By applying a totality of the circumstances standard when determining whether to enhance damages in cases of willful patent infringement, the U.S. Supreme Court’s 2016 decision in Halo Elecs., Inc. v. Pulse Elecs., Inc., 579 U.S. 93, 136 S. Ct. 1923, 195 L. Ed. 2d 278 (2016), remains an important decision to consider in many aspects of patent practice.  Such areas include opinions of counsel (e.g., freedom-to-operate, noninfringement and invalidity), non-attorney opinions (e.g., noninfringement from engineers or other technical consultants), business decisions when put on notice of a patent (e.g., exploring licensing opportunities, attempting design-arounds, ceasing or limiting sales of alleged infringing devices), and conduct during litigation (e.g., ceasing or limiting sales of alleged infringing devices, exploring settlement).  This article explores the background of the decision and how it continues to provide essential guidance to practitioners today.

The Statutory Basis for Enhancement of Patent Damages

In cases of patent infringement, the United States Code provides that district courts “shall award the claimant damages adequate to compensate for the infringement.” 35 U.S.C. § 284.  This provision is designed to ensure that “full compensation” is awarded for “any damages” that are suffered “as a result of the infringement.” General Motors Corp. v. Devex Corp., 461 U.S. 648, 654-55, 103 S. Ct. 2058, 76 L.Ed.2d 211 (1983).  Section 284 further provides that district courts “may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284.

The Development of Case Law Leading to Halo v. Pulse

In Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380, 1389-90 (Fed. Cir. 1983), the Federal Circuit imposed an “affirmative duty” on potential infringers, stating, “[w]here … a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing. Such an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.”  Accordingly, in order to avoid a finding of willful infringement (and possible enhancement of damages), a potential infringer was expected to obtain an opinion of counsel before commencing possibly infringing activity.

A few years after Underwater Devices, the Federal Circuit would hold that an accused infringer’s failure to produce advice from counsel “would warrant the conclusion that it either obtained no advice of counsel or did so and was advised that its [activities] would be an infringement of valid U.S. Patents.”  Kloster Speedsteel AB v. Crucible Inc., 793 F.2d 1565, 1580 (Fed. Cir. 1986).

Recognizing that such an “adverse inference” was having a detrimental effect on the attorney-client privilege, the Federal Circuit reconsidered its reasoning in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed. Cir. 2004) (en banc).  In Knorr-Bremse, the Federal Circuit held that invoking the attorney-client privilege or work product protection does not give rise to an adverse inference.  Id. at 1344-45.  It also went further, and held that an accused infringer’s failure to obtain legal advice does not give rise to an adverse inference with respect to willfulness. Id. at 1345-46.

In reviewing its jurisprudence on willful infringement, the Federal Circuit noted that “[the ‘affirmative duty’] standard was announced shortly after the creation of the court, and at a time ‘when widespread disregard of patent rights was undermining the national innovation incentive.’” In re Seagate Technology, LLC, 497 F.3d 1360, 1369 (Fed. Cir. 2007) (citations omitted).  The Court sought to raise the standard for enhancement of damages.

Under Seagate, a plaintiff seeking enhanced damages was required to show that the infringement of his patent was “willful.” 497 F.3d at 1368.  The Federal Circuit had adopted a two-part test for determining whether damages may be increased pursuant to § 284.  First, a patent owner had to “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” Id. at 1371. This showing, of objective recklessness is to be done without regard to “[t]he state of mind of the accused infringer.” Id.  Second, the patentee had to demonstrate, also by clear and convincing evidence, that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” Id.

The U.S. Congress also sought to protect the attorney-client privilege in the context of patent litigation.  Under the America Invents Act, enacted in 2011, the failure to obtain an opinion of counsel can no longer be used to prove willful infringement:  “The failure of an infringer to obtain the advice of counsel with respect to any allegedly infringed patent, or the failure of the infringer to present such advice to the court or jury, may not be used to prove that the accused infringer willfully infringed the patent or that the infringer intended to induce infringement of the patent.”  35 U.S.C. § 298.

