Has the Supreme Court Breathed New Life into Patent Trolls in Halo and Stryker?

The chance of a court tripling damages for patent infringement has significantly increased.  The Supreme Court, Halo Electronics, Inc. v. Pulse Electronics, Inc., et al. and Stryker Corporation, et al. v. Zimmer, Inc., et al., granted district courts more discretion to award enhanced damages for willful patent infringement.  However, the Court’s recent decision could have unintended consequences.

Summary of Enhanced Damages

When a company is sued for patent infringement, the key question is whether that company actually produces, sells, or does what is covered by the patent.  Whether the company knew about the patent is immaterial to a court’s analysis on infringement.  In other words, the mindset of a potential patent infringer is irrelevant for determining direct patent infringement.

However, the United States has an unusual doctrine regarding patent infringement that is not found anywhere else in the world: the court actually considers a potential patent infringer’s mindset when determining whether to increase damages for willfulness.  If willful infringement is found, the court can up to triple the amount of damages owed to the patent owner.

Triple damage awards for willful infringement were almost never awarded prior to the Supreme Court’s decision in Halo and Stryker.  However, on Monday, the Court made triple damage awards (also called enhanced damages) more available to patent owners, including patent trolls.

Prior to Halo and Stryker, triple damage awards could be awarded if an infringer acted recklessly – where a high risk of infringing is either known or so obvious that it should have been known.  The plaintiffs in this case, Halo and Stryker, had both urged the Supreme Court to adopt the standard adopted by the Court in Octane Fitness LLC v. Icon Health & Fitness Inc., where it held that attorney’s fees can be awarded whenever a case “stands out from others” based on the “strength of a party’s litigating position … or the unreasonable manner in which the case was litigated.”  Furthermore, Octane Fitness reduced the amount of evidence needed to award attorney’s fees.

The Court’s Decision in Halo and Stryker

On Monday, the Supreme Court decided two cases, Halo Electronics, Inc. v. Pulse Electronics, Inc., et al. and Stryker Corporation, et al. v. Zimmer, Inc., et al., that explicitly lowered the standard for awarding increased damages to a patent holder when an infringer is found to have willfully infringed the holder’s patent.  In the decision, the high court has overturned the previous Federal Circuit standard from In re Seagate Technology, LLC, 497 F. 3d 1360 (2007) (en banc), which required the objective recklessness standard – clear and convincing evidence that an infringer acted despite an objectively high likelihood that its actions constituted infringement of a patent.  The petitioners in Halo and Stryker argued that the Seagate standard was far too strict, and allowed even the most unscrupulous of copyists the opportunity to escape enhanced damages as long as they came up with (even after the fact) a non-frivolous argument for non-infringement or invalidity of the patent.  With little chance for a patent holder to recover enhanced damages, copyists had little incentive to curtail their behavior, the Court was told.

Ultimately, the Supreme Court sided with the petitioners, and held that the Seagate test is not consistent with willful infringement decisions of the last 200 years and the codification of enhanced damages in 35 U.S.C. § 284.  The result will be significantly increased damages in at least some patent infringement suits.  And patent trolls live off of damages (or at least the threat of them).

Will the Decision Benefit Patent Trolls?

The term patent troll—or less antagonistically, a non-practicing entity—is generally used to refer to a company that purchases patents for the sole purpose of compelling settlements from potential infringers of the patents.  In other words, patent trolls buy patents and seek out money from those who may infringe those patents.  Patent trolls are often looked upon with disfavor and are even accused of being a “tax” on innovation.  Others argue that patent trolls help the patent marketplace operate more efficiently by making the market for patents more liquid, and compensating individual inventors who could not alone commercialize an invention.

The Supreme Court’s relaxation of the requirements for willful infringement could be a game changer for patent trolls.  Patent trolls often threaten to sue companies to convince the threatened party to pay a settlement, rather than engage in a lengthy and expensive court battle that could end with tens or hundreds of millions of dollars in liability.  By creating a better chance at a threefold increase in the potential jackpot a troll could win in a patent lawsuit, the Court may empower patent trolls to extract even higher settlement amounts from those they threaten to sue, or extract settlements from potential infringers that would not have otherwise settled but for a fear of a treble damage award at trial.

The Supreme Court Responds

The Supreme Court apparently heard concerns about trolls from the respondents and their amici, addressing the concern about trolls specifically in their decision: “They [Respondents] worry that the ready availability of [enhanced] damages will embolden ‘trolls,’” and that “balance can indeed be disrupted if enhanced damages are awarded in garden-variety cases.”  The Supreme Court rebuts these concerns, however, implying that the standards enumerated in the decision should keep enhanced damages from being awarded in these “garden-variety cases.”  The Court goes on to say that the “policy concerns” of the Respondents “cannot justify imposing an artificial construct such as the Seagate test” on the discretion given to the district courts to impose enhanced damages for willful infringement.

