Supreme Court Overrules Federal Circuit’s Seagate Test for Enhanced Damages

In a combined opinion for two cases, Halo Electronics, Inc. v. Pulse Electronics, Inc. (No. 14–1513) and Stryker Corp. v. Zimmer, Inc.(No. 14–1520), a unanimous Supreme Court rejected the two-part test for awarding enhanced damages under 35 U.S.C. § 284. The Federal Circuit had pronounced this test nearly a decade ago in In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007) (en banc). Finding the Seagate test inconsistent with the statute, the Supreme Court broadly endorsed the free exercise of discretion by district courts in deciding whether an enhanced damages award is appropriate.

In Seagate, the Federal Circuit imposed two strict requirements on patentees seeking an award of enhanced damages: (1) show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent, and (2) demonstrate by clear and convincing evidence that the risk of infringement was either known or so obvious that it should have been known. See slip op. at 1-2. The Supreme Court was primarily concerned with this test’s first prong, known as the “objective recklessness” requirement. On this point, the Court asserted that “[s]uch a threshold requirement excludes from discretionary punishment many of the most culpable offenders, such as the ‘wanton and malicious pirate’ who intentionally infringes another’s patent.” Slip op. at 9. Following the reasoning it applied in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. ___, 134 S.Ct. 1749 (2014) (relaxing the test for attorneys’ fees awards in patent cases), the Court determined that the Seagate test improperly insulated a patent infringer’s subjective bad faith behind a threshold test of the objective strength of the infringer’s case. See slip op. at 9-10.

The Court’s objections did not end with the objective recklessness requirement. In both prongs, the Court found the Seagate requirement of clear and convincing evidence to be unwarranted, noting that “§284 ‘imposes no specific evidentiary burden, much less such a high one.’” Slip op. at 12. In providing guidance to the Federal Circuit, the Supreme Court rejected a “rigid formula for awarding enhanced damages under §284″ as inconsistent with the broad discretion provided district courts by the plain language of the statute. Id. Nonetheless, the Court acknowledged the Respondents’ concerns about empowering patent trolls, cautioning that this exercise of discretion should nonetheless “limit[] the award of enhanced damages to egregious cases of misconduct beyond typical infringement.” Slip op. at 15.

In rejecting the rigid Seagate standard, the Court gives district courts much broader discretion to punish willful infringers by increasing damages awards. For patent holders, this is a positive development, yet it still remains to be seen how much district court judges will actually exercise their broader authority in deciding enhanced damages issues. In the meantime, we anticipate that patentees, and certainly many patent trolls, will use this decision to leverage higher monetary value settlements when enforcing their patents, against accused infringers, particularly in cases where a patentee has already argued or alleged facts supporting willfulness. We are continuing to monitor decisions in this area and will provide additional updates as district courts interpret and apply the Court’s ruling and issue new decisions.