Enhanced Damages: An Inevitable Shift?

By: Emily A. Curtis  |   December 11, 2015

After overturning Federal Circuit precedent regarding the standards required to award attorney fees in patent cases, the highest court has agreed to hear additional patent cases related to awarding damages. See Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371 (Fed. Cir. 2014). The Supreme Court granted certiorari for Halo Electronics, Inc. v. Pulse Electronics, Inc.and Stryker Corp. v. Zimmer, Inc., 782 F.3d 649 (Fed. Cir. 2014), both concerning the standards applied by district courts and the Federal Circuit when treble damages for patent infringement are requested under 35 U.S.C. § 284. Given recent jurisprudence with respect to an analogous two-prong test in awarding attorneys’ fees in patent cases, has the Supreme Court already revealed how it will decide Halo and Stryker?

Enhanced damages for patent infringement may be awarded by a court under 35 U.S.C. § 284: “the court may increase the damages up to three times the amount found or assessed.” Trebledamages can be determined by a jury or the court under statute. Id. The Supreme Court mentioned increased damages in cases where willful or bad-faith infringement could be shown. Halo, at 1384, citing Aro Mfg. Co. v. Convertible Top Replacement Co., 377U.S. 476, 508 (1964) (“…it could in a case of willful or bad-faith infringement recover punitive or "increased" damages under the statute's trebling provision…”). In In re Seagate Technology, LLC, an en banc Federal Circuit outlined a two-prong test for willful infringement. Halo, 377 U.S. at 1384.To show willfulness, a patentee must demonstrate “by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,” and that the infringer either knew or should have known about the “objectively-defined risk.” Id. at 1382. This test and the former test for attorney’s fees “both were predicated on our interpretation of the Supreme Court’s decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. (“PRE”)…which we believed required a two-step objective/subjective inquiry before either enhanced damages or attorneys’ fees could be awarded.” Id. at 1384, citing PRE, 508 U.S. 49, 113 (1993).

An understanding of the how and why the Supreme Court ruled on the standards to award attorneys’ fees can offer insight to how the Supreme Court will decide Halo and Stryker. The Federal Circuit’s test for awarding attorney’s fees according to 35 U.S.C. §285 was based on the test applied in PRE. Brooks Furniture Mfg. v. Dutailier Intern., Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005). Section 285 states: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” In PRE, the Supreme Court defined sham litigation in antitrust law. PRE, 508 U.S. 49, 60-61 (1993). Where a case is objectively baseless and is brought in bad-faith, it is “sham” litigation. Id. The Brooks panel applied the Supreme Court’s definition of a shamcase to the §285 requirement of an exceptional case. See 393 F.3d at 1381. In the absence of misconduct, attorneys’ fees could be awarded where the litigation was in subjective bad faith and the litigation was objectively baseless. Id.

This interpretation of PRE was struck down by the Supreme Court in 2014 with two decisions regarding the award of attorneys’ fees. Octane Fitness v. Icon Health & Fitness, 134 S.Ct. 1749 (2014), Highmark Inc. v. Allcare Health Management, 134 S.Ct. 1744 (2014).The Court focused on statutory interpretation and the purpose of §285. In Octane, the Court determined that “exceptional” is not defined by the statute and must be construed “in accordance with its ordinary meaning.” 134 S.Ct. at 1756. The word has not changed in meaning since first used by Congress in this context and continues to mean something that is uncommon or rare. Id. Thus, “an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigation position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” Id. A district court should determine this on a case-by-case basis at their discretion, based on the totality of the circumstances. Id. PRE defined a sham case based on the need to protect First Amendment rights to petition the governmentbut this definition was used by a Federal Circuit panel in Brooks to determine when a case is exceptional. Id. at 1757. The sham litigation exception applies to antitrust law’s Noerr-Pennington doctrine, invoked “to avoid chilling the exercise of the First Amendment right to petition the government for the redress of grievances.” Id. This right does not apply in a similar way to fee shifting in accordance with §285. Id. Fee shifting in exceptional cases is further distinguished based on the history of these provisions and an exception to them. Id. at 1758. This exception applies where there is “willful disobedience of a court order or when the losing party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons.” Id. The award of attorneys’ fees in exceptional cases is not analogous to the exception to antitrust immunity in sham cases and PRE does not apply to cases invoking §285. Id.

