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Supreme Court Decision Impacts Product Launch Strategy

June 24, 2016

By: Drew Meunier 

Guided by its 2014 decision in Octane Fitness LLC v. Icon Health & Fitness Inc. and Highmark Inc. v. Allcare Health Management Systems Inc., the Supreme Court just issued another unanimous decision in Halo Electronics, Inc. v. Pulse Electronics, Inc.—a decision that should make it easier for patent holders to be awarded enhanced (e.g., treble) damages under 35 U.S.C. § 284. The Court this time rejected a rigid rule from In re Seagate Technology, LLC, 497 F. 3d 1360 (2007) (en banc), where the Federal Circuit 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. 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 problem with the first “objective recklessness” part of the Seagate test was it allowed an accused infringer to avoid enhanced damages by raising a substantial question as to the validity or non-infringement of the patent, even if he was not aware of the arguable defense when he acted. The Federal Circuit reviewed the lower court’s application of this first part of the test de novo. Finally, both parts of the test suffered from a heightened burden of proof. The Supreme Court found all of this to be in error.

35 U.S.C. § 284 states in relevant part that “the court may increase the damages.” (emphasis added). The Court concluded that the word “may” clearly denotes discretion. While “discretion is not whim,” neither does it involve a precise rule or formula. However, the Court did recognize that enhanced damages should generally be reserved for “egregious cases of culpable behavior.” The Court clarified that enhanced damages are designed as a “punitive” or “vindictive” sanction based on the culpability of the actor at the time of the challenged conduct.

The Court also followed Octane Fitness in holding that the standard for establishing willfulness is by “a preponderance of the evidence” instead of by “clear and convincing evidence.”

The Court likewise rejected the Federal Circuit’s framework for appellate review, concluding that determinations of enhanced damages should be reviewed for abuse of discretion, informed by the considerations identified by the Supreme Court.

Therefore, the Supreme Court has actually issued a pro-patent decision that gives patent holders a greater chance to recover enhanced damages and therefore greater leverage over accused infringers during settlement talks. Potential infringers can no longer rely on an ex post defense generated for litigation. Instead, their culpability will be measured according to their knowledge at the time of the accused conduct.

The Court’s discretionary standard therefore places a potential infringer at risk of enhanced damages if they do not reasonably determine that their product/service will not infringe a patent prior to launch. Justice Breyer clarifies in his concurring opinion that while the mere fact that counsel was not consulted is not by itself evidence of willfulness, a well-reasoned opinion of counsel can help draw the line between infringing and non-infringing uses. Thus, the Halo decision increases the importance of engaging counsel prior to launching a product or service.

For further information, please contact:

Drew Meunier - 404-645-7711 or dmeunier@mcciplaw.com

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