The Halo effect

November 1st, 2016 / By: , / Business, Management

Threading carefully to minimize damages from patent infringement.

The smart textile industry continues to respond to customer interest in interactive fabrics that meet a variety of needs, including the monitoring of athletic performance and the improvement of tissue reconstruction. This growth drives new approaches to solve problems, pushing the textile industry to draw on advancements made in other technologies. For example, BAE Systems, based in the United Kingdom, introduced a smart fabric vest earlier this summer for the military market; the vest is made from conductive yarns that can charge and power electronics via a USB port, alleviating the clutter of wires, cables, battery packs and other impracticalities that can hamper soldiers in the field.

Combining different technologies in nontraditional manners can present legal challenges for companies. Smart textile companies are encountering complex landscapes that must be analyzed for potential claims of patent infringement before introducing new products to the market. While assessing the risk for infringement exposure is commonplace in valuing any new project, a recent decision by the Supreme Court, Halo Elecs., Inc. v. Pulse Elecs., Inc., 136 S. Ct. 1923 (2016), creates a greater potential for increased damage claims,  affecting how businesses approach this step in the valuation process. In particular, it may be of increased importance for businesses to take timely and meaningful action—albeit sometimes expensive—to assess and address potential infringement issues prior to product launches. Avoiding exposure for increased damages is especially relevant in the wake of the Halo case.

WILLFUL INFRINGEMENT

Under U.S. patent law, a patent owner (or patentee) who wins an infringement lawsuit may recover monetary damages adequate to compensate for the infringement. The law also provides that the damages awarded to a patentee against an infringer can be increased up to three times in certain circumstances (see 35 U.S.C. § 284). Enhancement of damages is generally based on willful infringement. In layperson’s terms, this is infringement that is carried out in “bad faith.” Until the recent decision in Halo, however, patentees were rarely able to obtain enhanced damages, because satisfying the legal standard for willful infringement was quite difficult.

To establish willfulness and obtain enhanced damages, a patentee had to meet a two-part test, established in Seagate Technology, 497 F. 3d. 1360, 1371 (Fed. Cir. 2007). Under the first prong of the test, the patentee had to show that the infringer acted with “objective recklessness.” That is, regardless of the state of mind of the infringer, the actions taken amounted to recklessness. This prong was rarely satisfied, because if an infringer had a reasonable defense at trial that the patent was invalid or that the activities were non-infringing—even if the infringer was not aware of the defense when the infringing conduct occurred—the objective prong could not be met.

Under the second prong, the patentee had to show that the accused infringer was actually aware, or should have been aware, of the risk of infringement (the subjective prong). Only when both steps were satisfied could a trial court consider whether to exercise its discretion to award enhanced damages.

A MORE FLEXIBLE TEST

The Supreme Court rejected the stringent Seagate test and explained that whether to award enhanced damages is a decision left to the discretion of the trial court, to be made after considering the totality of the circumstances. In other words, the trial court does not have a rigid test to meet for awarding enhanced damages. Instead, the court looks at the facts of each case, particularly at the conduct of the alleged infringer, before launching into the alleged infringing activity, and makes a case-by-case determination of whether the infringement essentially occurred in bad faith.

The Supreme Court emphasized that such discretion is to be exercised with the understanding that enhanced damages are not meant to be the norm or typical damages award but are, instead, designed as a punitive or vindictive sanction for particularly egregious behavior. Factors considered by the court in determining whether an enhanced damages award is appropriate include whether the infringer deliberately copied the ideas of another; whether the infringer, after becoming aware of a patent, investigated the scope of the patent and formed a good-faith belief that it was invalid or that the infringer’s conduct was non-infringing; the duration of the infringement; whether the infringer took any remedial action; and whether the infringer attempted to conceal the misconduct. See Arctic Cat Inc. v. Bombardier Recreational Prods., Inc., No. 14-CV-62369, 2016 WL 4249951, at *6 (S.D. Fla. July 27, 2016)(citing Read Corp. v. Portec Inc., 970 F.2d 816 (Fed. Cir. 1992).

While Halo’s more flexible standard seems to make it easier for patentees to obtain enhanced damages, the guidance from the Supreme Court is, in its own words, neither precise nor formulaic, leaving room for interpretation by individual judges and courts. Parties involved in patent litigation will face uncertainty on how the standard will be applied by the courts for a while.

ASSESSING RISK

Against this backdrop, textile businesses concerned about potential patent infringement need to be proactive in assessing and addressing this risk before launching a new product or process. A dual strategy that combines in-house and external resources can help achieve a strong risk assessment analysis, while mindfully addressing cost-related challenges.

Internally, companies should have a firm grasp of the relevant technology landscape. That is, those involved in research and development activities should familiarize themselves with all of the relevant technology already available and under development by others in the field. Proactive patent monitoring efforts can serve as evidence of good faith, as the business is making efforts to be informed of the rights of others in the area. If any potentially problematic patents are identified in the process, in-house legal personnel can also perform preliminary infringement analyses, where patents in the relevant field are analyzed to determine how closely they relate to the product under development.

INDEPENDENT LEGAL COUNSEL

Externally, the most common strategy is to seek a “clearance” or “freedom-to-operate” opinion from independent legal counsel. The opinion typically requires a search for relevant patents and an analysis of whether potentially problematic claims cover the features of the product or process at issue. A strong opinion sets forth the relevant law at the time the opinion is issued, the technical aspects of the product or process under consideration, an overview of the patent claims being analyzed, and a comparison between the claims and the product or process being cleared.

Ultimately, the goal is to explain, in sufficient detail, how certain features distinguish the target process or product from the patent claims, so that counsel can reach a conclusion of non-infringement under the relevant law. While the cost of obtaining an opinion from independent legal counsel may be high and can seem higher during budget-strict product development stages, it will almost always be substantially lower than that of defending a willful infringement allegation in litigation.

There are steps that businesses can take to manage the cost of independent legal opinions. First, ensure that counsel receives accurate and complete technical information about the product to be cleared. Waiting to disclose important technical details after counsel has begun drafting the opinion will almost always increase the cost of the opinion.

Second, it is important to make counsel aware of any potentially relevant patent licenses or discussions with third parties concerning patents related to the product being cleared. Often discussions around this topic will provide insight on how your technical team interprets the scope of the patent and help flag potential issues for counsel’s consideration early in the process.

Third, bring any preliminary patent search efforts undertaken within the company to counsel’s attention. While a more comprehensive search may be required, these preliminary searches can reduce costs by providing more specific guidance about potentially problematic patents.

Fourth, make sure counsel is aware of all potential competitors. This information can also help focus the patent searches and specifically target existing patents that may present obstacles.

DOCUMENTED STEPS

The best strategy for a textile company facing potential infringement allegations is to take concrete measures to document that it has taken adequate steps to assess a potential patent infringement risk, and that when such risk has been identified, its subsequent conduct has been cautious and respectful of others’ intellectual property rights.

Mareesa A. Frederick and Clara N. Jimenez are attorneys at Finnegan, a multi-national legal firm that specializes in intellectual property.

Leave a Reply