Halo Electronics, Inc. v. Pulse Electronics, Inc.: Supreme Court holds the Seagate test is inconsistent with the Patent Act, changing the requirements for enhanced damages due to willful infringement

June 15, 2016

The Supreme Court’s recent decisions in Halo Electronics, Inc. v. Pulse Electronics, Inc., and Stryker Corp. et al. v. Zimmer, Inc., et al., clarified the enhanced damages standard for patent infringement.[1] The Court reversed the Federal Circuit’s application of the Seagate test for determining whether a patentee should be awarded treble damages and held that the Seagate test is not consistent with §284 of the Patent Act.  In In re Seagate Technology, LLC, the Federal Circuit held that a district court may increase damages pursuant to §284 when a patentee shows that: 1) an infringer acted “despite an objectively high likelihood that its actions constituted infringement of a valid patent;” and 2) the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” [2]  The Supreme Court abrogated the Seagate test and held that enhanced damages are to be awarded within the discretion of the district courts.

Halo Electronics, Inc. (Halo) and Pulse Electronics, Inc., and Pulse Electronics Corporation (Pulse) each supply electronic components.[3] In 2007, Halo sued Pulse for patent infringement. The jury found that Pulse had willfully infringed Halo’s patents. The district court declined to award enhanced damages under §284, finding that Pulse had presented a defense that “was not objectively baseless, or a ‘sham,’ ” and concluded that Halo had failed to show objective recklessness under the first step of Seagate. The Federal Circuit affirmed.

Stryker Corporation, Stryker Puerto Rico, Ltd., and Stryker Sales Corporation (Stryker) and Zimmer, Inc., and Zimmer Surgical, Inc. (Zimmer), both manufacture orthopedic pulsed lavage devices used to clean tissue during surgery. In 2010, Stryker sued Zimmer for patent infringement.[4] The jury held that Zimmer had willfully infringed Stryker’s patents and awarded Stryker $70 million in lost profits. The district court added $6.1 million in supplemental damages and then trebled the total sum under §284. The Federal Circuit affirmed the lower court judgment but vacated the treble damages award, concluding such damages were unavailable because Zimmer had asserted “reasonable defenses” at trial.

The United States Supreme Court granted certiorari to hear both cases together and subsequently vacated and remanded the Federal Circuit’s decisions. In its unanimous decision, the Court emphasized the extensive history of enhanced damages awards and the discretionary authority of courts to award such damages. In reviewing the Seagate test, the Court noted that though the test aligned with the historical guidance to grant the district courts discretion in awarding enhanced damages for “egregious infringement behavior,” the test was also “unduly rigid” and “encumbers the statutory grant of discretion to district courts.”[5] This was mainly due to the Seagate test requirement of finding objective recklessness as a prerequisite for enhanced damages.[6]  The Court observed that this prerequisite can exclude infringers who intentionally steal a patent for gain, noting that the subjective willfulness of an infringer may merit trebled damages independently of whether the conduct was objectively reckless.[7]

According to the Court, the Seagate test was also problematic because it enabled infringers to disprove objective recklessness by crafting a defense at trial to show an objectively reasonable basis for the infringing behavior.[8] The Court held that the standard should measure culpability against the knowledge of the actor at the time of the offense, which is the well-established basis for intent in tort law, rather than allow an offender to escape liability by crafting a defense after the fact.[9]

The Court also found that the Seagate test requirement that recklessness be proven by clear and convincing evidence is inconsistent with §284 since the statute does not contain an evidentiary requirement.[10] Rather, enhanced damages are to be proven under a preponderance of the evidence standard, which is generally consistent with the burden of proof for other issues in patent litigation.[11]

The Court also rejected the Federal Circuit’s trifurcated appellate review standard for enhanced damages.[12] Under the previous standard of review for an enhanced damages award, the objective prong of Seagate is reviewed under a de novo standard, the subjective prong is reviewed for substantial evidence, and the overall decision to award enhanced damages is reviewed for an abuse of discretion.[13] Such awards are now to be reviewed in their entirety for an abuse of discretion.[14] The Court concluded that such discretion is limited and that the Federal Circuit should review district courts’ exercise of this discretion “in light of longstanding considerations that have guided both Congress and the courts.”[15] The Court then remanded the cases for proceedings consistent with its opinion.[16]

In a concurring opinion joined by Justices Kennedy and Alito, Justice Breyer reviewed the limits of §284 and explained how the statutory language ensures its application can foster continued innovation while providing others with notice and the continued benefits of inventive genius.[17] He made three main points regarding the limits of §284: First, “willful misconduct” for enhanced damages only applies to “egregious cases” and requires more than mere knowledge of a patent.  Second, 35 U.S.C. §298, which mandates that the failure to obtain the advice of counsel may not be used to prove willful infringement, is not weakened by the Court’s interpretation of §284 as applied to willful infringement. Third, enhanced damages are not to compensate patentees for either infringement-related costs, which are meted out before the award is trebled, or for litigation expenses, which are provided for under 35 U.S.C. §285.[18] Justice Breyer concluded by noting that an abuse of discretion determination may require the Federal Circuit’s familiarity with patent law.[19]

[1] 579 U.S. ___, 2016 WL 3221515 (2016).

[2] 497 F. 3d 1360, 1371 (Fed. Cir. 2007) (en banc).

[3] Halo Elecs., Inc. v. Pulse Elecs., Inc., 769 F.3d 1371 (Fed. Cir. 2014).

[4] Stryker Corp. v. Zimmer, Inc., 782 F.3d 649 (Fed. Cir. 2015).

[5] Halo, 579 U.S. ___, (2016) (slip op. at 9)(quoting Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1751 (2014) (construing §285 of the Patent Act)).

[6] Halo, 579 U.S. ___, (2016) (slip op. at 9).

[7] Id., slip op. at 9.

[8] Id., slip op. at 10.

[9] Id.

[10] Id., slip op. at 12.

[11] Id.

[12] Id.

[13] Bard Peripheral Vascular, Inc. v. W. L. Gore & Assoc., Inc., 776 F. 3d 837, 844 (Fed. Cir. 2015).

[14] Halo, 579 U.S. ___, (2016) (slip op. at 12).

[15] Id., slip op. at 13.

[16] Id., slip op. at 15.

[17] Halo, 579 U.S. ___, (2016) (concurring slip op. at 2).

[18] Id.

[19] Id.