ÒWanton or Malicious BehaviorÓ: How will the Supreme Court Revise the Willful Patent Infringement Rules?(Taiwan)

Ankwei Chen

Last October, the Supreme Court granted certiorari to a pair of cases from the Federal Circuit, Halo Electronics v. Pulse Electronics and Stryker Corporation v. Zimmer Inc. regarding the standard for determining when enhanced damages for patent infringement should be granted. Namely, the sole issue granted for review is taken from Halo: ÒWhether 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.Ó With oral arguments scheduled for February 23, this hearing will mark the first time the Supreme Court directly addresses the issue of enhanced damages for patent infringement in recent years, and as the United States is currently still the sole jurisdiction where antitrust-style treble damages may be imposed for patent infringement, the result is being closely watched in the patent law field around the world.

Halo is a small supplier of electronic components who owns three patents relating to surface mount electronic packages for mounting on IC boards inside electronic devices. Pulse Electronics is also a supplier of surface mount electronic components whose products are delivered to its customers both in the United States and abroad. It appears that Halo had offered a license to Pulse, who did not take up on the offer as Pulse had allegedly concluded internally that Halo’s patents may be invalid. Halo sued Pulse for patent infringement in 2007 in the District Court for the District of Nevada, and Pulse both denied infringement and challenged the validity of Halo’s patents on obviousness grounds. While the District Court did find that Pulse had infringed on Halo’s patents for Pulse products manufactured, shipped and delivered to buyers in the United States, it declined to do so for products Pulse manufactured, shipped and delivered to buyers outside the United States, and it held that Pulse’s infringement was not willful. Halo appealed to the Federal Circuit regarding the last two holdings, and Pulse cross-appealed on grounds that the District Court erred in not finding the Halo patents invalid for obviousness, among others. The Federal Circuit affirmed the District CourtÕs rulings and rejected HaloÕs arguments regarding the willfulness issue. Halo thus appealed to the Supreme Court regarding the Federal CircuitÕs determination of willfulness.

Treble damages in patent infringement have a deceptively long history in the United States. The Patent Act of 1793 originally required all infringers to pay at least three times the price of the patenteeÕs invention sold or licensed to others. It was not until the Patent Act of 1836 was the statute amended to split enhanced damages away from compensatory damages, capped them at three times the actual damages, and limiting such awards Òaccording to the circumstances of the case.Ó The language saw little material change in Congress for over a century, and the current statutory language in 35 U.S.C. ¤284 came from the 1952 Patent Act: ÒUpon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringementÉWhen the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessedÉÓ At no point, however, did the language ever clearly specify under which circumstances a court may impose treble damages on a defendant.

The Supreme Court took the first stab at interpreting the treble damages provision in the case Seymour v. McCormick in 1854, holding that treble damages should only be imposed on Òwanton or maliciousÓ infringers, as it would be unjust to make a defendant who acted in ignorance or good faith liable for the same penalty. Alongside the recognition in tort law that punitive damages should be reserved only in cases of bad faith, this rule was universally followed by the lower courts and the Supreme Court itself in subsequent patent infringement cases. The lack of clear standards as to what constitutes Òwanton or maliciousÓ, or ÒwillfulÓ in later parlance, and the possibility of enhanced damages to plaintiffs, meant that the proportion of successful assertions of willful patent infringement remained consistently quite low over the years.

Soon after the Federal CircuitÕs establishment in 1982 as the appeals court for patent issues, the Federal Circuit in the case Underwater Devices v. Morrison-Knudsen, 717 F.2d 1380 (Fed.Cir.1983) outlined a way to evaluate whether the infringement was willful, which is primarily based on a Òtotality of circumstancesÓ standard as to whether the accused infringer has met his affirmative duty to exercise due care in determining whether or not he is infringing. The key piece of evidence in demonstrating this due care requirement is a competent opinion of counsel that the accused is not infringing, and the reliance of the accused on such opinion would indicate that the accused acted in good faith. In contrast, failure to obtain this opinion is deemed as either the infringer neglected to obtain an opinion, or that the opinion advised the infringer to not engage in his proposed activity, which constitutes a negative inference. The issue with using an attorneyÕs opinion as the key evidence in rebutting against willfulness is that not only is it expensive to obtain a patent infringement assessment opinion (to fight off the specter of enhanced damages from a finding of willful infringement, no less), the presentation of such an opinion would also cause the alleged infringer to waive the attorney-client privilege. Even as the Federal Circuit eliminated the aforementioned negative inference from not obtaining a counselÕs opinion in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp. 383 F.3d 1337 (Fed.Cir.2004), the Underwater Devices totality of circumstances standard has not changed.

