March/April 2017
IP Litigator
By Jacob A. Schroeder; Duane L. Carver Jr.; Laura P. Masurovsky
Recently, patent holders have faced new challenges to the successful enforcement of their patent rights, such as the new process of inter partes review and the interpretation of patent eligibility under 35 U.S.C. § 101. However, a recent case decided by the U.S. Supreme Court, Halo Electronics, Inc. v. Pulse Electronics, Inc.,1 may serve as a balancing mechanism. Halo rejects the Federal Circuit’s two-prong, objective-reckless standard for willful infringement governed under 35 U.S.C. § 284, and sets forth a new test for willful infringement based on the subjective willfulness of a patent infringer. Halo may affect various aspects of patent litigation. Among them are enhanced damages, the potential increase in opinion practice, and the perceived value of patents.
Under the theory of willful infringement, a court may increase "damages up to three times the amount found or assessed," after finding a defendant to have willfully infringed.2 The question of whether the defendant has willfully infringed, however, has evolved, swinging from a strong mechanism for patent holders to obtain enhanced damages to, more recently, a weaker one.
In Underwater Devices,3 the Federal Circuit established that "where … a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing."4 This affirmative duty placed a high burden on a potential infringer to demonstrate that she had taken steps to ensure that her conduct was not infringing, and enabled patentees to pursue enhanced damages in a substantial number of cases.
In Seagate,5 however, the Federal Circuit overruled Underwater Devices and set forth a two-prong objective-recklessness standard that ignored the state of mind of the infringer at the time of infringement and required a higher standard of proof.6 Under Seagate’s two-prong test, a patent holder must show by clear and convincing evidence that the defendant (1) "acted despite an objectively high likelihood that its actions constituted infringement of a valid patent" and (2) "that this objectively-defined risk … was either known or so obvious that it should have been known to the accused infringer."7 Consequently, Seagate’s objective-recklessness standard weakened the patent holder’s ability to obtain enhanced damages for willful infringement. An infringing defendant could avoid willful infringement by constructing palatable defenses during litigation. Moreover, Bard set forth, after Seagate, that objective recklessness was a question of law to be determined by the judge, not the jury, which is subject to de novo review on appeal.8 As a further consequence, the rate of defendants seeking summary judgment on the question of willfulness rose, and courts often granted summary judgment for the defendant.
In Halo,9 the Supreme Court rejected the objective-recklessness standard established by Seagate. Halo and Pulse were competing suppliers of electronic components. Halo alleged that Pulse’s surface-mounted electronics packages infringed three of Halo’s patents.10 The district court held that although Pulse infringed, its infringement was not willful because it had presented a reasonable defense at trial. The Federal Circuit affirmed.11
The Supreme Court found the Seagate standard "unduly rigid" with the possibility of having "the effect of insulating some of the worst patent infringers from any liability for enhanced damages."12 The Court noted that if the infringer sets forth a reasonable defense at trial, the existence of such defense would insulate the infringer from enhanced damages under the objective-recklessness standard, even if the defense was unsuccessful at trial and she did not act on the basis of the defense at the time of the alleged conduct.13 The Court found that "culpability is generally measured against the knowledge of the actor at the time of the challenged conduct."14 As a result, the Supreme Court eliminated the objective-recklessness standard and instead, decided that "the subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless."15
Although the Court eliminated Seagate’s objective-recklessness standard, the Court acknowledged that the principle of Seagate reflected a sound recognition that enhanced damages are appropriate only in "egregious cases typified by willful misconduct" and cautioned that enhanced damages should not be awarded in "garden-variety cases."16
Additionally, the Court lowered the burden of proof to establish willfulness from the "clear and convincing" standard under Seagate to the "preponderance of the evidence" standard holding that 35 U.S.C. § 284 does not impose any specific evidentiary burden to establish willfulness.17 The Court also simplified the appellate standard of review from the tripartite standard established by Seagate and Bard to the abuse of discretion standard.18
Halo already has had an impact in favor of patent holders. Courts are now rejecting summary judgment motions based on no willful infringement, unlike the pre-Halo decisions, where courts granted summary judgment of no willful infringement over 40 percent of the time.19 The lowering of the evidentiary standard makes it easier for patent holders to meet their evidentiary burden to establish the subjective standard in Halo. Furthermore, the new procedural standard for the Federal Circuit’s review (abuse of discretion) also lends itself towards decisions affirming a finding of willful infringement.
