Rethinking Enhanced Damages: Stryker Oral Arguments

Last week the Supreme Court heard argument in Stryker Corp., et al. v. Zimmer, Inc., et al., docket no. 14-1520, which was the first time this term that the Court has considered a patent matter. Stryker, the petitioner and patent holder, invited the Court to overturn the Federal Circuit’s test for enhanced damages, which requires a showing of objectively reckless and willful infringement. Many patent holders would prefer that the Court side with Stryker and replace the Federal Circuit’s test, which is perceived as being difficult to satisfy, with a more flexible standard. This would strengthen patents across the board by increasing the likelihood that infringers would be liable for treble damages.

Background

Damages for patent infringement are governed by 35 U.S.C. 284, which provides in relevant part that courts “may increase the damages up to three times the amount found or assessed.” The district court did just that, trebling the jury award of $70 million for lost profits. Zimmer appealed, and the Federal Circuit reversed the district court’s determination of willfulness, thus depriving Stryker of its enhanced damages. In its petition for certiorari, Stryker alerted the Court to the fact that nowhere in the statute is there a requirement for willfulness, concluding that the Federal Circuit’s test is therefore improper. Certiorari was granted on October 19.

The Federal Circuit’s willfulness test was articulated in In re Seagate Technology, LLC, 497 F.3d 1360 (2007) (en banc). Seagate held that enhanced damages required willful infringement, which could be shown by “clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” The decision overturned decades-old precedent that only required a showing that infringers breached an “affirmative duty to exercise due care” in order to prove willfulness and thus open eligibility for enhanced damages. Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380, 1389 (Fed. Cir. 1983). Since this shift, it has become much harder for patentees to secure enhanced damages because defendants need only supply a reasonable defense to avoid treble damages. The deterrent effect of enhanced damages has thus been lessened in the wake of Seagate.

Stryker’s strategy, as outlined in its brief, is to emphasize the parallels between the challenged Federal Circuit test for enhanced damages and the recently rejected Federal Circuit test for attorneys’ fees. Before being rejected by the Supreme Court two years ago, the Federal Circuit applied a test for attorneys’ fees that required proof that a lawsuit was “objectively baseless” and brought “in subjective bad faith.” Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005). The Supreme Court held that this formulation was “overly rigid” and that district courts should instead “consider[] the totality of the circumstances.” Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1756 (2014). The Court also relaxed the Federal Circuit’s clear and convincing evidentiary standard and opted for a preponderance standard. Stryker hopes the Court will apply a similar interpretation to the damages provision, 35 U.S.C. 284, as it did to the Attorney fees provision, 35 U.S.C. 285, and grant courts more flexibility.

Argument

Petitioners began with the intention of rooting their argument in the statute’s plain language and in the favorable precedent the Court provided in Octane. That line of discussion was quickly derailed however, and the remaining argument, for all sides, largely focused on policy. The Court was most concerned about the proper balance between deterring extortive patent assertions and deterring infringers, or as the Respondents characterized it, “trolls versus pirates.”

Justice Breyer was the most vocal critic of relaxing the Federal Circuit’s standard. His chief concern was for the small businesses that would be bullied by patentees with the threat of enhanced damages. The arguably widespread practice of asserting weak patents by non-practicing entities, pejoratively referred to as trolls, was obviously on his mind. A ruling that relaxed the Federal Circuit’s standard would conceivably strengthen the hand of these companies to negotiate licensing fees for even flimsy patents. Petitioners tried to allay his fears by characterizing their proposal as one that would still maintain a high bar for enhanced damages, one that would capture only egregious offenders.

The opposing concern, that patentees were not adequately protected against infringers or pirates, was voiced by Justices Kagan and Sotomayor.

JUSTICE SOTOMAYOR: Mr. Phillips, there’s a whole lot of worry articulated by Justice Breyer and reflected in your briefs about protecting innovation. But there’s not a whole lot of worry about protecting the patent owner. . . . I don’t know that that swung things so far the other way that it can only be 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. If I’m there—and I don’t think that the Seagate test is appropriate but I am still in the balance of how do we get a similar protection without an artificial test that I don’t think is right, where do I go?

Justice Kennedy picked up on Justice Sotomayor’s concern that willful infringers could escape enhanced damages under the Seagate standard, but seemed open to a middle ground that did not completely do away with the Federal Circuit’s Seagate test.

JUSTICE KENNEDY: Is there any way to allow some consideration for a subjective intent to infringe in an egregious case, as an additional element for—as an additional way to define willfulness without completely wrecking the Seagate standard?

None of the lawyers were able to articulate such a test that would be suitable to both camps, and so the Court failed to coalesce around any particular alternative to Seagate.

Petitioners can take comfort in the fact that at least two justices were receptive to the statutory argument for relaxing the Federal Circuit’s test. Justice Ginsburg seemed ready to vote in favor of a lessened evidentiary standard and questioned whether de novo review was appropriate. “Can we at least peel off the clear and convincing evidence that seems to come out of nowhere and the — the standard is de novo review rather than abuse of discretion?” Justice Roberts also took notice of the statute’s minimal guidance and interpreted the silence as allowing for greater district court discretion. “[T]he choice is reflected in the statute, which leaves a lot of discretion to the district courts.”

The arguments seemed to indicate that Petitioners can probably count on at least four votes (Justices Roberts, Ginsburg, Sotomayor, and Kagan) toward at least tweaking the Seagate standard. What such a change would look like is difficult to say from the arguments, and it is unclear whether such an argument could secure a fifth vote and become the law of the land.

Michael Vincent is a J.D. candidate, 2017, at NYU School of Law.