Supreme Court to Continue Undoing Rigid Tests in Patent Cases?

On October 19, 2015, the Supreme Court granted certiorari in two cases, Stryker Corp. v. Zimmer, U.S., No. 14-1520, and Halo Electronics, Inc. v. Pulse Electronics, Inc., U.S., No. 14-1513, on the sole issue of whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284. The test the Federal Circuit applied in Stryker and Halo Electronics is very similar to the rigid, two-part test the Court rejected in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 572 US __ (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285. The decisions in these cases, coupled with Octane Fitness, could alter patent litigation strategies.

The relevant text of the statute at issue here, 35 U.S.C. § 284, reads: “[i]n either event the court may increase the damages up to three times the amount found or assessed.” As a comparison, the text 35 U.S.C. § 285 reads: “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” As we discussed in our client alert “Supreme Court Makes Landmark Rulings on Attorney Fees in Patent Cases,” the Federal Circuit had previously held in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F. 3d 1378, 1381 (2005), that exceptional cases are those cases which are proven by clear and convincing evidence to be both “objectively baseless” and “brought in subjective bad faith” or “when there has been some material inappropriate conduct.” In Octane Fitness, the Court overturned this test and held that:

an “exceptional” case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances. As in the comparable context of the Copyright Act, “[t]here is no precise rule or formula for making these determinations,’ but instead equitable discretion should be exercised ‘in light of the considerations we have identified.” (quoting Fogerty v. Fantasy, Inc., 510 U.S. 517, 114 S.Ct. 1023 (1994)).

In applying the enhanced damages provisions of 35 U.S.C. § 284, the courts have interpreted these provisions as containing a “willfulness” requirement, though the word “willfulness” does not appear in the statute. Similar to the “exceptional” requirements under 35 U.S.C. § 285, the Federal Circuit developed a two-part test to assess willfulness: as the Federal Circuit held in In re Seagate Tech., LLC, 497 F.3d 1360, willfulness required showing that the defendant “acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,” and that “this objectively-defined risk…was either known or so obvious that it should have been known to the accused infringer.” 

The Supreme Court likely granted certiorari on these two cases because (a) the Federal Circuit is applying a rigid, two-part test similar to Octane Fitness; (b) the test has no textual basis in the statute; and (c) a jury’s express finding of willfulness was overturned—in Halo Electronics by the district court in post-trial motions and in Stryker by the Federal Circuit. In Octane Fitness, the Court emphasized the need to exercise equitable discretion and avoid precise rules or formulas. This guidance appears to be particularly relevant to the test here where the Federal Circuit’s test is not rooted in the statutory text. The current test arguably makes it far more difficult for successful litigants to recover enhanced damages by confining the exercise of discretion, though the statute does not handcuff the exercise of discretion. Certainly, the Court will likely strongly consider whether the Federal Circuit’s test sufficiently allows for consideration of an accused infringer’s subjective bad faith in determining whether enhanced damages should be awarded. 

The question is what the standard should be, in practice as well as in doctrine, for evaluating whether the discretion exercised to enhance damages was appropriately exercised. Arguably the Federal Circuit has set the bar too high. Many argue, as Halo argues in its petition, that accused infringers can “concoct a defense” to avoid willfulness under the Federal Circuit’s standard, for example taking “advantage of hindsight to locate and combine…prior publications” to develop an obviousness invalidity defense. Others have different views. One thing is certain: increasing the threat of enhanced damages by lowering the bar to recovering them would have a significant impact on the calculus of deciding to bring infringement claims and deciding whether to risk a claim of infringement. We look forward to seeing what standard, precisely, the Supreme Court will articulate to ensure that the discretion to award enhanced damages is not unfettered, while respecting a statutory text that contains no apparent limits on the exercise of that discretion. Given the recent propensity of the Supreme Court to modify Federal Circuit precedent, companies would be wise to consider obtaining a competent opinion of counsel on a pre-suit defense before going forward with a proposed product or process because a non-frivolous defense developed for trial may be insufficient to avoid willfulness.