Willfulness test sets high bar for IP treble damages

A patent infringement fight involving Indiana’s Zimmer Inc. has sparked a judicial debate over how much leeway District Court judges should have when deciding how intentional an infringer’s actions were.

In Stryker Corp. v. Zimmer, Inc., 14-1520, the medical equipment manufacturers argued over their designs for hand-held, battery-powered pulsed lavage devices. The U.S. District Court for the Western District of Michigan described these surgical instruments as a combination of a motorized squirt gun and a small suction tube. During surgery, the device first sprays water into the wound then vacuums out the dirty fluid.

For years, the pulsed lavage devices were massive instruments that had to be wheeled from room to room in the hospital. Stryker developed the portable model that overtook the market and put Zimmer’s presence in the pulsed lavage marketplace at risk. However, the District Court found that in response to the upheaval, Zimmer did not engage its own engineers to develop a competing product but, instead, handed Stryker’s device to an independent contractor and said, “Make one for us.”

Stryker charged Zimmer had infringed on its patent and a jury agreed in February 2013, awarding $70 million in lost profits. When the jury also found that Zimmer had willfully infringed, U.S. District Court Chief Judge Robert Jonker went a step further and enhanced the damages to $210 million.

On appeal, the U.S. Court of Appeals for the Federal Circuit affirmed Zimmer infringed Stryker’s valid patent. But the circuit panel reversed the lower court’s judgment that the Indiana medical manufacturer’s conduct was willful and vacated the award of treble damages.

The dispute reached the Supreme Court of the United States Feb. 23 when the justices heard arguments in the consolidated cases of Stryker Corp. v. Zimmer and Halo Electronics, Inc., v. Pulse Electronics, Inc., 14-1513. Both actions focus on the question of whether the infringement was willful.

In partially reversing the Zimmer ruling, the Federal Circuit drew upon In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007) (en banc), which established a two-part test for determining willfulness. First, the patent holder must prove the infringer acted despite an “objectively high likelihood” that the actions violated a valid patent. Then after that threshold is met, the patent holder must show the “objectively high risk” was either known or should have been known to the infringer.

Stryker likely challenged the two-part test because of the Supreme Court’s landmark decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014). The Federal Circuit established another two-part test for awarding attorney fees but the justices rolled it back, finding the standard too stringent.

Michael Swift, an IP attorney at Maginot Moore & Beck LLP in Indianapolis who’s familiar but not involved with the case, expects history to repeat itself.

Swift

“It seems to me if the Supreme Court follows what they did in Octane Fitness, they’re likely to pare back the meaning of ‘willful’ and make it easier for a patentee to prove willfulness,” he said. A reversal “should chill the actions of patent infringers” and cause them to think “long and hard about infringing.”

Incentive or loophole?

The natural momentum created by Octane Fitness carried the willfulness standard to the Supreme Court but Mark Janis, professor at Indiana University Maurer School of Law and director of its Center for Intellectual Property Research, is uncertain how the justices will rule.

Janis

The Octane Fitness decision, he explained, was a reaction to patent trolls and the dubious infringement claims they often make. The Supreme Court felt the two-part test for attorney fees would have made it impossible for defendants to get remedy after bad-faith litigation so the justices eased the standard to tamp down on troll activity.

However, during oral arguments in Stryker, the justices seemed uncertain whether the test for willfulness helped or hindered trolls.

Justice Stephen Breyer viewed the standard set by the Federal Circuit as being friendlier to small innovators. Small companies that get a letter asserting infringement may not be willing to mount a defense, knowing it could face enhanced damages.

“We have one more path leading us to national monopoly by Google and Yahoo or their equivalence, and the patent statute is not designed to create monopolies throughout the United States,” Breyer said. “It’s designed to help the small businessman, not hurt him. So leave those words for interpretation to the expert court, and in this area it may well be the Federal Circuit.”

However, Justices Elena Kagan, Anthony Kennedy and Sonia Sotomayor espoused the opposite view, finding the two-part test established by the Federal Circuit set the bar too high and could stifle innovation. Small inventors who hold patents would have a more difficult time proving willfulness and getting enhanced damages.

Questioning the attorney representing Zimmer and Pulse, Kagan advanced a hypothetical situation where a bad actor copies a patented product, sells it and reaps the profits. Then when hit with an infringement suit, the infringing party hires an attorney to formulate an argument about why the patent is not valid and, because of the Federal Circuit’s strict test, is able to escape penalty.

“It seems to stick in the craw a bit,” Kagan said.

Judicial discretion

A reversal of the Federal Circuit’s two-part willfulness test will not turn the courts into the Wild West, Janis said. Such a ruling will make willfulness easier to prove and could lead to a short-term spike in willful infringement claims, but the District Court judges are likely going to show restraint in awarding enhanced damages.

During the Stryker oral arguments, Chief Justice John Roberts hinted to a confidence in District Courts’ ability to wield discretion carefully. He compared the exercise of discretion in many cases to carving a channel which then confines the leeway judges have. District Court rulings that fall outside of that channel could bring appellate review.•