emphasized the danger to innovation that can be caused by too many enhanced damages awards.

The decision is consistent with the position advocated in an AIPLA amicus brief filed in this case.

District Court Discretion

Although Section 284 provides no express standards for enhanced damages awards, Chief Justice Roberts pointed out that its use of the word "may" evidences the discretionary nature of the district court's power to increase damages. He added that more than 180 years of such awards demonstrates that they are designed as a “punitive” or “vindictive” sanction for egregious infringement behavior. The Court agreed that Seagate recognizes this, but said the Seagate test is "unduly rigid."  It impermissibly encumbers the statutory grant of discretion to district courts, Justice Roberts explained, citing the Court’s recent criticism in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014), of the Federal Circuit’s test for attorney fee awards under Section 285.

According to the Court, the Seagate test can have the effect of insulating some of the worst patent infringers from any enhanced damages liability by requiring district courts first to find objective recklessness in every case.  This threshold requirement, Justice Roberts observed, excludes from discretionary punishment many of the most culpable offenders, such as the “wanton and malicious pirate” who intentionally infringes another’s patent—with no doubts about its validity or any notion of a defense—for no purpose other than to steal the patentee’s business. As in Octane for attorneys’ fees, he noted, the subjective willfulness of a patent infringer may also warrant an enhanced damages award, without regard to whether his infringement was objectively reckless.

The Seagate test aggravates the problem by making dispositive the infringer’s ability to muster a reasonable but unsuccessful defense at the infringement trial, the Court pointed out.  The existence of such a defense insulates the infringer from enhanced damages, even if he did not act on the basis of that defense or was even aware of it.  However, culpability is generally measured against the knowledge of the actor at the time of the challenged conduct, Justice Roberts pointed out. Under the Federal Circuit standard, “someone who plunders a patent—infringing it without any reason to suppose his conduct is arguably defensible—can nevertheless escape any comeuppance under §284 solely on the strength of his attorney’s ingenuity,” he wrote.

The Court observed that Section 284 allows district courts to punish the full range of culpable behavior, but it also said that enhanced damages need not necessarily follow a finding of egregious misconduct. As with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount, according to the Court. Under Section 284, district courts may exercise their discretion to enhance damages free from the inelastic constraints of the Seagate test, but, consistent with nearly two centuries of decisions, such punishment should generally be reserved for egregious cases typified by willful misconduct, Justice Roberts pointed out.

Burden of Proof

The Court also found Seagate inconsistent with Section 284 in its requirement of clear and convincing evidence to prove recklessness. As it did for attorney fee awards under Octane, the Court found no basis the heightened standard of proof for enhance damages. Like Section 285, Section 284 imposes no specific evidentiary burden, much less such a high one, according to the Court, noting that Congress expressly provided a high standard of proof elsewhere in the statute but did not do so under Section 284. As stated in Octane, patent infringement litigation has always been governed by a preponderance of the evidence standard, Justice Roberts pointed out, adding that enhanced damages are no exception.

Appellate Review Standard

The Court also overturned the Federal Circuit’s three-part framework for appellate review of enhanced damages awards, again referring to a parallel between enhanced damages awards and attorney fee awards. In 2014 the Court in Highmark Inc. v. Allcare Health Management System, Inc., 134 S.Ct. 1744 (2014), held that attorney fee awards are properly reviewed under the abuse of discretion standard since Octane decided that such awards are committed to district court discretion. The same reasoning applies to enhanced damages awards, Justice Roberts explained.

The appellate review framework adopted by the Federal Circuit reflects a concern that district courts may award enhanced damages too readily, and distort the balance between the protection of patent rights and the interest in technological innovation. Nearly two centuries of exercising discretion in awarding enhanced damages in patent cases, however, has given substance to the notion that there are limits to that discretion. The Federal Circuit should review such exercises of discretion in light of the longstanding considerations we have identified as having guided both Congress and the courts.

The Court was not persuaded that Congress in 2011 ratified Seagate by reenacting Section 284 in the America Invents Act, pointing out that the reenacted language rather confirmed district court discretion under the statute. It was also unpersuaded that Congress endorsed the Seagate test in enacting Section 298, which bars a court from considering a defendant's failure to obtain an opinion of counsel in making a willfulness determination. Justice Roberts pointed out that Section 298 was intended instead to overturn Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (1983), which imposed on defendants the affirmative duty of obtaining an opinion of counsel to avoid willfulness liability.

The Court acknowledged the legitimate concern that the law of enhanced damages not disturb the “careful balance” between promoting innovation through patent protection and facilitating the imitation and refinement necessary to invention itself. While that balance could be disturbed if enhanced damages were awarded in garden-variety cases, it should not be if awards follow the guidance presented in this opinion, according to Justice Roberts. He observed that such serious policy concerns "cannot justify imposing an artificial construct such as the Seagate test on the discretion conferred under §284.”

The judgments in Halo and Stryker were vacated, and the cases were remanded for proceedings consistent with this opinion.

Concurring Opinion

In an opinion joined by Justices Kennedy and Alito, Justice Breyer emphasized that too many enhanced damages awards can endanger innovation. He made three points: (1) willful misconduct means more than infringement with knowledge of the patent; (2) the circumstance is what transforms simple knowledge into egregious behavior; and (3) considerations of cost and the discouragement of lawful innovation may be factors that affect the decision on whether to seek advice of counsel.

Justice Breyer noted that there are more than 2.5 million patents currently in force, and that some firms uses patents primarily to obtain licensing fees. He posed the question: how is a growing business to react to the arrival of a demand letter on a patent that may not be warranted, particularly where there’s a risk of treble damages? The more businesses that adopt this approach, he observed, the more often a patent will reach beyond its lawful scope to discourage lawful activity.

Finally, Justice Breyer stated that abuse of discretion determinations may require the patent law expertise of the Federal Circuit. Whether an infringer truly had “no doubts about the validity of a patent may require an assessment of the reasonableness of a defense that may be apparent from the face of that patent, he observed, and any error on such a question would be an abuse of discretion.

To read the opinions in this case, click here.