The Supreme Court also considered the clear and convincing evidentiary standard applied by the Federal Circuit in fee shifting cases. Id. Comparable statues have not required such a high standard of proof, and given a lack of further direction from the statute, the Federal Circuit erred in requiring such a high burden. Id. A preponderance of the evidence standard is appropriate for such a case generally, and in patent law. Id. The standards used to apply §285 were also the subject of Highmark, 134 S.Ct. at 1746. The Supreme Court held that, “[b]ecause §285 commits the determination whether a case is ‘exceptional’ to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion.” Id. at 1748.

Presently, the Supreme Court has granted certiorari for two cases addressing enhanced damages awarded in patent cases according to 35 U.S.C. §284. Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371 (Fed. Cir. 2014), cert. granted (U.S. Oct. 19, 2015) (No. 14-1513); Stryker Corp. v. Zimmer, Inc., 762 F.3d 649 (Fed. Cir. 2014), cert. granted (U.S. Oct. 19, 2015) (No. 14-1520). In Halo, the Federal Circuit affirmed the district court’s judgment of no willful infringement. 769 F.3d at 1374. At the lower court, a jury found that “it was highly probable that Pulse’s infringement was willful.” Id. at 1376. Applying the two-prong test of Seagate, the judge “concluded that the objective component of a willfulness inquiry was not satisfied because Pulse ‘reasonably relied on at least its obviousness defense’ and Pulse’s unsuccessful obviousness defense was not ‘objectively baseless.’” Id. The Federal Circuit panel reviewed the objective prong of the enhanced damages test de novo. Id. at 1382. After review of the record, the panel agreed with the district court judge and found that under the totality of the record evidence, there was not “clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” Id. The panel asserted that the Pulse defense was “not objectively unreasonable.” Id. at 1383.

Judge O’Malley, joined by Judge Hughes, wrote a concurring opinion citing the binding precedent that might be reconsidered by an en banc Federal Circuit. Id. at 1384 (O’Malley, J., concurring). According to the concurrence, the “willfulness test, as described in Seagate…, and our old §285 test, under Brooks Furniture, both were predicated on our interpretation of the Supreme Court’s decision in [PRE].” Id. Considering the recent Supreme Court decisions regarding §285, the Federal Circuit “should reconsider whether those same interpretative errors have led [the court] astray in [the] application of the authority granted to district courts under §284.” Id. at 1385.Accordingly, Judge O’Malley states a need to consider whether the clear and convincing evidence standard and de novo review are appropriate. Id.

In the denial of the petition for rehearing en banc, Judge Taranto, joined by Judge Reyna, acknowledges the recent Supreme Court rulings and the questions raised with respect to enhanced damages. Halo v. Pulse, 782 F.3d 649 (Fed. Cir. 2014), petition for rehearing en banc denied (Fed. Cir. March 23, 2015). Halo’s petition for rehearing asked the court to consider whether Pulse’s defense at trial can be considered in the determination of willfulness, rather than asking whether willfulness is necessary to award enhanced damages. Id. Judge Taranto concludes that this was not the right question to convene an en banc panel with respect to §284. Id. Judge O’Malley, joined by Judge Hughes, dissented from the denial of a rehearing en banc, largely restating the arguments of her earlier concurring opinion. Id.