The Supreme Court advises that “although there is ‘no precise rule or formula’ for awarding [enhanced] damages,” a district court’s “‘discretion should be exercised in light of the considerations’ underlying the grant of that discretion.”  (Quoting Octane.)  Ultimately, the Court concludes that a district court should “take into account the particular circumstances” of a case and reserve the punishment of enhanced damages “for egregious cases typified by willful misconduct.”  Such guidance leaves a lot up to the discretion of the district courts.  What’s more, that discretion will now be reviewed under an abuse of discretion standard, which largely defers to the district court (and is much more deferential than the previous de novo standard that was used for part of the Seagate test).

What Could Go Wrong?

The guidance from the Supreme Court in the decision is, in its own words, not precise nor formulaic, leaving room for interpretation of individual judges and courts.  This guidance may, in some cases, not be enough to prevent undesirable results.  Justice Breyer’s concurrence even warns that the discretion granted to district courts must be applied carefully, “to ensure that they only target cases of egregious misconduct.”  Breyer voices several concerns, including, in particular, that it may be difficult for possible infringers to know exactly when they might be on the hook for such enhanced damages.

One way patent owners alert potential infringers that they may be infringing a patent is by sending a demand letter.  A demand letter can put the recipient on “notice” regarding the patent, opening the door for a finding down the road that the infringer was willfully infringing the patent.  Justice Breyer identifies a real concern with how these demand letters might cause confusion among potential infringers:

How is a growing business to react to the arrival of such a letter, particularly if that letter carries with it a serious risk of treble damages?  Does the letter put the company “on notice” of the patent?  Will a jury find that the company behaved “recklessly,” simply for failing to spend considerable time, effort, and money obtaining expert views about whether some or all of the patents described in the letter apply to its activities (and whether those patents are even valid)?  These investigative activities can be costly.  Hence, the risk of treble damages can encourage the company to settle, or even abandon any challenged activity.

If a patent troll, or other entity, can send a letter that discourages a challenged activity because of enhanced damages, this can frustrate the goals of patent system to “promote” the “Progress of Science and useful Arts.”  U. S. Const., Art. I, §8, cl. 8.  Further, demand letters often include little to no merit or helpful information.  The Court’s decision could incentivize patent trolls or other entities to send out these deficient demand letters.

Finally, the Halo and Stryker decision could cause undesirable forum shopping by patent holders of all kinds.  As cases are decided under the new rule, it may become apparent that particular districts or judges are more likely to grant enhanced damages based on a finding of willful infringement.  This could cause undesirable forum shopping, and particularly forum shopping that may disproportionately benefit patent owners.

What Can be Done?

Without strict guidance from the Supreme Court on how to apply a new willfulness standard, one way to mitigate this uncertainty may be to rely on rules that regulate demand letters.  Already, many states have passed laws requiring a certain level of specificity to be included in demand letters, so that an accused infringer is reasonably apprised of the allegations against them: what patents are at issue, what products of the accused allegedly infringe, etc.  This may be a good start, as such rules help recipients of those letters more fairly assess the threat posed by a particular demand letter.  However, these state laws are disparate and have not been passed in every state.

Accordingly, this decision from the Supreme Court may present additional motivation for Congress to harmonize rules nationwide that ensure demand letters meet certain standards for specificity, legislation that Congress has already been considering.  Congress could go one step further, and codify a minimum threshold of specificity for demand letters that qualifies to trigger actual knowledge of a patent for purposes of willful infringement.  Such a law could help alleviate many of Justice Breyer’s concerns, and at least create some meaningful baseline rule for when enhanced damages might be applied.  The leverage a troll might have during settlement negotiations may also be reduced if there is more certainty about when willful infringement might be found at trial.  Predictability for a willful infringement standard could also reduce disparate decisions among different districts and cut down on potentially undesirable forum shopping.

Last, Justice Breyer’s concurrence hints that Opinions of Counsel are likely still helpful for patent holders looking to avoid liability for willful infringement: “I do not say that a lawyer’s informed opinion would be unhelpful.”  However, two things from this decision should be noted.  First, in Halo, the alleged infringer relied on the opinion of an engineer that a patent was invalid.  The lower courts still found willful infringement.  Thus, opinions of legal counsel are advantageous over those of engineers or technical advisors, because a court is likely to give the opinion more weight and opinions from legal counsel are privileged.  Second, the Court appeared to bristle at opinions obtained well into a dispute over infringement that were merely used to satisfy the Seagate test.  Accordingly, if an alleged infringer is to obtain an Opinion of Counsel that a patent is invalid or not infringed, it would seem advisable based on Halo and Stryker to do so early on after learning of the patent.

Time will tell whether the Supreme Court has breathed new life into the  patent troll business model; or, on the other hand, if demand letter practice and the decisions of district court judges can be applied in the manner aspired to by the Court, limiting any harmful effects of the additional discretion given to trial judges to increase damages in patent suits.