Arctic Cat v. Bombardier at the Supreme Court — Is Willful Infringement Determined by a Negligence Standard?

Currently making its way through the Supreme Court appeal process (petition for certiorari filed, not yet granted), Arctic Cat v. Bombardier is an important willful infringement case that implicates the standard of care applicable to potential infringers when investigating patent risk.

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The current rule is that, in order to show willfulness and obtain enhanced damages, a patentee must demonstrate that the infringer acted despite a risk of infringement that "was either known or so obvious that it should have been known." The phrase "should have known" suggests the existence of a duty of care against which an accused infringer's actions will be compared.

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Does that make it a "negligence" standard? Does it matter? That's what this case is about.

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Specifically, the question presented to the Supreme Court is whether the Supreme Court's Halo decision changed the prior subjective willfulness inquiry under Seagate (in addition to eliminating the objective inquiry) or if it simply kept the subjective part as it was. Under Seagate, the subjective inquiry required the patentee to demonstrate that a risk of infringement "was either known or so obvious that it should have been known to the accused infringer." Bombardier argues that Halo changed this rule when the Court stated that "the subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless." Arctic Cat argues that this statement does not necessarily preclude a "should have known" standard and, further, that the statement is not a controlling holding. This "should have known" language made its way into the jury instructions at trial, which was the basis for Bombardier's appeal to the Federal Circuit and beyond.

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‍Background‍

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The underlying facts as found by the district court include the following:

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• Bombardier knew about the subject patents before they issued and in fact had made a note in a file to reexamine the patent after its issuance.
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• Bombardier did in fact later learn of the patents about a month after they issued.
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• The only pre-suit investigation relied upon by Bombardier "consisted of one conclusory sentence on a page of handwritten notes" and pertained to the published application, not the issued claims.
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• Bombardier recognized a likelihood of infringement of Arctic Cat's patents and attempted to purchase them through an intermediary (to remain anonymous).
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• After the patent purchase was unsuccessful and after years of infringing activity, Bombardier sought opinion of counsel regarding infringement and invalidity.
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• By the time the opinion was received, Bombardier had already known about the patents for 8 years, and had been selling infringing products for at least 5 years.
  
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The jury found willful infringement, and the district court trebled damages to a total of $46 million after consideration of the Read egregiousness factors. The court found that seven of the nine Read factors weighed in favor of enhancement including factors 1 (copying), 2 (lack of investigation), 4 (size and financial condition of infringer), 5 (closeness of the case), 6 (duration of misconduct), 7 (remedial action), and 9 (attempt to conceal misconduct).

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On appeal to the Federal Circuit, the panel found no error in the jury instruction that included the "should have known" language derived from Seagate and affirmed the district court's award of trebled damages. Quoting its earlier post-Halo decision in WesternGeco L.L.C. v. ION Geophysical Corp., the appeals court reiterated that subjective willfulness can be shown with "proof that the defendant acted despite a risk of infringement that was either known or so obvious that it should have been known to the accused infringer."‍

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Analysis

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‍Bombardier's primary argument is that the Supreme Court set out a new standard for subjective willfulness when it stated that "the subjective willfulness of a patent infringer, intentional or knowing, may warrant enhanced damages," which does not include the "knew or should have known" phrase. Bombardier further argues that "knew or should have known" amounts to a negligence standard and, as such, should not be a basis upon which to award punitive damages.

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Arctic Cat argues that the Supreme Court left the Seagate rule for subjective willfulness intact, and that the rule is not based on negligence at all but instead comes from a well-established definition of recklessness. After all, the lower court decisions as well as Halo itself do not recite the word "negligence" at all. Indeed, Halo specifically notes Supreme Court precedent regarding a “recklessness” standard, not negligence, stating that "a person is reckless if he acts 'knowing or having reason to know of facts which would lead a reasonable man to realize' his actions are unreasonably risky."

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This case wouldn't be sitting in Supreme Court chambers if it were easy. On one hand, the phrase "knew or should have known" essentially requires a standard of care against which to compare an accused infringer's actions. How would you know whether an actor "should have known" about something without applying some kind of duty of care or objective conditions that determine whether they acted appropriately or within reasonable risk? And if a duty of care exists and is breached, isn't that the definition of negligence?

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On the other hand, the phrase "knew or should have known" must be taken in its context. The context typically describes the thing that should have been known as an "unjustifiably high" or "unreasonable" or simply "high" risk of infringement as part of a definition of recklessness. Ultimately, whether the rule is called "negligence" or "recklessness" is largely beside the point because neither label is explicitly part of the rule.

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Experienced patent practitioners' ears are surely ringing at the suggestion of a duty of care with respect to others' patents. They know that the Federal Circuit unceremoniously disposed of any notion of an affirmative duty of care in 2007 with the Seagate decision. But if a premise of installing the Seagate two-part willfulness test was eliminating the affirmative duty, and Halo overruled Seagate, doesn't that leave open the possibility that an affirmative duty could re-emerge? Or maybe it still exists in some form, perhaps just not as stringent as the one that Seagate rejected?

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The real crux of the issue is where to place the question of objective risk. With an affirmative duty to investigate like that which existed prior to Seagate, opinion of counsel essentially assured objectively reasonable risk at the front end. After Seagate, litigators in infringement suits were tasked with validating objectively reasonable behavior at the back end. So if Halo removed Seagate’s objective inquiry without implementing a duty of care, how do we now balance the requirement for competent patent investigation at the front end without overburdening innovation? In other words, today's patent thickets can be extremely dense and companies must occasionally launch products at known risk — what is the proper mechanism, if any, to evaluate the reasonableness of that risk and what should be the consequences?

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We’ll have more to say on this topic in coming weeks. The Supreme Court is scheduled to decide whether to grant certiorari in Arctic Cat on September 24, 2018.