The Federal Circuit finally gave up on the Underwater Devices regime in In re Seagate Technology LLC 497 F.3d 1360 (Fed.Cir.2007), which lays out the current standard for evaluating willfulness. In its analysis, the Federal Circuit remarked that the use of the term “affirmative duty” in Underwater Devices and the placement of the burden on the infringer made the inquiry more akin to the standards for negligence, and willfulness in other contexts have always required a degree of “recklessness” on the part of the tortfeasor, so the Federal Circuit flipped the script and now requires the patentee to show (I) clear and convincing evidence that the accused infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent (the “objective test”), and (ii) the objective risk of infringement under (i) was either known by the accused infringer or so obvious that is should have been known by the accused infringer (the “subjective test”). Only after the objective test has been met will a court move on to examine the subjective test. While the Federal Circuit intentionally left the application of this rule to the lower courts in future cases, the sequence of the tests shows that the inquiry will be primarily objective in nature; the infringer’s state of mind is no longer a concern until it has been shown that the infringer’s conduct can be considered objectively very risky.

Although the lower courts predictably had a hard time filling in what constitutes an Òobjectively high likelihoodÓ in the Seagate rule above, there has been relatively little split among the lower courts in applying the rule. The challenge to the above Seagate doctrine came from a more unexpected avenue. In Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S.Ct. 1749 (2014), the Supreme Court took issue with the Federal Circuit’s rule in determining whether a patent infringement case is sufficiently ÒexceptionalÓ, per 35 U.S.C. ¤285, to award attorney’s fees against the losing party. The circumstances are strikingly similar. Even as Section 285 also provides no express rule as to what constitutes ÒexceptionalÓ, the same concept that enhanced damages should only apply in willful infringement still applies, thus the Federal Circuit fashioned a three-part test, one of which involves determining whether the claim was Òobjectively baseless.Ó The Federal Circuit confirmed in iLOR LLC v. Google, 631 F.3d 1372 (Fed.Cir.2011) that the objectively baseless standard Ò…is identical to the objective reckless standard for enhanced damages…under [Seagate].Ó Therefore, with the Federal Circuit’s rule for Section 285 overturned, it looks to be a matter of time for a challenge to mount against the Seagate rule, and this may have played some part in Halo’s decision to appeal on the willful infringement issue besides the potential for treble damages.

The Supreme Court’s main issue is that the Federal Circuit’s rule is too rigid, as the Federal Circuit developed the rule on its interpretation of the Supreme Court’s decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries Inc., 508 U.S. 49 (1993), which concerned a long-standing line of antitrust doctrine in which a plaintiff is generally held immune from antitrust liability (which includes treble damages, as mentioned above) for activity Òostensibly directed toward influencing governmental actionÓ (e.g. lobby the government for laws that will cause clearly anticompetitive effects) unless such petition is a sham that is solely intended to interfere with a competitor’s business relationships; in that case, a petition is defined as a sham if it is found to be Òobjectively baseless.Ó The Supreme Court clarified in Octane that the 1993 case was a narrow exception against the more important First Amendment freedom to make political speech. In other words, the Supreme Court is saying the Federal Circuit should not have taken a rule that is only intended to be applied under very limited circumstances and make it the front and center standard in determining enhanced damages.

Based on the above, on its face, the very act of the Supreme Court granting certiorari to hear the question presented by Halo is almost a spoiler on its own, given the recent trend of the Federal Circuit’s rulings more often than not to be reversed at the Supreme Court, and Halo is not arguing that the Supreme Court needs to resolve a split in the lower courts’ application of the Seagate rule. Despite the high likelihood that the Seagate rule will not remain in its current form, it is less clear to what extent the Supreme Court would go in changing the rule. The amicus briefs present a wide variety of options how the substantive part of the rule may be changed:

(1) Is willfullness the sole basis for enhanced damages under Section 284?
As mentioned above, Section 284, in its current or previous form, has never expressly mentioned any particular circumstances where it would be appropriate to impose enhanced damages on an infringer; it only states that the court has discretion to increase damages. While historical interpretation has set down willful infringement as one particular circumstance in which enhanced damages would be appropriate, the Federal Circuit’s rules have made it appear that willful infringement is the sole basis in which enhanced damages may be granted. This is the viewpoint of Judge Gajarsa in his concurrence in the Seagate decision and espoused by Halo and a few of the amici. It is argued by Judge Gajarsa that historically, there have been instances in which damages based on an assessment of the reasonable royalty owed were inadequate for compensatory purposes, and the amount may be increased for purely remedial reasons, so the Federal Circuit’s limited application of Section 284 to only willful infringement cuts out these other aspects which would have allowed a trial court to provide a more equitable outcome. Therefore, while willfulness may be sufficient for a finding of enhanced damages, it should not be necessary.