Halo v. Pulse Resets the Calculus for Enhancement of Damages

The U.S. Supreme Court took the opportunity to address the proper standard for enhanced damages in Halo Elecs., Inc. v. Pulse Elecs., Inc., 579 U.S. 93, 136 S. Ct. 1923, 195 L. Ed. 2d 278 (2016).  As the Court explained, the two-part Seagate test resulted in an undesirable effect:

The principal problem with Seagate’s two-part test is that it requires a finding of objective recklessness in every case before district courts may award enhanced damages. Such a threshold requirement excludes from discretionary punishment many of the most culpable offenders, such as the “wanton and malicious pirate” who intentionally infringes another’s patent — with no doubts about its validity or any notion of a defense — for no purpose other than to steal the patentee’s business. 

Halo, at 1932 (citation omitted).  Accordingly, the Supreme Court reasoned that the first step in the Seagate two-part test – the requirement of showing “objective recklessness” – should be discarded:

Under Seagate, a district court may not even consider enhanced damages for such a pirate, unless the court first determines that his infringement was ‘objectively’ reckless. In the context of such deliberate wrongdoing, however, it is not clear why an independent showing of objective recklessness should be a prerequisite to enhanced damages. … A patent infringer’s subjective willfulness, whether intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.

Halo, at 1926.  The Supreme Court held that courts should focus on subjective criteria and view the totality of the circumstances in deciding whether (and in what amount) to enhance damages to punish a culpable wrongdoer:

The Seagate test further errs by making dispositive the ability of the infringer to muster a reasonable defense at trial, even if he did not act on the basis of that defense or was even aware of it. Culpability, however, is generally measured against the actor’s knowledge at the time of the challenged conduct. In sum, § 284 allows district courts to punish the full range of culpable behavior. In so doing, they should take into account the particular circumstances of each case and reserve punishment for egregious cases typified by willful misconduct.

Halo, at 1926.  As the Court explained:

The Seagate test aggravates the problem by making dispositive the ability of the infringer to muster a reasonable (even though unsuccessful) defense at the infringement trial. The existence of such a defense insulates the infringer from enhanced damages, even if he did not act on the basis of the defense or was even aware of it. Under that standard, someone who plunders a patent — infringing it without any reason to suppose his conduct is arguably defensible — can nevertheless escape any comeuppance under § 284 solely on the strength of his attorney’s ingenuity.

Halo, at 1933.  The Court noted that enhanced damages should only be awarded in egregious cases, but reiterated that district courts have discretion to decide if damages should be enhanced, and by how much, in a particular case:

Awards of enhanced damages under the Patent Act over the past 180 years establish that they are not to be meted out in a typical infringement case, but are instead designed as a “punitive” or “vindictive” sanction for egregious infringement behavior. The sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or — indeed — characteristic of a pirate. District courts enjoy discretion in deciding whether to award enhanced damages, and in what amount.

Halo, at 1932 (citations omitted).  The Supreme Court noted that not every case of egregious infringement may warrant enhanced damages, but that district courts should take into account the particular facts of each case to decide whether enhancement is appropriate.

Section 284 allows district courts to punish the full range of culpable behavior. Yet none of this is to say that enhanced damages must follow a finding of egregious misconduct. As with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount. Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test. Consistent with nearly two centuries of enhanced damages under patent law, however, such punishment should generally be reserved for egregious cases typified by willful misconduct.

Halo, at 1933-34.

The Read Factors and Practical Considerations

With broad discretion to consider the totality of circumstances and decide whether and how much to enhance damages, many courts use the nine-factor test from Read Corp. v. Portec, Inc., 970 F. 2d 816, 826-28 (Fed. Cir. 1992), abrogated in part on other grounds by Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996):

(1) “[W]hether the infringer deliberately copied the ideas or design of another”;

(2) “[W]hether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed”;

(3) “[T]he infringer’s behavior as a party to the litigation”;

(4) “Defendant’s size and financial condition”;

(5) “Closeness of the case”;

(6) “Duration of defendant’s misconduct”;

(7) “Remedial action by the defendant”;

(8) “Defendant’s motivation for harm”; and

(9) “Whether defendant attempted to conceal its misconduct.”