At all stages of patent litigation, the impact of Halo is conspicuous. For example, in DermaFocus v. Ulthera, a district court denied a party’s motion to dismiss, based solely on post-complaint conduct, under Halo’s less rigid standard.20 Similarly, on appeal, the Federal Circuit has vacated rulings in favor of the infringer, as in WesternGeco, applying the new standards of Halo.21
In light of the modified standard of Halo, patent holders may observe changes in awarding enhanced damages, a potential increase in opinion practice, and in the perceived value of patents.
Uncertain Rise in Awarding Enhanced Damages
First, whether patent holders will see a substantial increase in awards or the amount of enhanced damages remains unclear. Certainly, courts will more frequently consider willful infringement and reasonable requests for enhanced damages. However, according to recent Federal Circuit cases, objective considerations may still have an impact on whether courts award enhanced damages, as well as how much to enhance the award. For example, in WesternGeco, the Federal Circuit affirmed that a defendant’s "objective reasonableness is one of the relevant factors" in determining how much to enhance a damages award.22 The nine Read factors, focused on the totality of the circumstances, are still relevant.23 They include, among others, "whether defendant investigated the patent’s scope and formed a good-faith belief of invalidity or non-infringement."24 These factors may still provide justification for a court to award smaller enhanced damages to patent holders than an optimistic assessment of Halo might suggest.
Potential Rise in Patent Opinion Practice
Second, after Halo, there may be a rise in parties seeking the opinion of competent legal counsel on issues of infringement. Underwater Devices’ doctrine of an affirmative duty to avoid infringement contributed to a robust opinion of counsel practice. After Seagate, this practice waned somewhat due to the objective-recklessness standard which allowed a defendant to avoid a finding of willful infringement based on good defenses during litigation.25
However, after Halo, parties may more often seek an opinion of counsel before committing a potentially infringing act or upon receiving notice of an alleged infringement. Halo decided that courts should measure willfulness against the knowledge of the actor at the time of the alleged conduct. Recent Federal Circuit cases show that the courts will focus on the alleged infringer’s state of mind before engaging in the alleged infringement. For example, in WBIP v. Kohler, the court observed that later developed legal arguments are less relevant, ruling "that there was substantial evidence for the jury’s finding that Kohler had knowledge of the patents in suit at the time of infringement" while seemingly giving no weight to the infringers’ post-litigation defenses.26 Accordingly, given the landscape, parties may wish to actively manage risks by assessing potential infringement before or upon receipt of a notice letter. Of course, whether and to what extent an opinion letter is appropriate will depend on the specific facts and circumstances.
Potential Rise in Perceived Value of Patents
Lastly, the perceived value of patents arguably is enhanced by a more flexible standard for finding an infringer’s conduct willful. This is important because, over the past few years, patent holders have faced new challenges while trying to enforce their patent rights, such as the new process of inter partes review and the interpretation of patentability under 35 U.S.C. § 101.
Looking at inter partes review, over 47 percent of mechanical or business methods, 54 percent of electrical claims, 67 percent of chemical patents, and 35 percent of biotechnology claims challenged in an inter partes review proceeding, as of July 2016, were found to be unpatentable.27 A smaller percentage of challenged claims were found to have been canceled or disclaimed by the original patent holder. In total, over 51,759 claims have been challenged within 3,410 petitions.28
Moreover, after Alice29 and Mayo,30 inventors have faced higher hurdles at the Patent Office in obtaining patents. In most software technology areas, in 2015, the rate at which Examiners rejected claims based on Section 101 increased to around 85 percent.31 Along with this, reversal rates of Examiner’s Section 101 rejections fell 14 percent, which is substantially lower than the historical reversal rate by the Board for other rejections.32 More patents were rejected under Section 101 by Examiners and on appeal than they had historically.33 Similarly, in district courts, 68 percent of dispositive motions based on Section 101 were granted, finding the claims invalid.34
On appeal of the Examiners’ Section 101 rejections, as of October 2010, the Board has affirmed the Examiner in 86 percent (162) of the cases, and the Board has reversed the Examiner in 14 percent (26) of the cases.35 In some technology centers, such as the notoriously difficult 3600, the Board has affirmed the Examiner in 100 percent (5) of the cases.36
Due to these new challenges, patent holders may find that Halo provides some relief.
