Enhanced Damages for Patent Infringement: A Normative Approach

By Hylton, Keith N. | The Review of Litigation, January 1, 2017 | Go to article overview

Enhanced Damages for Patent Infringement: A Normative Approach


Hylton, Keith N., The Review of Litigation


I. Introduction.417

II. Legal Background.419

III. Normative question.420

A. Damages Theory.421

1. Loss Internalization.421

2. Gain Elimination.426

3. Extending Damages Theory to Intellectual Property 428

B. Determinants of Optimal Damages.429

IV. The Legal Standard.431

A. Enhancement Factors.431

B. Elaboration on Intentionality and Social Harm.437

V. The Damages Multiplier.439

VI. Conclusion.441

I.Introduction

In Octane Fitness v. Icon Health,1 the Supreme Court overturned a highly restrictive rule adopted by the Federal Circuit governing the award of attorney's fees in patent infringement litigation. To justify an award of attorney's fees, the Federal Circuit had required a finding of (1) an objectively baseless lawsuit (2) brought in bad faith.2 The new standard established in Octane gives discretion to courts to award attorney's fees in cases that seem exceptional based on the facts or the law.3

The question immediately generated by Octane was whether the move toward greater discretion over fee awards would be extended to the matter of enhanced damages for patent infringement. Section 284 of the Patent Act permits courts to increase damages up to three times the patentee's loss.4 As in the case of attorney's fees, the Federal Circuit had adopted a highly restrictive standard for enhanced damages.5 Octane encouraged litigants to challenge the Federal Circuit's interpretation of the enhancement provision of Section 284. Two patentees, Halo Electronics and Stryker Corporation, responded to the encouragement by filing certiorari petitions in the Supreme Court seeking to overturn the Federal Circuit's standard on enhanced damages and put in its place a standard providing greater discretion to courts on the matter.6 The Supreme Court responded on June 13,2016, in Halo Electronics v. Pulse Electronics,7 siding with the patentees. The new standard established in Halo grants courts the discretion to enhance damages within guidelines suggested by "nearly two centuries of application and interpretation of the Patent Act."8

This paper takes a normative approach to patent infringement damages. Its underlying premise is that the goal of a damages regime should be to maximize society's welfare. Patent damages should therefore balance society's interest in encouraging innovation against the need to regulate infringement incentives. This balancing approach generates an optimal standard for awarding enhanced damages and guidelines for determining the size of the damages multiplier. On the legal standard, the approach developed here illuminates the factors that should be taken into consideration in the enhancement analysis, and, more importantly, the reasons those factors should be considered. On the precise size of the multiplier, this approach suggests principles that both justify and constrain the multiplier: (1) the elimination of gains from willful infringement, (2) the multiplication of damages for covert infringement, and (3) the social interest in enhancing damages where the ratio of the social to the private benefit from the patent is high.

Although the analysis here is mostly normative and draws heavily on the economic theory of penalties,9 the aim of this paper is to provide a set of practical guidelines courts can follow in explaining, justifying, and developing rules to structure the discretion that Halo has returned to them. Halo provides an opportunity for courts to integrate deterrence policy more closely with the rules governing the enhancement of damages for patent infringement.

II. Legal Background

On the question of enhanced damages, the relevant portion of the Patent Act, Section 284, is rather sparse. It says that "[w]hen damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed."10

A quick glance at these words should leave a reader with the impression that they were intended to grant courts discretion over enhanced damages, up to the limit of trebling. …

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