Opinions are Critical to Mitigating Patent Damages Post-Halo
Although the Supreme Court’s increased engagement with patent law over the last decade has generally been viewed as positive for parties accused of patent infringement, its recent decision in Halo Electronics, Inc. v. Pulse Electronics, Inc. casts aside Federal Circuit case law limiting the availability of enhanced damages under 35 U.S.C. § 284 and increases the risk to potential infringers. Freedom-to-operate opinions of counsel can limit these risks, especially if potential infringers promptly address known infringement risks.
Depending on your vintage, the increased importance of patent opinions may prompt nostalgia. Indeed, the controlling Federal Circuit decision in Underwater Devices v. Morrison-Knudsen from 1983 into this century imposed an “affirmative duty to exercise due care” when “a potential infringer has actual notice of another’s patent rights.”
The Federal Circuit softened the law with regard to opinions of counsel in its 2004 Knorr-Bremse v. Dana Corp. decision, holding that “the failure to obtain an exculpatory opinion of counsel shall no longer provide an adverse inference or evidentiary presumption that such an opinion would have been unfavorable.” The Federal Circuit significantly limited the availability of enhanced damages under 35 U.S.C. § 284 in its 2007 Seagate decision by requiring clear and convincing evidence that both (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.” As a result, the need for freedom-to-operate opinions seemed to be less urgent, at least to some observers.
In June 2016, the Supreme Court ruled in Halo that the Seagate test for enhanced damages was inconsistent with 35 U.S.C. § 284. Although consistent with the Supreme Court’s recent trend of rejecting Federal Circuit tests as “unduly rigid,” Halo removes several of the hurdles of Seagate such as the “clear and convincing” evidentiary standard and requirement for demonstrating “objective recklessness” in favor of an “egregious cases of culpable behavior” standard. Additionally, the Supreme Court rejected Federal Circuit case law barring enhanced damages when “reasonable defenses” to the alleged infringement were presented at trial.
Although lower courts will likely grapple with the new “egregious” standard for years to come, the Halo test is generally understood to be more permissive, and to allow for pleading of willful infringement in more suits. Additionally, the rejection of the reasonable-defense-at-trial shield introduces an inquiry of not just whether a defendant identified a reasonable defense, but when the defendant identified such a defense. Accordingly, there is again a need for early development of freedom-to-operate opinions in order to obtain the benefits of an opinion of counsel.
Post-Halo, we have seen, and expect to continue to see, increased requests for enhanced damages and discovery directed to the defendant’s state of mind at various points during the allegedly infringing product’s lifecycle. For example, if a product yields $300,000 in profits during 2017 before a patent infringement suit is filed in January 2018, discovery as to the existence and content of a patent opinion will typically be well worth a patent owner’s investment in view of the potential $600,000 in enhanced damages if the defendant’s conduct is found “egregious” under Halo.
This hypothetical scenario also illustrates a potential infringer’s ability to utilize patent opinions to manage patent infringement risk. Assuming that (i) the defendant’s profits are uniformly distributed throughout the year and (ii) the defendant has sufficient knowledge of the asserted patent at the beginning of 2016, a nine-month delay in engaging counsel to obtain a non-infringement opinion could result in $450,000 in enhanced damages relative to a hypothetical in which an opinion is obtained in January. Accordingly, patent infringement liability risk exposure can be reduced substantially by obtaining a freedom-to-operate opinion as early as possible.
Going forward, the contours of what conduct is “egregious” will continue to be contested and refined. What is clear from Halo, in the interim, is that potential infringers that delay considering their non-infringement and/or invalidity positions face increased financial risks associated with patent infringement liability. These risks can be addressed by promptly obtaining opinions of counsel, where appropriate.
Saul Ewing attorneys regularly assist clients with assessing and defending against patent infringement risks. If you have any questions about this Client Alert or would like more information, please contact Greg Bernabeo, Brian Landry, one of the other attorneys in the firm’s Intellectual Property practice, or the attorney in the firm with whom you are regularly in contact