The Supreme Court Writes a New Chapter on Patent Damages — Making an Award of Attorneys’ Fees and Multiple Damages Easier to Obtain and Once Again Changing the Patent Landscape

This article will review the recent history concerning patent litigation, patent damages, and recent changes effectuated by Congress and the Supreme Court.

First, a little history. Once upon a time there were a series of Plaintiff’s lawyers who brought a multitude of questionable litigations involving vague patents, which they attempted to apply across all industries. The litigations were typically settled for less than the cost of defense. Major corporations would be sued for such things as using a computer with the internet and performing rudimentary business transactions over the internet. This fairy tale is unfortunately quite real, and the perpetrators of these suits are known as “patent trolls.” Patent trolls have found favorable courts to practice their trade, particularly in the Eastern District of Texas. Patent trolls are typically non-practicing entities (NPEs), meaning that they do not make, use or sell the patented invention, but merely own the patent (or a series of patents) for the purpose of asserting it in litigation.

Patent trolls became a plague on businesses and it did not go unnoticed. On September 16, 2011, President Barack Obama signed into law the America Invents Act (AIA) which, among other things, provided for a series of post-grant opposition proceedings, i.e., such as the Inter Partes Review (after the patent is issued), which made it easier for defendants in patent cases to turn to the United States Patent Office (“Patent Office”) to challenge the validity of the patent. A defendant in a patent case who elects to pursue an Inter Partes Review can proceed at the Patent Office on the issue of validity for a fraction of the cost of defending itself in federal court. More recently, various states have attempted to enact statutes meant to thwart patent trolls.

The Inter Partes Review proceedings effectively reduced the number of patent litigations in the last few years, making the mere threat of litigation less onerous for the accused infringer. The trial court typically stays the case during the proceedings at the Patent Office. Additionally, the defendant does not waive any non-infringement defense it may have in electing to proceed at the Patent Office. The non-infringement defense is later litigated in court if the patent is determined to be valid after the proceedings at the Patent Office have concluded. For financial and business method patents, there are special proceedings known as Covered Business Method Petitions (CBMs), which are quite similar to Petitions for Inter Partes Review.

The proceedings at the Patent Office have a number of advantages for accused infringers. At the Patent Office, the challenger may prove invalidity under the preponderance of the evidence standard – i.e., is it more likely than not that the patent is invalid? In federal court, invalidity must be established by clear and convincing evidence. Clear and convincing evidence means that the evidence presented by a party during a trial must be highly and substantially probable. These differences are significant. Under the preponderance of the evidence standard, the jury is often instructed to think of evidence as a scale, and that the proof is sufficient if the scale tips even slightly in the Plaintiff’s favor.

As a result of these new proceedings, the pendulum appeared to have swung in favor of accused infringers. Then on June 13, 2016, the Supreme Court, in the case of Halo Electronics, Inc. v. Pulse Electronics, No. 14-1513 (U.S. 2016) (the “Halo decision”) lowered the standard for Plaintiffs to obtain an award of attorneys’ fees and multiple damages in patent cases. This decision significantly changes the patent landscape in favor of patent owners and presents new challenges in avoiding enhanced damage awards in patent litigation.

Now, a little background on our patent statutes. The patent statutes provide that “[u]pon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court . . . the court may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284. Further, “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” 35 U.S.C. § 285.

These statutes, like many other statutes, do not articulate any precise test as to when a court should award enhanced damages and/or find the case “exceptional” and award attorneys’ fees. In a series of decisions issued by the Court of Appeals for the Federal Circuit, which initially hears all patent appeals in the first instance, the Federal Circuit defined the level of proof to establish enhanced patent damages. In In Re Seagate Technology, LLC, 497 F. 3d. 1360 (Fed. Cir. 2007), the Federal Circuit adopted a two-part test. Under Seagate, a patent owner was required to show by clear and convincing evidence: (1) that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent; and (2) that the infringement was either known or so obvious it should have been known to the infringer. This is a higher standard of proof than is required in most civil cases which apply preponderance of the evidence standard.

Under this standard, if accused infringers could establish a reasonable basis for its defense (or for ignoring the patent), the Court, under Seagate, would generally not entertain enhanced damages. In close cases, prior to market launch, businesses often solicit legal opinions from counsel, commonly referred to as “freedom to operate” opinions. This opinion can later be used as evidence at trial to establish that the accused infringer had a reasonable basis to believe that the patent was not infringed and/or that the patent at issue was invalid. In order to use the opinion, however, the attorney–client privilege must be waived. The attorney’s opinion is introduced on the issue of willful infringement. Because the Seagate standard was fairly easy to meet, many companies did not even feel the need to solicit a legal opinion before product launch. Moreover, if the Defendant could put on a reasonable defense, regardless of its motives at the time it introduced the accused product, it could escape a finding of enhanced damages.

Turning now to the Halo decision, the Supreme Court overturned the Seagate standard, finding that the pertinent language of the statute, 35 U.S.C. § 284, contains no explicit condition on when enhanced damages are appropriate, noting that the word “may” clearly denotes discretion. The Court found the Seagate standard unduly rigid because by requiring that the patentee prove by clear and convincing evidence that the infringer had taken an objectively unreasonable risk of infringement, even wanton and reckless infringers who were intent on stealing the patentee’s business might escape an enhanced damage award. Instead, the Court held that the lower court need not apply any rigid formula, but should take into account the particular circumstances of each case. Thus, the need to establish objective recklessness by clear and convincing evidence was overturned. Instead, as in other areas of the law, the Courts will determine whether the accused infringer more than likely acted recklessly, i.e., “knowing or having reason to know” the facts concerning the infringement. The lower court’s determination will only be overturned for an abuse of discretion, a very difficult standard to overcome. This new approach lowers the standard because: (1) it no longer applies the higher evidentiary standard of clear and convincing evidence; and (2) applies the “more probable than not standard,” which is typically applied in civil cases.

What does this mean for your business? First, care should be given before a product launches. This means securing counsel and soliciting a freedom to operate opinion before an entirely new product line is released. Common sense dictates that counsel be contacted early in the design process to avoid costly expenditures in the development of technology that is covered by a competitor’s product. Counsel should also be contacted when a patent of concern comes to one’s attention. Also, be careful how these issues are discussed within your company. Discussions concerning patents that do not involve counsel are not protected by the attorney-client privilege. E-mails and other documents discussing your competitor’s patents and even products may lay the foundation for establishing enhanced patent damages.

If an actual lawsuit has been filed against your company, an independent legal opinion should be obtained from competent patent counsel. The opinion, in many instances, can be held in reserve until the issue of willfulness is tried.

In conclusion, the Supreme Court’s recent decision in Halo, in which it lowered the standard to obtain enhanced damages, has made patents more valuable. Enhanced damages are now easier to obtain in cases where infringement is established if the patentee can establish that the defendant knew or should have known of the facts surrounding the infringement. Greater care should be exercised when introducing new products by obtaining freedom to operate opinions.

Bill Cass is a Partner and Co-Chair of the Litigation and Additive Manufacturing Practices at with Cantor Colburn LLP (www.cantorcolburn.com).  Bill’s cases involve complex technology, including medical devices, circuitry, mechanical engineering, material science, chemistry, and computer software. Bill has spoken on topics concerning intellectual property internationally at EuroMold, IVA Sweden, Rapid (SME), and also at a White House Symposium on Additive Manufacturing.