Patent pirates?

New rules for patent pirates.

Extraordinary protection

Since 2007, wanton patent infringers have enjoyed extraordinary legal protection from awards of “enhanced” damages under section 284 of the Patent Act.

Last week, the Supreme Court stripped away three of the protections. The changes will make good patent cases better. But it won’t convert weak ones into strong ones.

Pair of cases

The Court used two lower-court decisions to announce its repudiation of the Federal Circuit’s infringer-friendly approach to punitive damages in In re Seagate Technology, LLC, 497 F. 3d 1360 (2007) (en banc).

In one of the cases, the district court refused to enhance damages against Halo Electronics despite a jury finding that it very likely acted “willfully” in infringing the patents of Pulse Electronics. In the second case, the district court enhanced damages against Stryker for its willful infringement of Zimmer’s patents to more than $228 million. Citing Seagate, the Federal Circuit upheld the refusal to enhance damages against Halo and reversed the enhancement of damages against Stryker.

In both, the rulings turned on the court of appeals’ requirement in Seagate that the plaintiff prove “objective recklessness”.

Rulings

Writing for an 8-0 court, Chief Justice Roberts rejected three key aspects of Seagate.

He stressed that the first of the trio — the requirement of “objective recklessness” by the infringer — “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.”Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14-1513, slip op. at 8 (U.S. June 13, 2016).

The fact that the infringer may eventually come up with a clever but losing way to avoid liability does not matter, the Court held, not least because “culpability is generally measured against the knowledge of the actor at the time of the challenged conduct.” Id. at 10.

In the second ruling, the Court concluded that the Federal Circuit’s insistence on a “clear and convincing evidence” test for subjective recklessness could not survive. The Court noted that it had held in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1758 (2014), that section 285 of the Patent Act allowed an award of attorneys’ fees without “clear and convincing” proof. “Like §285,” the Court held, “§284 ‘imposes no specific evidentiary burden, much less such a high one.'” Halo, slip op. at 12 (quoting Octane Fitness, 134 S. Ct. at 1758).

Finally, the Court ruled, “because we eschew any rigid formula for awarding enhanced damages under §284, we likewise reject the Federal Circuit’s tripartite framework for appellate review.” Id. The Seagate test called for de novo review of objective recklessness, required “substantial evidence” of subjective recklessness, and permitted reversal of a decision on whether to enhance damages for “abuse of discretion”. Id. at 5-6. Only an overall abuse of discretion standard applies from now on, the Court determined.

Effects

I canvassed some of my partners who handle a great deal of patent litigation to get their takes on what Halo will mean. One said the following:

Halo was certainly a win for patent owners. It allows willfulness much more easily than before. The practical impact will probably be a bit muted because the reality of it is that nobody brings a patent case due to willfulness. Moreover, enhanced damages for willfulness remains discretionary. So a patentee still must assess a case on the underlying merits. We also may see an uptick in notice letters and other ways of trying to prove willfulness. That said, my strong hunch is that judges will save willfulness for cases that meet a pretty high threshold. From the perspective of our contingent practice, I don’t think it changes the calculus much. It may affect evaluation on the margins but you still need a strong case.

Another wrote this:

There is some commentary out there that this is a boon for patent trolls and will make it much easier for them to extract settlements, etc. That is ridiculous. The patent litigation landscape has evolved such that it is now hard to get a verdict and hard to get decent damages worth trebling in the first place. It is hard to see how a Federal Circuit that is so restrictive on patent verdicts will all of a sudden start affirming trolls’ willfulness awards, even if the standard is an abuse of discretion by the district court.

This will increase SOME defendants’ pressure to settle SOME very compelling patent cases. Most every other defendant will ignore it.

The third partner said:

It’s a game changer to the good for patent holders — to put punitive son equal par with other torts.

Complexity of cases will not change. Opens discovery into knowledge of patents — but not a change in most courts.

Long and short:  not much more time and expense for plaintiffs, but a huge extra risk for defendants.

My take: Good cases get better; weak ones stay that way.

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