High Court Argument Split on Patent ‘Trolls vs. Pirates'

Bloomberg BNA’s Patent Trademark & Copyright Law Daily™is the IP industry’s premier news service, offering objective, timely,and reliable daily news coverage and commentary from leading IP law...

By Tony Dutra

Feb. 22 — Setting an appropriate standard for when courts award “enhanced damages” for patent infringement—up to triple the base amount—came down to a “trolls vs. pirates” debate in arguments before the U.S. Supreme Court Feb. 23.

Justice Stephen G. Breyer presented the case against a flexible standard based on the royalty demand letter problem generally attributed to patent assertion entities, aka trolls. Counsel for the patent-owning petitioners in the two cases at issue acknowledged Breyer's “best possible version of the respondents' argument.”

But Justice Elena Kagan was uneasy, at best, about the current rigid Federal Circuit standard. When a deliberate copier of a patented product, aka a pirate, expects their lawyer to come up with an “objectively reasonable” argument for patent invalidity if it's ever litigated, she said, “It seems to stick in the craw a bit.”

“But is it worth the gamble [to change the standard],” counsel for the respondents asked, given that we have evidence of large-scale trolling behavior and “there aren't that many pirates out there?”

It seemed apparent that some members of the court intend to look to add possible circumstances whereby courts can assess enhanced damages against “bad faith” infringers. But they will probably have to contend with Chief Justice John G. Roberts Jr.'s line of questioning, which ultimately came down to statutory interpretation: 35 U.S.C. §284 on enhanced damages doesn't suggest a strict test, so let's leave it up to district court judges to use their discretion.

Patent Owners vs. Breyer

The enhanced damages standards set by the U.S. Court of Appeals for the Federal Circuit rely on a finding of willful infringement, which can be defeated if the court sees an “objectively reasonable” argument for the defendant's infringement. In re Seagate Tech. LLC, 497 F.3d 1360, 2007 BL 83845, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007) (en banc) .

The test is so difficult that “a large number of the worst infringers, even bad-faith copiers, are immunized from any enhancement,” said Jeffrey B. Wall of Sullivan & Cromwell LLP, Washington, arguing for the patent owners, Halo Electronics Inc. and Stryker Corp. The patent owners would do away with the objective reasonableness requirement or—at minimum—make the infringer prove they had a good argument at the time infringement began.

Breyer clearly would not go that far. The patents at issue cover a transformer used in electronics components and a medical device, but Breyer's concern was focused on small firms that have to use technology that might be covered by one or more software patents.

“We have decided to patent tens of thousands of software products and similar things where hardly anyone knows what the patent's really about,” he said. “I think it's unfortunate that Congress hasn't passed a special regime for those kinds of patents, but they haven't.”

In Breyer's scenario, the small firm then receives a royalty demand letter from one of those patent holders and can't possibly afford to get a legal opinion on whether the patent is valid and the firm likely infringes it. That small firm has to take the risk of infringement and shouldn't later be foreclosed from putting forward, after being sued, a good argument for either invalidity or noninfringement, he said.

Indeed, we shouldn't have any problem with litigation-induced patent challenges, Carter G. Phillips of Sidley Austin LLP, Washington, argued on behalf of the companies found to have infringed the patents, Pulse Electronics Inc. and Zimmer Inc., respectively.

If the alleged infringer “demonstrated that that patent was invalid, the position of the world would be, ‘That's great',” Phillips said, “because this patent should be declared invalid and the monopoly that attaches to it should be declared null and void and unenforceable.”

Non-Unicorns vs. Kagan

Phillips was charged with responding to Kagan's concern about the so-called “efficient infringers,” which Wall described as “people who can infringe, knowing that they can discount by the probability that they'll be found to have infringed in litigation with virtually no back-end penalty, even if they were a very bad infringer.”

“I understand the desire to have enhanced damages against that particular bad actor,” Phillips said. “That's why I say in a lot of ways, this case comes down to what do you worry about more, pirates or trolls?”

But, he argued, “If you [create] a rule that is designed simply to get the one in a million pirates—I would call them unicorns—but one in a million pirates, you'd end up with a rule that will allow the trolls to go after every legitimate producer of products and services in this country.”

Will Government's View Prevail?

Roman Martinez, assistant to the U.S. Solicitor General, presented the government's views, sharing time with the patent owners but not completely on their side.

The government supports “three buckets” of reasons for enhancing awards: intentional bad faith conduct; recklessness, though with a lower standard than an objective reasonableness test; and “other” encompassing non-infringement actions like corporate espionage and destroying evidence relevant to litigation.

Several justices were clearly interested in the government's proposed replacement test, though Justices Sonia M. Sotomayor and Anthony M. Kennedy were displeased that “willfulness” wasn't on the list and questioned whether the three buckets, taken together, provide an adequate redefinition of willfulness.

Statutory Reliance Argument

Only Roberts focused in the oral argument on a key debate in the briefing. The text of Section 284 is roughly similar to Section 285 on what constitutes an “exceptional case” for awarding attorneys' fees to a prevailing party in a patent infringement case. And the Supreme Court struck down the Federal Circuit's “objective reasonableness” prong for a Section 285 finding less than two years ago in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 2014 BL 118431, 110 U.S.P.Q.2d 1337 (2014).

In Octane, the high court forced the exceptional case determination to be more at the discretion of the district court judge and faulted the appeals court for devising a strict test in contrast to flexible statutory language.

Now, Roberts quoted Section 284, saying that it “leaves a lot of discretion to the district courts” and criticized the Federal Circuit's decision. “To erect this fairly elaborate standard on the basis of that language I think is surprising,” he said.

Roberts closed saying, “And a lot of the arguments we've heard today are the sort of arguments that can be made to the district court's discretion in a particular case.”

Wall of Sullivan & Cromwell LLP, Washington, is counsel of record for Stryker. Craig Earl Countryman of Fish & Richardson P.C., San Diego, represents Halo.

Mark L. Hogge of Dentons US LLP, Washington, represents Pulse. Seth P. Waxman of Wilmer Cutler Pickering Hale & Dorr, Washington, represents Zimmer.

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Mike Wilczek in Washington at mwilczek@bna.com