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Supreme Court Asserts Itself and Patent Trolls Win

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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In what has become a U.S. Supreme Court ritual in recent years, the justices Monday smacked down a patent-law precedent created by the U.S. Court of Appeals for the Federal Circuit, the unusual appellate court that specializes in patent law. The high court’s decision makes it easier for patent holders to get higher damages against willful patent infringers.

It’s a win for discretion over strict rules, as well as for patent holders over infringers. But it may also be a win for patent trolls, who will now more easily be able to add the threat of higher damages to their existing shakedown schemes.

Above all, it’s yet another piece of evidence that the Supreme Court resents the Federal Circuit’s tendency to establish its own legal regime in the technical area of patents. Its repeated decisions reversing the Federal Circuit are meant to put the “supreme” back in Supreme Court.

The immediate issue in the case, Halo Electronics v. Pulse Electronics, was the meaning of the provision of patent law that says in cases of infringement, lower courts “may increase the damages up to three times the amount found or assessed.” That provision, Section 284, doesn’t say when or how the enhanced damages -- known as treble damages -- should be assessed. That silence implicitly gives discretion to the courts to decide on special damages.

Appellate courts don’t care for unfettered discretion in lower courts. Such discretion makes it much harder for an appellate court to do its job of reviewing lower court decisions: How do you know whether discretion has been abused if there is no standard against which it can be measured?

Worse, appellate judges tend to think that too much discretion threatens the rule of law, which requires like cases to be treated alike.

Added to these general concerns is the Federal Circuit’s distinctive conception of its own role as the court in charge of patent law. The court’s judges often have special expertise when they’re first chosen, and they see thousands of patent cases over their careers. As far as they’re concerned, Congress wants them to make patent law sensible and effective.

It’s no surprise, then, that the Federal Circuit adopted a fairly rigorous standard for awarding treble damages: The test required proof of an “objectively high likelihood” of infringement and proof that the risk of infringement was either known or so obvious that it should have been known.

The effect of these requirements was to make treble damages pretty rare. The Federal Circuit is mindful of the subtle realities of the patent world. Infringement is often a matter of opinion. Infringers are often making a probabilistic judgment, weighing the costs of a successful infringement suit against the benefits of making a product using a potentially infringing technology.

In this environment, the appellate court thought that treble damages should be rare. High damages distort incentives to take patent risks, discouraging what could be efficient bets against an infringement finding.

The Federal Circuit may also have been worried about giving too many incentives to patent trolls, who file or acquire patents not to make anything but to come after businesses that may unwittingly have infringed on their patents. Treble damages are a potent tool for trolls, who increase the odds of extracting a settlement from companies that are actually making something with the threat of collecting them.

Despite the Federal Circuit’s well-established precedent, the Supreme Court rejected the appellate court’s approach in favor of extending greater discretion to lower courts and lowering the barrier to treble damages. The opinion, by Chief Justice John Roberts, said the rule was “unduly rigid.” Roberts quoted a nearly parallel decision reached by the court in 2014 that involved Section 285 of the patent code, a companion to Section 284 that deals with attorney’s fees. In that case, too, the court reversed the Federal Circuit’s more rigid rule.

Roberts said he was troubled especially by the “objective” test of likelihood. To a lawyer, that means a lower court shouldn’t consider the infringer’s actual state of mind, but rather whether a reasonable person would have that state of mind. Roberts said that, ordinarily, punitive damages are awarded based on the wrongdoer’s actual state of mind -- what lawyers call a “subjective” test.

The chief justice’s view makes some sense of treble damages, which are meant to express a moral judgment, like other punitive damages. But the moral analysis makes little sense in the ordinary patent context, when all the actors are economically and technically sophisticated and are making de facto bets on how a court will read a given patent.

Apparently worried about trolls who might take advantage of the holding, Justice Stephen Breyer concurred to clarify that treble damages were only appropriate in “egregious” cases. He was joined by Justices Anthony Kennedy and Samuel Alito. But the concurrence is unlikely to alleviate the concerns of potential infringers. What counts as “egregious” is surely in the eye of the beholder.

It’s hard to discern a really good reason for the court’s judgment other than its desire to show the Federal Circuit who’s the patent boss. In my view, the high court has gone too far recently in stripping the appellate court of its traditional role. The justices don’t really know the patent world. And it shows.

  1. The Federal Circuit also created a three-part test to review whether a lower court got these two issues right. Such are the foibles of appellate law.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Noah Feldman at nfeldman7@bloomberg.net

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Brooke Sample at bsample1@bloomberg.net