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Supreme Court ruling in Halo Electronics, Inc. v. Pulse Electronics, Inc. relaxes standard for enhanced damages in patent cases; freedom to operate opinions gain renewed importance

June 15, 2016

On Monday, June 13, 2016, the United States Supreme Court issued an important decision that will make enhanced damage awards in patent cases more common and more likely to survive on appeal. In Halo Electronics, Inc. v. Pulse Electronics, Inc. and a companion case Stryker Corp. v. Zimmer, Inc. , the Court reviewed the standard for awarding enhanced damages under 35 U.S.C. §284 established in the In re Seagate Technology LLC decision of the Federal Circuit Court of Appeals in 2007.

To receive enhanced damages under the Federal Circuit’s In re Seagate decision, a patentee had to prove by clear and convincing evidence that: (1) the defendant “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.”

At trial, Halo Electronics won a $1.5 million patent infringement verdict against Pulse Electronics, but the district court judge refused to enhance damages. Stryker Corporation won a $70 million patent infringement verdict against Zimmer and the district court trebled the damages, including $6.1 million in supplemental damages, to a total of $228 million. On appeal in each case, the Federal Circuit applied the standard and methodology of its In re Seagate decision. The Federal Circuit upheld the decision of the trial court not to enhance damages in Halo Electronics and reversed the trial court award of enhanced damages in Stryker Corp .

The Supreme Court rejected the two-part In re Seagate test as an encroachment on the statutory discretion §284 gives to the district courts. The Court believed the first objective part of the Seagate standard could protect bad actors who intentionally infringe a patent, in conflict with the objective for awarding enhanced patent damages. The Supreme Court also rejected the evidentiary requirement that enhanced damages must be proven by clear and convincing evidence. Instead, the Supreme Court held that the proper standard for proving enhanced patent infringement damages is the lower preponderance of evidence standard and the district court’s decisions should be reviewed for abuse of discretion. The Court did emphasize however that an award of enhanced damages should remain an unusual outcome available only in cases of willful infringement.

As a result of the Halo Electronics decision, we expect to see more awards of enhanced patent damages at the district court level and more of those decisions being upheld on appeal. This may counterbalance other recent patent law developments that have made it less attractive for plaintiffs to bring patent lawsuits, such as the rising popularity of inter partes proceedings to invalidate patents under the America Invents Act.

Renewed Need for Patent Opinions: Another aspect of the Halo Electronics decision is critically important, especially to those practicing in a crowded field of technology. Prior to the Halo Electronics decision, defendants frequently relied on non-infringement and invalidity defenses developed during the course of litigation as a means of demonstrating that their actions were not objectively reckless (i.e. the first-prong of the In re Seagate test was not satisfied). The Supreme Court specifically criticized the use of made-for-litigation non-infringement and invalidity defenses that were not relied upon by defendants at the time that they made the decision to engage in the infringing activity. Prudent businesses that want to protect themselves against the potential for enhanced patent infringement damages should strongly consider getting a thorough freedom to operate (patent clearance) opinion from competent counsel earlier in the product development and commercialization process.