Supreme Court Just Made It Easier For Patent Trolls

from the wrong-direction,-guys dept

As we've noted over the past decade or so, the Supreme Court has been smacking down the Court of Appeals of the Federal Circuit (CAFC) over and over and over again on issues related to patent law. And on Monday, the Supreme Court did it once again -- but this time in a way that actually might not be good.

The key issue in the case (which is actually a combination of two separate cases that the Supreme Court put together) -- Halo v. Pulse and Stryker v. Zimmer -- concerns when it is and when it's not appropriate to triple damages in patent infringement cases. Basically, for centuries, the patent system has allowed for treble damages, but basically made it optional and a tool only for egregious violations of clear copying for most of that time. In 2007, CAFC created a specific two part test for awarding treble damages. First, an "objective recklessness" standard defined as "the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent...." Second, it must be shown that the risk of such infringement "was either known or so obvious that it should have been known to the accused infringer."

The unanimous ruling does state that it shouldn't be easy to get treble damages, and that it is fitting that it only applies in the most extreme cases -- but then says that the test above, called the Seagate test since it was first articulated in a case involving Seagate -- is "unduly rigid." And the Justices' main concern is that such a rigid test might leave out other kinds of egregious behavior that deserve punitive damages awards:

The principal problem with Seagate’s two-part test is that it requires a finding of objective recklessness in every case before district courts may award enhanced damages. Such 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—with no doubts about its validity or any notion of a defense—for no purpose other than to steal the patentee’s business...., a district court may not even consider enhanced damages for such a pirate, unless the court first determines that his infringement was “objectively” reckless. In the context of such deliberate wrongdoing, how- ever, it is not clear why an independent showing of objective recklessness—by clear and convincing evidence, no less—should be a prerequisite to enhanced damages.

Conceptually, this argument makes sense. The court points to the important Octane Fitness ruling from a couple years ago that tossed out a similarly "rigid" standard, but that one was over the question of when to award attorneys' fees for egregious behavior by patent holders. The court notes that this is a similar issue, though one more likely to negatively impact defendants, rather than plaintiffs in patent cases.

And I certainly see the logical consistency there, especially in allowing flexibility to the courts in deciding what's truly egregious behavior. But, of course, this somewhat ignores the reality of the patent landscape today, where so much activity is really in the shakedown process, where the final outcome is unlikely to be via a court ruling. Instead, it's all about the shakedown threats -- and this ruling can be seen as giving trolls even greater leeway in insisting that someone they're threatening has much greater liability on the line. I can almost guarantee that we'll start hearing of threat letters from patent trolls that point to this ruling in Halo as providing support for massive punitive damages.

So, in the end, I don't necessarily think this is the wrong decision. There's certainly a legal consistency there (especially one that says "damn, CAFC gets everything wrong..."). But that doesn't mean we should be concerned about the overall impact. Perhaps it won't matter that much -- as any competent patent attorney will let many people facing a shakedown know that the treble damages argument is unlikely to meet any reasonable standard used by any court. But lots of people are scared into just settling when they see the potential losses they face, and it seems like this might embolden patent trolls some more.

At least some of the Justices seem to understand this. Even though they signed onto the unanimous opinion, Justices Breyer, Kennedy and Alito added a concurrence (written by Breyer, who is usually quite good on patent issues) that at least raises the issue of patent trolling behavior. Breyer uses the concurrence to basically try to prevent the case from being misused (something that it might not succeed at, as it holds no weight at all as case law). He reiterates that treble damages should only be used in the most extreme cases, and nothing in this ruling changes that. He also notes that not checking with a patent lawyer before creating a product is not evidence of willful infringement. And, finally, he notes that such "enhanced" damages should have a "limited" role, as they have a high likelihood of impeding, rather than enabling, innovation.

To say this is to point to a risk: The more that businesses, laboratories, hospitals, and individuals adopt thisapproach, the more often a patent will reach beyond itslawful scope to discourage lawful activity, and the moreoften patent-related demands will frustrate, rather than “promote,” the “Progress of Science and useful Arts.”

One hopes that this concurrence helps stop the ruling from being abused, but that may be too optimistic.

At the very least, this seems like an argument for Congress to finally stop sitting around and doing something to fix the patent troll problem.

Filed Under: cafc, damages, extraordinary damages, patent trolls, patents, rigid rules, supreme court, treble damages