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SCOTUS Takes on Federal Circuit's Strict Patent Damages Test

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By Casey C. Sullivan, Esq. on October 22, 2015 6:59 AM

The Supreme Court granted cert to two appeals from the Federal Circuit on Monday. Both cases -- the only intellectual property cases the High Court has agreed to hear this year -- challenge the Federal Circuit's two-part test for awarding treble damages in patent infringement cases.

The petitioners' argument is fairly straight forward: the law is simple, granting discretion to the courts in awarding adequate damages; the Federal Circuit's test is far from simple, imposing rigid restrictions on damage awards. If Supreme Court history is our guide, the Federal Circuit won't fair very well.

The Trouble With Treble Damages

Both cases stem from the refusal to allow enhanced damages in patent infringement cases. In the first case, Stryker v. Zimmer, the Federal Circuit upheld a finding that Zimmer, a medical device company, infringed upon Stryker's patents relating to "pulsed lavage devices." But, the Court vacated the award of treble damages, finding the infringement wasn't willful. In the second case, Halo Electronics v. Pulse Electronics, the district court itself found no willful infringement, awarding $1.5 million but declining to triple add an extra $3 million to that. The court's holding was upheld by the Federal Circuit.

Patent law on applying damages is clear and broad. The code simply states that, when infringement is found, "the court shall award the claimant damages adequate to compensate for the infringement," which should be no less than a reasonable royalty. Further, "the court may increase the damages up to three times the amount found or assessed." That's it. There's no extra qualifying language

Those damages enhancements aren't so straightforward under Federal Circuit precedent. The circuit applies a two-part "objective/subjective test for willful infringement." Under that test, established in 2007's In re Seagate Technology, a patentee must show that "the infringer acted despite an objectively high likelihood that its actions constituted infringement." That constrains courts' ability to offer enhanced damages much more than the statutory language itself.

Let the Past Guide You

In Halo, both Judges Kathleen O'Malley and Todd Hughes called for the Federal Circuit to reevaluate its enhanced damages standard. The current test seems particularly suspect in light of the Supreme Court's 2014 ruling in Octane Fitness v. Icon Health. There, the High Court struck down another Federal Circuit restriction on enhanced damages. Again, the law was simple -- the court may award reasonable attorney fees in exceptional cases. The Federal Circuit's test was difficult, requiring material inappropriate conduct and bad faith or objectively baseless litigation. That was an "unduly rigid" test which "impermissibly encumbers the statutory grant of discretion to district courts."

Under the logic of Octane, it's likely that the circuit's treble damages test will similarly fail. Plus, the Federal Circuit hasn't had the best track record in the Supreme Court lately. The circuit was reversed in two out of three Supreme Court cases last year, and five out of six the year before.

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