Halo has fundamentally changed the willful infringement analysis. The less rigid subjective willfulness standard potentially adds value to patents because patent holders may have a greater chance to obtain enhanced damages. Whether or not this change represents a substantial shift towards higher awards of enhanced damages—only time will tell.
Endnotes
1 Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14–1513 (June 13, 2016).
2 35 U.S C. § 284, providing that a court "in exceptional cases may award reasonable attorney fees to the prevailing party."
3 Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983).
4 Id. at 1389.
5 In re Seagate Technology LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc), cert. denied, 129 S. Ct. 1917 (Feb. 25, 2008).
6 See id. at 1371.
7 Id.
8 Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 682 F.3d 1003, 1006-1007 (Fed. Cir. 2012) ("The court now holds that the threshold objective prong of the willfulness standard enunciated in Seagate is a question of law based on underlying mixed questions of law and fact and is subject to de novo review.").
9 Halo, Slip. Op. at 1-3.
10 Halo, Slip. Op. at 6.
11 Id.
12 Id. at 9.
13 Id. at 10.
14 Id.
15 Id.
16 Id. at 15.
17 Id. at 12.
18 Id.
19 See, e.g., Docket Navigator Analytics, Docket Navigator, motion success rates (motion for summary judgment—no willful infringement) Oct. 1, 2007–June 1, 2016); see also Seaman, Christopher B., "Willful Patent Infringement and Enhanced Damages After In re Seagate: An Empirical Study," 97 Iowa L. Rev. 417, 420 (2012) (noting increase in summary judgment of no willful infringement post-Seagate).
20 DermaFocus v. Ulthera, Civ. No. 15-164 SLR (D. Del. Aug. 11, 2016) (Robinson J.).
21 WesternGeco L.L.C. v. ION Geophysical Corp., Nos. 13-1527, 14-1121, 14-1526, 14-1528 (Fed. Cir. July 2, 2015).
22 WesternGeco, Slip. Op. at 8.
23 See Finjan, Inc. v. Blue Coat Systems, Inc., 2016 U.S. Dist. LEXIS 93267 (N.D. CA. July 18, 2016); Boston University v. Everlight Electronics Co. Ltd., 2016 U.S. Dist. LEXIS 96045 (D. MA. July 22, 2016).
24 Read v. Portec Inc., 970 F.2d 816, (Fed. Cir. 1992).
25 See Seagate, 497 F.3d at 1371 (emphasizing no affirmative duty to obtain an opinion of counsel).
26 WBIP, LLC v. Kohler Co., No. 2015-1038, 2016 U.S. App. LEXIS 13136, at *49-50 (Fed. Cir. July 19, 2016).
27 See Patent Trial and Appeal Board Statistics, available at https://www.uspto.gov/sites/default/files/documents/2016-07-31%20PTAB.pdf (July 2016).
28 Id.
29 Alice Corp. v. CLS Bank Int’l, 573 U.S. __, 134 S. Ct. 2347 (2014).
30 Mayo v. Prometheus, 132 S. Ct. 1289 (2012).
31 See Sachs, Robert, http://www.bilskiblog.com/blog/2015/06/the-one-year-anniversary-the-aftermath-of-alicestorm.html (June 06, 2015).
32 See Werking, Gaudry, and Mallon, "75%–The Real Rate of Patent Applicant Success on Appeal," IPWatchdog, May 2, 2012, "Appeals and RCEs—the Frequency and Success of Challenges to Specific Rejection Types," Intellectual Property Today, November 2011.
33 See Bludau, Cook, and Jiron, http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=44911826-d236-453f-a813-0759f6f3887e (Oct. 06, 2015).
34 Id.
35 See Sachs, Robert, http://www.bilskiblog.com/blog/2015/06/the-one-year-anniversary-the-aftermath-of-alicestorm.html (Oct. 19, 2016).
36 Id.
willful infringement, damages, Halo Electronics Inc. v. Pulse Electronics Inc., 35 U.S.C. § 101
Originally printed in IP Litigator in March/April 2017. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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