Instead of willfulness being the sole criteria, Halo and others argue that the idea of the statute is best met with a flexible approach in which the court has broad discretion in deciding whether to grant enhanced damages. Some of the factors listed by Halo in its brief include defendantÕs size and financial conditions, defendantÕs motivation, and whether defendant attempted to conceal its misconduct. They argue that this not only follows the flexibility in the test closer, but also better serves the original purpose of enhanced damages – deterrence for misconduct.

(2) Keep enhanced damages to willful infringement only but modify the Seagate tests:
Others point to the aforementioned historical context and assert that it is appropriate to limit enhanced damages to willful infringement because in addition to the overwhelming historical context showing such, Congress in the 2011 Leahy-Smith America Invents Act added a Section 298, which essentially codifies the Knorr rule by stating that the absence of a letter of counsel may not be used to prove that the accused infringer willfully infringed the patent, while leaving Section 284 unchanged. It is therefore argued that if Congress did not relate Section 284 to willful infringement and the past case law, then there is no reason for Congress to specifically add Section 298.

There are quite a few suggested ways to revise the Seagate tests. For example, the governmentÕs position in its amicus brief is that the Seagate objective prong, in its current form, incorrectly allows an infringer to escape enhanced damages if the infringer comes up with a plausible defense during litigation even if the infringer fully intended to infringe at the time of the act, because the infringerÕs state of mind is expressly precluded under the objective test. Thus, the rule should be changed so that the assessment of defendantÕs behavior should be moved back in time to the time of the infringing conduct rather than at litigation, which is more consistent with the Òobjective reasonablenessÓ doctrine in many other contexts of law. The amicus brief submitted by the American Intellect Property Law Association echoes the governmentÕs position that the problematic timing of the alleged infringerÕs defense, but goes further and argues that the willfulness inquiry should be focused on a subjective bad-faith test, in which the inquiry is whether the defendant had a good faith belief at the time of infringement that it was not infringing or that the patent was invalid. AIPLA argues that this strikes the best balance between the Òtotality of circumstancesÓ approach and the current Seagate test, while preserving the deterrence effect that the enhanced damages provision is supposed to create.

(3) Keep the Seagate rule in its entirety:
The amicus briefs espousing this view, which were primarily submitted by large global technology firms, commonly cite the importance of retaining a high bar to granting enhanced damages as set by Seagate. They argue that HaloÕs petition for a totality of circumstances standard would enable Non-Practicing Entities (NPEs) to seek enhanced damages more often in hopes of forcing defendants to settle, which they would be more likely to do in the prospect of court costs and the legal uncertainties under a vague Òtotality of circumstancesÓ rule. Other criticisms made by these amici of the above positions include the argument that it is not remotely realistic for a company to have developed a defense every time it thinks it might be infringing on a patent; further, the best evidence for a defendant to show that it had a defense would still be a counsel opinion, which would bring back all the issues with Underwater Devices, and the new Section 298 would be rendered completely meaningless if willfulness is no longer required for enhanced damages under HaloÕs petition. Finally, these briefs also argue that Octane was about attorneysÕ fees in Section 285, which has its own body of law over the years that is very different in nature from that for enhanced damages in Section 284.

Although a textual interpretation of the statute as advanced by Halo and some of the amici may find some favor with the Justices, given the long historical link between willful infringement and enhanced damages, the chances of the Supreme Court making a sweeping change to allow the courts broad discretion to apply Section 284 are relatively small. However, given that past landmark cases, such as KSR v. Teleflex in which the Supreme Court found the Federal CircuitÕs rule for determining obviousness to be too rigid, have ultimately not caused a large shift in practice as some have thought, and empirical research on willful infringement cases have shown that Seagate has not actually significantly reduced willful infringement findings, if the Supreme Court takes a measured approach to revising the Seagate test, despite the debate that will surely follow this decision, the impact on actual patent practice remains to be seen.