Thursday, June 16, 2016

Halo v. Pulse and the Increased Risks of Reading Patents

I wrote a short post on Monday's decision in Halo v. Pulse for Stanford's Legal Aggregate blog, which I'm reposting here.

The Supreme Court just made it easier for patent plaintiffs to get enhanced damages—but perhaps at the cost of limiting the teaching benefit patents can provide to other researchers. Chief Justice Robert’s opinion in Halo v. Pulse marks yet another case in which the Supreme Court has unanimously rejected the Federal Circuit’s efforts to create clearer rules for patent litigants. Unlike most other Supreme Court patent decisions over the past decade, however, Halo v. Pulse serves to strengthen rather than weaken patent rights.

Patent plaintiffs typically may recover only their lost profits or a “reasonable royalty” to compensate for the infringement, but § 284 of the Patent Act states that “the court may increase the damages up to three times the amount found or assessed.” In the absence of statutory guidance on when the court may award these enhanced damages, the Federal Circuit created a two-part test in its 2007 en banc Seagate opinion, holding that the patentee must show both “objective recklessness” and “subjective knowledge” on the part of the infringer. The Supreme Court has now replaced this “unduly rigid” rule with a more uncertain standard, holding that district courts have wide discretion “to punish the full range of culpable behavior” though “such punishment should generally be reserved for egregious cases.”

Given how closely the Court’s reasoning tracks its 2014 decisions on attorney’s fees in patent cases, Ronald Mann detects “a tone of impatience on the part of the Chief Justice that the Federal Circuit is just not getting the message.” But to be fair to the Federal Circuit, Judge Taranto wrote a compelling concurrence from the denial of rehearing en banc in Halo explaining that although this was not the right case, many § 284 issues could merit en banc review. I was surprised the Court did not give the Federal Circuit time to work this out.

It remains to be seen how much Halo v. Pulse will lower the bar for receiving enhanced damages. There are good policy justifications for much more frequent treble-damage awards. Jonathan Masur has persuasively argued that “any defendant who challenges a strong and worthwhile patent by infringing, and loses at trial, should be made to pay for having created a risk that the patent will be mistakenly invalidated.” And this win for patent plaintiffs might help stem what Mark Lemley has dubbed a potential “crisis of underprotection” for patentees.

But there are also costs to this higher risk of liability. Justice Breyer’s concurrence, joined by Justices Kennedy and Alito, asserts that enhanced damages should remain exceptional. He repeatedly cites the Brief of Amici Curiae Internet Companies (authored by Mark Lemley) and other amicus briefs to note the risk that increased treble damages awards could cause any firm that receives an overreaching demand letter to simply “abandon any challenged activity.”

One cost that received little attention from the Court is the possibility that innovators will avoid learning about patents in the first place—which would limit the teaching benefit that patents can provide. To be sure, there are already some companies that dissuade their researchers from reading patents. But as explained by a former Chief Judge of the Federal Circuit, the risk of liability under Seagate was minimal: “The people who say, ‘Don’t read your rival company’s patents because you’ll get hung for willful infringement’—I think that’s ridiculous.” My own prior survey work has shown that patents serve a valuable information-disclosure function: some researchers do read patents and do find useful technical information in them that is not duplicative of the scientific literature, and very few of my respondents were dissuaded from reading patents based on fear of enhanced damages. I’m now following this prior work up with a broader survey, and my preliminary results are similar.

My research does not imply that the disclosure function of patents is perfect: many patents are far from a model of clarity, and I am working on how patent disclosures could be improved. But the Supreme Court itself has recognized this information-disclosure function as one of the main purposes of the patent system in many cases. And I hope that as lower courts flesh out the meaning of Halo, they recognize the potential harm from firms deciding that the risks of enhanced liability from reading patents outweigh the teaching benefit those patents could otherwise provide.

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