Supreme Court Apt to Tinker With Patent Damages

Supreme Court Apt to Tinker With Patent Damages Diego M. Radzinschi / The National Law Journal Justice Stephen Breyer, United States Supreme Court

In its first patent case of the term, the U.S. Supreme Court appeared to be searching for a middle ground Tuesday on awarding enhanced damages for willful patent infringement.

Given the Supreme Court’s history over the past few years of trying to rein in patent litigation, patent owners will probably be happy for anything they can get.

The justices’ squeamishness about any sort of expansion of patent power was on full display during the hearing in Halo Electronics v. Pulse Electronics and Stryker v. Zimmer. But faced with open-ended statutory language and the U.S. government taking the side of patentees, the justices sounded ready to at least do some tinkering with the Federal Circuit’s complex, difficult-to-meet Seagate standard and make it easier for judges to award enhanced damages in extreme cases.

Though the issues are somewhat technical, the case is being closely watched across the technology sector. Large operating companies including Google Inc., Yahoo Inc., Dell Inc. and Marvell Technology Group; big patent holders including Ericsson Inc. and Nokia Technology Oy; industry groups such as the Software Alliance and Licensing Executives Society; and six members of Congress weighed in with amicus curiae briefs.

Justice Elena Kagan and others pointed out that under Seagate, a company that intentionally copies a patented invention can still escape enhanced damages so long it can conjure some nonfrivolous validity defense by the time of trial. “It seems to stick in the craw a bit,” Kagan told Sidley Austin chairman Carter Phillips, representing Pulse and Zimmer.

Phillips appealed directly to the Supreme Court’s distaste for nonpracticing entities, or in his words Tuesday, patent “trolls.” Although both cases before the court Wednesday were between competitors, Phillips argued that loosening the willfulness standard would embolden NPEs to bring more cases.

“This case comes down to: What do you worry about more, pirates or trolls?” Phillips told the court. “And if you keep a rule that is designed simply to get the one-in-a-million pirates … you’d end up with a rule that will allow the trolls to go after every legitimate producer of products and services in this country.”

At issue is Section 284 of the Patent Act, which says simply that “the court may increase the damages up to three times the amount found or assessed.” Under Seagate and other decisions interpreting it, the U.S. Court of Appeals for the Federal Circuit requires proof by clear and convincing evidence that the infringer’s defenses were objectively unreasonable. Because it’s an objective test, what the accused infringer knew when it began infringing is irrelevant.

As Assistant U.S. Solicitor Roman Martinez put it Tuesday, if a willful, deliberate infringer can dig up an obscure doctoral dissertation from a library in Germany that arguably anticipates the patent-in-suit, that is enough to take enhanced damages off the table under Seagate.

Patent owners say the test has given accused infringers carte blanche to ignore licensing demand letters and infringe with impunity.

In Stryker’s case, which involves the design of a surgical device to clean bone surfaces, U.S. District Judge Robert Jonker found that Zimmer “in essence, handed [an] independent contractor a copy of Stryker’s product and said, ‘Make one for us.’ ” The jury in that case awarded $70 million in lost profits, with Jonker adding $140 million for willfulness. Exercising de novo review, the Federal Circuit threw out the $140 million portion of the award, saying that while Zimmer had a losing case, its defenses weren’t unreasonable.

The Supreme Court faced a similar situation in 2014 when it reconsidered the Federal Circuit’s complex, difficult-to-meet standard for fee-shifting in patent cases. In Octane Fitness v. Icon Health and Fitness, the high court ruled that, because the attorney fee provision in the Patent Act doesn’t set out specifics, district judges should simply assess the totality of the circumstances when awarding fees.

Federal Circuit Judge Kathleen O’Malley argued in dissent in Halo that the same should be true for enhanced-damages statute.

Sullivan & Cromwell partner Jeffrey Wall, representing Halo and Stryker, ran with that theme at Tuesday’s argument. Seagate is “a one-of-its-kind, good for patent-damages-only framework that does not track the enhancement statute’s text, history or purposes,” he told the court, according to a transcript of the hearing.

The argument seemed to resonate with Chief Justice John Roberts. “A lot of the arguments we’ve heard today are the sort of arguments that can be made to the district court’s discretion in a particular case,” he said at one point.

Other justices sounded more hesitant to make that leap. Justice Stephen Breyer said he was concerned that big companies with their vast patent portfolios could use the threat of willfulness to intimidate smaller competitors. “You start saying, little company, you must pay $10,000 to $100,000 to get a letter, lest you get willful damages against you should your bet be wrong,” he said. “We have one more path leading us to national monopoly by Google and Yahoo or their equivalence.”

Breyer said the country has 475 district judges “who don’t see patent cases very much.” Better to leave interpretation of Section 284 to “the expert court, and in this area it may well be the Federal Circuit.”

Other justices expressed similar cautions, but sounded convinced that some sort of compromise is in order. Several gravitated to the government’s position, which would allow enhanced damages for “unusually egregious” conduct and can be negated by “a good-faith and reasonable defense.”

“I don’t know if this is all a matter of semantics, but I think the SG is right,” Sotomayor told Wall.

Justice Anthony Kennedy voiced support for “some consideration for intent” in an egregious case, “without completely wrecking the Seagate standard.”

And Justice Ruth Bader Ginsburg asked if the court could “at least peel off the clear and convincing evidence [standard] that seems to come out of nowhere,” and set an abuse-of-discretion standard on appeal.

That didn’t leave too much breathing room for Phillips, who tried to pick up where Breyer had left off. “We’re not talking about a situation here where it’s obvious when something is infringed,” he said. “There are thousands of patents, hundreds of thousands of patents.”

But even Breyer didn’t sound rock solid. “Is there a way of compromising on this in any way?” he asked Phillips, adding that maybe some “leeway around the edges” can be found.

“There’s a whole lot of worry articulated by Justice Breyer and reflected in your briefs about protecting innovation,” Sotomayor told Phillips. “But there’s not a whole lot of worry about protecting the patent owner.”

At the very least, she said, “I don’t know that … if you come up with something, any defense whatsoever in the litigation that’s not frivolous, that that gets you out of enhanced damages.”

Contact the reporter at sgraham@alm.com.

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