Supreme Court Loosens Standards for Awarding Enhanced Damages for Patent Infringement Damages

In Halo Electronics, Inc. v. Pulse Electronics, Inc., the U.S. Supreme Court gives trial judges more discretion over awarding enhanced damages in patent infringement cases.

Patent protection allows a patent holder to sue infringers and recover various types of damages. Beyond standard money damages that compensate the plaintiff, courts can also award “enhanced damages,” in cases where the infringement is found to be willful. In other words, courts can punish infringers who purposefully or maliciously steal someone else's patent. These enhanced damages can include punitive damages as well as the patent holder’s attorney’s fees. In its recent decision of Halo Electronics, Inc. v. Pulse Electronics, Inc., the U.S. Supreme Court clarified how and when lower courts should award these greater damages to plaintiffs.

U.S. Law on Patent Infringement Damages

Under the federal Patent Act, the owner of a patent can enforce that patent through a patent infringement lawsuit. If the plaintiff in such a litigation is able to prove that the defendant used the patent without permission, the plaintiff will be entitled to compensation in the form of money damages.

Generally, damages for patent infringement are governed by a provision of the U.S. Patent Act, 35 U.S. Code § 284. That provision states that: “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” The provision further allows that “the court may increase the damages up to three times the amount found or assessed.”

The U.S. Court of Appeals for the Federal Circuit (the federal court with jurisdiction over many patent cases) has interpreted this provision by applying a strict two-factor test of whether a trial court has the discretion to award “enhanced damages” under 35 U.S. Code § 284. In its 2007 case of In re Seagate Technology, LLC, the Federal Circuit also found that the patentee must prove by clear and convincing evidence (i) that there was an “objectively high likelihood” of infringement, and (ii) that this likelihood was known or should have been known by the infringer.

Not surprisingly, this high bar made the “enhanced damages” of 35 U.S. Code § 284 somewhat difficult to achieve.

Factual Background of Halo Case

The Halo case arose from a patent dispute between Halo Electronics, Inc., and Pulse Electronics, Inc., both suppliers of electronic components. Halo claimed that Pulse infringed its patents for electronic packages for transformers. In 2002, Halo sent Pulse two letters offering to license Halo’s patents. After one of its engineers concluded that Halo’s patents were invalid, Pulse continued to sell the allegedly infringing products. In 2007, Halo sued Pulse. Pulse lost, and the jury found that there was a high probability it had infringed on the patents willfully.

Halo sought triple damages under 35 U.S. Code § 284. The district court, however, declined to award these “enhanced damages,” after determining that Pulse’s defense was not without some degree of merit. Thus, the court concluded, Halo had failed to show objective recklessness under the Federal Circuit’s “Seagate test.” The Federal Circuit affirmed this decision.

The Supreme Court’s Analysis in Halo

In reviewing the Federal Circuit’s Halo decision, the Supreme Court noted that “enhanced damages” have existed in American patent law, in some form, since 1793. Awards of enhanced damages under the Patent Act “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…as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed characteristic of a pirate.”

In its June 13, 2016 decision, the Supreme Court rejected the Federal Circuit’s test for “enhanced damages” as being too rigid. The unanimous opinion, authored by Chief Justice John Roberts, gives trial court judges more discretion to award the damages.

Historically, Chief Justice Roberts noted, district courts enjoyed broad discretion in deciding whether to award enhanced damages, and in what amount. But thanks to a recent history of appellate cases, “the channel of distraction has narrowed.” The Federal Circuit’s test “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.” Moreover, the Court noted, “it can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages.”

Emphasizing the plain language of 35 U.S. Code § 284, the Court held that judges should use their discretion to “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.”

Conclusion and Implications of Halo Case

While it will take several years for patent lawyers and scholars to determine the effects of the Supreme Court's Halo decision, it seems likely to result in higher awards to victorious plaintiffs. By rejecting the Federal Circuit’s restrictive test, the Supreme Court has loosened the standard by which “enhanced damages” under 35 U.S. Code § 284 may be awarded. Now, if a plaintiff is able to successfully prove “willful” infringement, trial courts will be free to use their discretion to award the triple damages permitted by the statute.

Effective date: June 13, 2016