The U.S. Supreme Court, in a unanimous decision written by Chief Justice John Roberts, ruled that the two-part Seagate test for enhanced damages established by the Court of Appeals for the Federal Circuit was inconsistent with the the Patent Act, handing patent owners a rare major victory that could make it easier for them to win treble damages for cases involving willful infringement.

Patent market observers said the decision represents a rare win for patent owners after a spate of Supreme Court rulings that have limited patent owner rights. First the high court made it harder to win injunctions in the eBay v. Mercantile Exchange case, and then the high court established new restrictions on patentable subject matter in Mayo and Alice, which relegated software and business methods to the realm of the unpatentable for obviousness.

"After a string of rulings unfavorable to patent owners, the Supreme Court handed patent owners a major victory today," said Brian Pandya, a partner with Wiley Rein in Washington, D.C. "The threat of willfulness had nearly been erased from patent litigation by recent Federal Circuit decisions.

Pandya noted that although the Seagate test was dismissed by the Supreme Court as too rigid, it provided clear guidance in the area of enhanced damages. "The Federal Circuit, district courts, and patent lawyers will have their hands full in the coming years sorting out what are the few situations that amount to willful infringement under the Supreme Court’s new, more flexible standard."

Some patent market observers said the ruling may prove to be a deterrent to the recent patent market phenomenon known as efficient infringement, whereby an infringer feels free to infringe and litigate because it is cheaper than settling and paying for a license in most cases.

"The Halo decision will act as a damper on this competitor patent model,"said Rob Sterne, a partner with Sterne Kessler Goldtein & Fox in Washington, D.C.

Sterne added that since 2007 the use of an opinion of counsel to serve as a legal insulator for enhanced damages declined dramatically as competitors realized the risk of enhanced damages was significantly reduced. "Now, with this Halo decision, it can be expected that there will be renewed use of opinions of counsel by competitors to provide addition legal protection against enhanced damages."

Adam Mossoff, a professor of law at George Mason University in Arlington, Virginia, said the high court has been less concerned about abridging patent rights than many patent owners believe.

"The Supreme Court is not ideologically opposed to patent owner rights with the possible exception of Justice Breyer," Mossoff said. "The high court hasn't liked the Federal Circuit's view of bright line rules and especially the creation of special rules for patent cases even in areas covered by doctrinal jurisprudence."

Mossoff said the Supreme Court's dislike of the Federal Circuit's special treatment of patent cases has created the perception that it is anti-patent. He added that anti-patent forces have done a good job of exploiting this perception until now.

Going forward, Mossoff said it is likely that the number of motions for enhanced damages by patent owners will increase just as the number of motions for exceptional case fees increased after the Octane Fitness ruling.

"It makes it easier for patent owners to obtain treble damages for willful infringement."

Asked whether there was caused for concern that the ruling would be exploited by non-practicing entities, he said NPEs or patent licensing companies are just as likely to have their patents willfully infringed as operating companies. "There's no evidence willful infringement is a bigger problem for patent licensing companies than operating companies."

“This ruling will incrementally increase the value of U.S. patents,” said Mark Gober, a senior director at 3LP Advisors in Silicon Valley. “It’s perhaps not quite as impactful as a potential ruling in the MCM case (which could eliminate the IPR process), for example, but it definitely represents a swing in the pendulum.”

The high court’s ruling vacated the Federal Circuit rulings in both the Halo Electronics v. Pulse Electronics and in Stryker Corp. v. Zimmer. The cases involved appeals of awards won for patent infringement after the Federal Circuit upheld rulings against enhanced damages.

Halo had won a $1.5 million jury verdict against Pulse, while Stryker won $210 million from Zimmer Inc. In both cases, the district courts ruled the patent owners had not passed the Seagate test and the Federal Circuit agreed.

The high court’s ruling in Halo v. Pulse noted that Section 284 of the Patent Act provides that, in a case of infringement, courts “may increase the damages up to three times the amount found or assessed.”

Under the two-part test established by the Federal Circuit’s Seagate ruling, a patent owner first must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. Second, the patent owner must 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.

Justice Roberts noted that under Federal Circuit precedent, an award of enhanced damages is subject to trifurcated appellate review. The first step of Seagate -— objective recklessness —- is reviewed de novo; the second—subjective knowledge—for substantial evidence; and the ultimate decision— whether to award enhanced damages—for abuse of discretion.

“The Seagate test is not consistent with Section 284….The pertinent language of Section 284 contains no explicit limit or condition on when enhanced damages are appropriate, and this court has emphasized that the ‘word ‘may’ clearly connotes discretion.’…At the same time, however, “[d]iscretion is not whim.” ….Although there is ‘no precise rule or formula’ for awarding damages under Section 284, a district court’s ‘discretion should be exercised in light of the considerations’

“Here, 180 years of enhanced damage awards under the Patent Act establish that they are not to be meted out in a typical infringement case, but are instead designed as a sanction for egregious infringement behavior."

The high court noted that while in many respects, “the Seagate test rightly reflects this historic guidance. It is, however, ‘unduly rigid, and . . .impermissibly encumbers the statutory grant of discretion to district courts.’”

The objective recklessness requirement of the Seagate test “excludes from discretionary punishment many of the most culpable offenders, including the ‘wanton and malicious pirate’ who intentionally infringes a patent—with no doubts about its validity or any notion of a defense— for no purpose other than to steal the patentee’s business.

“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.”

The high court also cited its own ruling in Octane Fitness v. ICON Fitness, which concerned exceptional case fees, in rejecting the rigidity of the Federal Circuit’s Seagate test.

“Octane Fitness arose in a different context but is instructive here. There, a two-part test for determining when a case was ‘exceptional’—and therefore eligible for an award of attorney’s fees — was rejected because a claim of ‘subjective bad faith’ alone could ‘warrant a fee award.’ So too here: A patent infringer’s subjective willfulness, whether intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless."

The high court noted that 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."

The high court ruled that Section 284 allows district courts to punish the full range of culpable behavior. It also instructed the district courts to take into account the particular circumstances of each case and reserve punishment for egregious cases typified by willful misconduct.

“Seagate’s requirement that recklessness be proved by clear and convincing evidence is also inconsistent with Section 284. Once again, Octane Fitness is instructive. There, a clear and convincing standard for awards of attorney’s fees was rejected because the statute at issue supplied no basis for imposing a heightened standard. Here, too, Section 284 ‘imposes no specific evidentiary burden, much less such a high one.’”

“And the fact that Congress erected a higher standard of proof elsewhere in the Patent Act, but not in Section 284, is telling. ‘[P]atent-infringement litigation has always been governed by a preponderance of the evidence standard.’ Enhanced damages are no exception.”

The high court also rejected the Federal Circuit’s tripartite appellate review framework. “Because Section 284 ‘commits the determination’ whether enhanced damages are appropriate to the district court’s discretion, ‘that decision is to be reviewed on appeal for abuse of discretion.’”

Indeed, the chief justice said “Nearly two centuries of enhanced damage awards have given substance to the notion that district courts’ discretion is limited, and the Federal Circuit should review their exercise of that discretion in light of longstanding considerations that have guided both Congress and the courts.”

-—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899 or at dan@thepatentinvestor.com