06.21.2016 In Halo Electronics v. Pulse Electronics, Supreme Court Strikes Down Seagate Test for Enhanced Damages Under Section 284 of the Patent Act. By: Joshua B. Brady

Patent infringement plaintiffs and defendants alike fret over enhanced damages: Section 284 of the Patent Act, the basis for enhanced damages, provides that a court may grant a damages award up to three times actual damages. On Monday, the Supreme Court of the United States significantly altered patent damages jurisprudence by overturning the Federal Circuit’s two-part Seagate test. In its decision, the Supreme Court held that the Seagate test too strictly limited the discretion Section 284 gives district courts to award enhanced damages for egregious or flagrant patent infringement. The Court acknowledged the Federal Circuit’s desire to limit the frequency of enhanced damages awards but disagreed with the Federal Circuit’s rigid approach.

The Seagate test required a patent owner seeking enhanced damages to show, by clear and convincing evidence, that: (1) “the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent” and (2) “the risk of infringement was either known or so obvious that it should have been known to the accused infringer.” District courts were barred from awarding enhanced damages, even in cases of deliberate infringement and wrongdoing, unless both requirements of the Seagate test were met.

Although accused infringers having legitimate noninfringement and/or validity issues benefited, the Seagate test effectively minimized the risk of enhanced damages. The Supreme Court found that the Seagate test allowed even the most flagrant patent infringer to avoid enhanced damages so long as the accused infringer could present a reasonable, even if ultimately unsuccessful, defense at trial. The first prong of the Seagate test could not be met if the accused infringer was able to raise a substantial validity or noninfringement argument. Problematically, the infringer could use such a defense even if the infringer did not think of or discover the defense until after the patent owner brought suit. Instead, Section 284 requires district courts to focus on the accused infringer’s subjective conduct and apply only a preponderance of the evidence standard. 

As before, accused infringers can reduce the risk of an enhanced damages award through evidence of reasonable steps taken to assess and, if necessary, avoid potential infringement. Absent the Seagate test, however, these prudential steps are more important than ever and should become commonplace in the product development and launch lifecycle.  Failure to take reasonable steps to avoid infringement may make reaching favorable settlement difficult for accused infringers.

In vacating the Seagate test, the Supreme Court made clear that district courts should still refrain from awarding enhanced damages except in particularly egregious cases of infringement. The Court’s ruling here follows its recent decision in Octane Fitness, in which it struck down another two-part test created by the Federal Circuit for determining whether a case qualified as exceptional in regard to awarding attorney’s fees under Section 285 of the Patent Act.

Ultimately, the Supreme Court’s holding is a win for patent holders, as the rigid Seagate test is no more, and the patent holder’s burden of proof is lowered to a preponderance of the evidence standard. Further, the Federal Circuit must apply an abuse of discretion standard for review. Nonetheless, the Supreme Court issued a strong warning to the lower courts: awarding enhanced damages commonly or in garden-variety infringement cases could have catastrophic and far reaching results. Even so, many companies would benefit from including freedom-to-operate analyses in their product development and launch procedures. 

Halo Elecs., Inc. v. Pulse Elecs., Inc., No. 14-1513, 2016 WL 3221515 (U.S. June 13, 2016).