Treble Damages in|Patent Wars Probed

WASHINGTON (CN) - The Supreme Court convened for a second time this week without Justice Antonin Scalia, this time to consider how district courts should award extra damages in patent infringement cases.

The vaguely worded federal Patent Act says courts can award up to treble damages when a company intentionally infringes a patent.

The consolidated petitioners - Halo Electronics and Stryker Corp - argue that the current test used to determine intentionality is too strict and lets the worst of the worst off too easy.

Zimmer Inc. infringed on Stryker patents for a wound- and tissue-cleaning device used during surgeries, while Pulse Electronics Inc. infringed on Halo patents for surface-mount transformers used in electronic devices.

In separate lawsuits, the Federal Circuit declared the patents valid and infringed, but denied Halo and Stryker enhanced damages for failing to prove that the infringement was willful.

"Even bad-faith copiers are immunized from any enhancement," petitioner attorney Jeffrey B. Wall said of the Federal Circuit's too-"rigid" test.

Comprised of two parts, the current test requires evidence proving the infringer knew that a high likelihood of infringement existed on a valid patent.

The second part of the test gets trickier, requiring proof that the infringement was so obvious that the infringer must have known about it.

Legal defenses for this part of the test can be developed during litigation, as "after-the-fact" defenses that disregard the facts and intent at the time of the infringement, Wall said.

"Even if you acted intentionally at the time - as Zimmer did - what the Federal Circuit says is, if you can hire good lawyers and come up with defenses in litigation, you'll be off the hook," Wall said. "A patent lawyer can virtually always come up with some non-frivolous defense in litigation."

Wall argued that the rigidity of the current rule has stripped district courts of their "judgment call" in using discretion to award extra damages.

To remedy this, Wall advised the justices to provide guidance in line with a 150-year tradition of using totality inquiries that consider all of the circumstances of the infringement, rather than allowing a last-minute defense to eclipse the nature of it.

"They hired an independent contractor, they handed the contractor a patented product," Wall said of Zimmer's infringement of Stryker's patent. "They said, essentially, make one of these for us."

Chief Justice John Roberts probed Wall about his assertions.

"They could have had, you know, a good-faith belief that the patent wasn't valid," Roberts said, adding that would not automatically qualify it for sanctions.

Other uncertainties swirl around the outcome of this case and the effect it could have on small business. Pulse Electronics and Zimmer argue that implementing a less-rigid test will discourage innovation and will stifle challenges to the validity of flawed patents, thereby limiting competition.

"The patent statute is not designed to create monopolies throughout the United States. It's designed to help the small businessman, not to hurt him," Justice Stephen Breyer said. "So leave those words for interpretation to the expert court, and in this area it may well be the Federal Circuit."

"Justice Breyer, the sky didn't fall for a century and a half, and it's not going to fall if you reverse the Federal Circuit's framework," Wall said.

He added that on "the other side of the parade of horribles" are the companies that will feel emboldened to infringe without the deterrent of much steeper penalties.

"We think the bar ought to be high. We just don't think it ought to be arbitrarily high as it is now," Wall said.

Bad actors that want to copy a patented product to profit it from it do not get a free pass - they still have to pay damages, sometimes in the tens of millions of dollars, Carter G. Phillips, the attorney representing Pulse Electronics and Zimmer, said.

Phillips contends history is on the side of Pulse and Zimmer because for nearly a century, courts - including the Supreme Court - have required a test of willfulness for infringement that has always been required for awarding punitive damages.

The issue can be boiled down to one of pirates versus trolls, Phillips said.

"There are not very many pirates out there. And if you keep 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," Phillips said. "And that's the price you'd have to pay to get at the really bad actor."

The Supreme Court will now consider the appropriateness of the Federal Circuit's willfulness test according to the parameters of the Patent Act, and is expected to issue a ruling later this spring.

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