Stryker Corp. v. Zimmer, Inc. also relates to the application of §284. 782 F.3d at 660-61. In Stryker, a jury found that Zimmer willfully infringed Stryker’s patents and the judge awarded treble damages for the willful infringement. Id. at 653. According to the district court, willfulness was based on testimony that “Zimmer all but instructed its design team to copy Stryker’s products.” Id. at 661. Further, the “‘pioneering’ nature of Stryker’s inventions and the secondary considerations of non-obviousness ‘made it dramatically less likely that Zimmer’s invalidity arguments were reasonable.’” Id. However, the Federal Circuit panel found that an “objective assessment of the case shows that Zimmer presented reasonable defenses to all of the asserted claims of Stryker’s patents.” Id. Because Zimmer’s defenses were not found to be objectively unreasonable, the panel determined Zimmer did not act recklessly. Id. at 662. Therefore, no treble damages should have been awarded for willfulness. Id.

The Supreme Court granted certiorari for one question presented by Halo:

1. Whether the Federal Circuit erred 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.

The Court further granted review off two questions from Stryker:

1. Has the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. §284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. §285, the statute providing for attorneys’ fee awards in exceptional cases?

2. Does a district court have discretion under 35 U.S.C. §284 to award enhanced damages where an infringer intentionally copied a direct competitor’s patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention?

Halo and Stryker (“the §284 cases”) are closely analogous to Octane Fitness and Highmark (“the §285 cases”). The statutory language of §284 mirrors that of §285. 769 F.3d at 1384; Compare 35 U.S.C. §284 (“…the court may increases the damages up to three times the amount found or assessed.”) with 35 U.S.C. §285 (“The court in exceptional cases may award reasonable attorney fees to the prevailing party.”). In the §285 cases, the Supreme Court determined the Federal Circuit standards for an exceptional case were too narrow, limiting the application of §285 beyond the statutory meaning. 134 S.Ct. at 1758.Contrary to previous understanding and application, PRE does not apply to fee shifting schemes. Id. at 1757. As PRE also influenced the willfulness test applied to cases for enhanced damages, the application of PRE in these cases is uncertain. 769 F.3d at 1384. An important distinction between the statutes at issue is the explicit statement of the type of case in which an award may be made. Section 285 allows for an award in exceptional cases where §284 does not explicitly determine which cases may result in an enhanced damages award. Compare 35 U.S.C. §284 with 35 U.S.C. §285. The definition of an “exceptional” case was the issue in Octane Fitness which distinguished the case from previous Supreme Court decisions, so this distinction will likely be important in the future application of §284. See 134 S.Ct 1749. Currently, the Federal Circuit requires the patentee to show “that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” 782 F.3d at 660. The requirement that an infringement be willful to justify enhanced damages is not statutory and will likely be questioned by the Supreme Court in light of the §285 decisions. 35 U.S.C. §284. The Supreme Court is likely to discuss the statutory interpretation of §284 and whether the willfulness or bad faith requirement was intended by Congress. If it was not intended by Congress and the statute, then courts will have to apply a different standard to determine enhanced damages. Given the unanimous decision from the most recent term overturning the Federal Circuit’s statutory interpretation of §285, the grant of certiorari appears to be another opportunity to correct an interpretation and change the application of patent laws at the Federal Circuit.

It is also possible that the Supreme Court will address the standard of review applied by the Federal Circuit in cases with enhanced damages. The Federal Circuit applies a clear and convincing evidence standard for patentees to prove willfulness, analogous to that applied previously to award attorneys’ fees. 769 F.3d at 1381-82. Because the Supreme Court relied on similar cases and other standards of patent law to change the standard in the §285 cases, it is likely to do so for enhanced damages cases as well. The current standards allow for de novo review of the objective prong of the willfulness test. 769 F.3d at 1382. If the Court follows their recent precedent, leaving enhanced damages to the discretion of the district court, the Federal Circuit will have to apply an abuse of discretion standard to the enhanced awards.  The ground work has already been laid for the Court to alter or remove willfulness as a requirement for enhanced damages, given its absence in the statute and the recent §285 cases.