In its June 2016 decision in Halo Electronics Inc. v. Pulse Electronics, Inc., which we covered in our June issue, the Supreme Court loosened the conditions under which a trial court may award enhanced damages to a patent owner. Halo emphasized that trial courts must retain discretion to punish “egregious” behavior by an infringer, based on the infringer’s knowledge at the time of the conduct in question. A defendant’s ability to muster a plausible defense after the fact should be of no consequence if its infringement at the time was willful and egregious.
This standard suggests that a company may take proactive measures that can prevent its behavior from being perceived as egregious. Specifically, before engaging in conduct that might infringe a competitor’s patent, a company might do well to obtain an opinion of counsel on the validity of that patent and the likelihood of infringing it. Already, some post-Halo decisions demonstrate that the presence or absence of such contemporaneous legal advice may affect a judge’s decision whether to assess enhanced damages against an infringer.
WBIP, LLC. v. Kohler, Co. involved competitors in the marine generator business. An internal Kohler memo requesting funding for developing products to compete with Westerbeke Corporation indicated that Kohler was aware of Westerbeke’s patents. Kohler took no action to evaluate the scope of the patents or avoid their claim limitations. Moreover, Kohler’s other activities demonstrated that it had deliberately tried to “plunder” Westerbeke’s business; Kohler employees had visited Westerbeke representatives at a trade show, questioned them about their technology, and released a competing product within a year.
Westerbeke assigned its patents to WPIB, which sued Kohler for infringement before Halo was decided. The trial judge ruled that Kohler had willfully infringed WBIP’s patents and granted WPIB enhanced damages of 50%. Kohler appealed, and the Federal Circuit affirmed the district court in view of the Halo decision that had issued just weeks earlier. Halo required the Federal Circuit to review the enhanced damages based on whether the trial court had abused its discretion in awarding them. This deferential standard means that a trial judge’s award of enhanced damages is unlikely to be overturned.
In another post-Halo case, Boston University sued Everlight Electronics, a maker of LED lightbulbs, and Epistar Corporation, its chip supplier, for patent infringement. However, Cree, Inc., BU’s licensee, had previously brought the BU patent to the attention of Everlight, which contacted its chip supplier Epistar with Cree’s concerns. Epistar consulted two law firms for infringement opinions and obtained third-party testing of its accused products. Epistar concluded that its products did not infringe the patent because they were missing two of the claim limitations. Epistar provided its analysis to Everlight, which presented it to Cree along with samples of Epistar chips for further testing. In 2008, Cree and Everlight reached a business resolution, whereby Everlight agreed to buy more Cree chips. For four years, neither Cree nor BU alleged infringement against Everlight.
Epistar’s proactive investigation of the scope of the patents gave it a “good faith belief” that it was not infringing BU’s intellectual property, said the court. Moreover, since Epistar did not deliberately copy BU’s patent and provided Cree with samples of its products for testing, the court considered its behavior not egregious and denied BU’s request to award enhanced damages.
As shown in this first trickle of cases interpreting the Supreme Court’s recent decision, a company’s actions in response to a third party’s patents can influence a jury’s perception of the company’s good faith and a judge’s willingness to find egregious conduct warranting enhanced damages. Whenever a company becomes aware of a third party’s patents that seem related to its own products, it should therefore promptly evaluate the patents for potential validity defenses and infringement problems. When a competitor or research institution sends the company a cease-and-desist letter or an offer to license patents, the company should ask its counsel for a written opinion that can be presented at a potential trial, in case the third party accuses the company of infringement. The company should also, if applicable, document its efforts to design around the patents.
These measures are also appropriate when monitoring competitor activity. As demonstrated in WBIP, a company can check its competitors’ packaging and advertising materials for patents that may apply to its own products. Furthermore, if a company regularly tracks developments in its competitors’ patent portfolios, it can screen issued claims for potential liabilities.