Supreme Court Overturns Seagate and Returns More Discretion to District Court Regarding Awarding Enhanced Damages

Takeaway: Supreme Court’s stance on enhanced damages for patent infringement is a win for patent holders, such that their burden of proof to show egregious behavior is lowered and the rigid Seagate test that required a showing of “objective recklessness” was overturned. Enhanced damages up to 3 times actual damages may become more common. 

On June 13, 2016, the Supreme Court unanimously overturned the Federal Circuit’s holding in In re Seagate Technology, LLC, 497 F. 3d 1360, which required the district courts to consider enhanced damages only if there was “objective recklessness,” and returned some discretion back to the district court.  Halo Electronics, Inc. v. Pulse Electronics, Inc., U.S., No. 14-1513, 6/13/2016; Stryker Corp. v. Zimmer, U.S., No. 14-1520, 6/13/2016.

Further, the Supreme Court held that the burden of proving that an egregious circumstance warranting enhanced damages is at a lower standard of a “preponderance of the evidence,” which is standard generally applied to infringement, rather than “clear and convincing evidence,” and that the standard for appellate review for such awards is abuse of discretion. However, in a concurring opinion (joined by Justices Kennedy and Alito), Justice Breyer pointed out the potential danger to innovation if too many enhanced damages were rewarded.

In 2007, the Federal Circuit held in In re Seagate Technology, LLC, that the standard for awarding enhanced damages under 35 U.S.C. §284 follows a two-part test.  The first is an objective prong wherein the patent owner must show that the infringer acted despite an objectively high likelihood that its actions would constitute infringement and the second is a subjective prong wherein the patent owner must show that the infringer either knew or should have known of the risk of infringement.

The Supreme Court found the Seagate test to be “unduly rigid” and “impermissibly encumbers the statutory grant of discretion to district courts.”  Id. at 8-9.  Chief Justice Roberts pointed out that the use of the word “may” in 35 U.S.C. §284 was evidence that the district court was to be given discretion to increase damages.

“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.”

The Court further analyzed that using the higher “clear and convincing evidence” to prove enhanced damages was inconsistent with 35 U.S.C. §284 because it imposed no specific evidentiary burden and therefore should not default to a higher standard.

The Court also warned the lower courts that awarding enhanced damages more commonly because of this holding would result in catastrophic and far-reaching results.  Now, under Halo and Styker, undoubtedly, the state of mind of infringers will be examined under the microscope.