The Halo decision; and how to avoid court-ordered punitive damages for culpable patent infringement (reckless infringement)
One problem that both startups and established corporations face is what to do in situations where their product might infringe on someone else’s patent. If the corporation ends up in court, and a judge determines that the infringement was somehow unusually extreme (e.g. egregious), then the judge may punish the offender for reckless infringement by awarding up to three times actual damages (punitive damages). This can severely damage or destroy the infringer.
But what is “unusually extreme”? Is it when an engineer is worried about a particular patent, or a competitor sends a warning letter, but the company proceeds anyway? How close does the product have to match the patent?
The law has been going back and forth on this. Earlier the rules were strict. Then the reckless infringement rules became so lax that punitive damages were hardly ever awarded. Now, in the June 2016 case of Halo Electronics v. Pulse Electronics, SCOTUS (Supreme Court of the United States) has clarified that the rules are somewhat in-between these two extremes.
In the Halo decision, SCOTUS clarified that what is relevant is “culpability”, which in essence is the state of mind of the person (actor) at the time of the conduct. In a corporate setting, this is likely the state of mind of the decision-makers at the time they either decided to launch the product, or decided to keep selling in the face of some knowledge of infringement.
In particular, the issue is one of acting recklessly (not like a normal person) and/or with willful misconduct while knowing that there was a patent infringement issue. The court can determine this if the majority of the evidence supports this conclusion (i.e. preponderance of the evidence standard).
Getting advice of legal counsel:
Earlier, when the rules were strict, the courts, in essence, created a duty to get the advice of legal counsel before acting. However later, when the rules were lax, there was not much of a need for this. Courts in this era set the threshold for punitive damages so high that such damages were almost never awarded.
Now, with the present rules, the situation is in-between. Failure to get the advice of legal counsel does not automatically prove that a company acted recklessly. However, getting advice before acting (e.g. launching a product) can help prove a lack of recklessness. Timely advice can help establish that the company acted with normal caution, thus hopefully avoiding punitive damages. But note that there is a timing issue: the legal standard is the state of the mind at the time of the (infringing) conduct. SCOTUS is not impressed by legal arguments concocted afterward.