In a recent decision, In re Seagate Tech. LLC, the United States Court of Appeals for the Federal Circuit redefined willfulness as it relates to patent infringement. Misc. Dkt. 830 (Fed. Cir., August 20, 2007) (en banc). In doing so, the Federal Circuit has altered how willfulness will be litigated, both procedurally and substantively, and called into question defensive opinion policies in place in many sophisticated companies. This advisory discusses the background leading up to Seagate, the decision itself and some of its possible implications on modern patent practice.
Under the Federal Circuit’s prior precedent, a company aware of another’s patent rights in a given technology space had an affirmative duty of due care with respect to those rights, which duty included obtaining and relying upon competent legal advice before the initiation of possibly infringing activity. See Underwater Devices Inc. v. Morrison-Knudsen Co. Inc., 717 F.2d 1380 (Fed. Cir. 1983). A corollary to this duty developed later; to-wit, if an accused infringer failed to produce and rely upon such an opinion in rebutting a charge of willful infringement, adverse inferences could be drawn — at least where the infringer was aware of the patent in question — that either an opinion had not been obtained or any opinion that was obtained was against the accused infringer’s interests and thus has not been produced. See Kloster Speedsteel AB v. Crucible, Inc., 793 F.2d 1565, 1580 (Fed. Cir. 1986). Where applicable, these inferences increased the likelihood that any infringement would be found to have been willful, thus triggering the possibility of treble damages and attorneys’ fees.
The net effect of these rules has been viewed practically as shifting the burden of proof on willfulness to the infringer. As a result, the Underwater Devices and Kloster Speedsteel cases became a reason (there are others) for many companies to adopt strict patent due diligence policies; policies, however, that proved burdensome to implement, yet were necessitated as a pseudo-insurance policy against catastrophic damage/fee awards.
Because reliance on the advice of counsel defense constitutes a waiver of the attorney-client privilege and, in some respects, work product immunity, the Underwater Devices/Kloster Speedsteel rules created increasingly burdensome and expensive satellite litigation concerning the proper bounds of allowable discovery beyond the privilege. For fear of having to make a broader waiver than desired, many companies established policies that required the use of separate law firms as opinion and trial counsel, a practice that even further increased the burden on businesses hoping to avoid treble damages and attorneys’ fees. Compounding the problem is that discovery decisions by the district courts are interlocutory and thus usually only addressed to the Federal Circuit in petitions for mandamus, which are rare and even more rarely granted. As a result, there were different rules from district to district, and sometimes from judge to judge within the same district.
In 1991, the Federal Circuit denied a mandamus petition, but in so doing remarked that its willfulness doctrine forced accused infringers either to waive the privilege and expose the patentee to its defensive strategies, or face a real risk of willfulness, treble damages and attorneys’ fees. To address this dilemma, the court suggested, quite unpopularly as it turned out, that trial courts use in camera review and bifurcation as a means of alleviating the concerns. See Quantum Corp. v. Plus Development Corp., 940 F.2d 642, 643 (Fed. Cir. 1991). In 2004, in Knorr Bremse Systeme Fuer Nutzfahreuge GmbH v. Dana Corp., 383 F.3d 1337, 1343 (Fed. Cir. 2004) (en banc), the Federal Circuit cited the “inappropriate burdens” the Kloster Speedsteel inferences placed on the attorney-client relationship and did away with both of them, while leaving in place the underlying duty to obtain counsel’s advice and the need to waive the privilege in order to rely upon such advice in defense of willfulness.
More recently, the Federal Circuit granted a petition and addressed the scope of the waiver that results from reliance on the advice of counsel defense. In In re Echostar Communications Corp., 448 F.3d 1294 (Fed. Cir. 2006), the court ruled that (a) relying on in-house counsel’s opinion as a defense to willfulness waives the attorney-client privilege also with respect to outside counsel who had advised the client on the same subject matter as had in-house counsel, and (b) the waiver extended to all documents that were communicated to the client or referred to communications with the client on the same subject matter. Id. at 1299-1304. The court’s Echostar decision did not reach the question of whether the waiver would extend to the privilege that existed between the client and its trial counsel, but its rationale for extending the waiver from in-house counsel to outside counsel suggested that the waiver might well reach trial counsel, and several trial courts subsequently held as much. See e.g. Informatica Corp. v. Bus. Objects Data Integration, Inc., 454 F. Supp. 2d 957 (N.D. Cal. 2006).
III. In re Seagate
Seagate soon presented that very issue to the court and, perhaps not satisfied with the trajectory of its own jurisprudence, the court granted a mandamus petition and indicated that it would address three issues:
1. Should a party’s assertion of the advice of counsel defense to willful infringement extend waiver of the attorney-client privilege to communications with that party’s trial counsel? See In re Echostar Commc’n Corp., 448 F.3d 1294 (Fed. Cir. 2006).
2. What is the effect of any such waiver on work-product immunity?
3. Given the impact of the statutory duty of care standard announced in Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983) on the issue of waiver of attorney-client privilege, should this court reconsider the decision in Underwater Devices and the duty of care standard itself?
After receiving briefs on these issues from the parties and some 21 amici curiae, the court issued several important holdings and announced several new rules that, although dicta, will affect cases going forward:
(1) There is no affirmative duty of care with respect to patents belonging to others. (Holding)
(2) There is no affirmative duty to obtain an opinion of counsel regarding another’s patent. (Holding)
(3) Proof of willful infringement permitting treble damages and attorneys’ fees requires clear and convincing evidence of “objective recklessness,” i.e., that the infringer acted despite an “objectively high likelihood that its actions constituted an infringement of a valid patent.” (Holding)
(4) The state of mind of the accused infringer is not relevant to this objective inquiry. (Holding)
(5) If this objective standard is met, the patentee must also prove that the objective risk was either known or should have been known to the accused infringer. (Holding)
(6) Consistent with Rule 11, Fed.R.Civ.P., any willfulness claim “must necessarily be grounded exclusively” in the accused infringer’s pre-filing conduct. (Dicta)
(7) A claim that an accused infringer’s post-filing conduct is reckless can be addressed by filing a preliminary injunction motion. (Dicta)
(8) A patentee who does not seek a preliminary injunction should not be allowed to accrue enhanced damages “based solely” on the infringer’s post-filing conduct. (Dicta)
(9) If a patentee seeks a preliminary injunction and fails based on the existence of a substantial question as to infringement or validity, it is likely that any infringement is not willful. (Dicta)
(10) A substantial question about invalidity or infringement is likely sufficient to avoid a charge of willfulness based on post-filing conduct. (Dicta)
(11) Opinions received after suit has been filed are of marginal value as a defense to willfulness; the reasoning in the opinions might disprove willfulness, but the opinions themselves provide little cover. (Dicta)
(12) Absent unique circumstances suggesting abuse, relying on the advice of counsel defense does not waive the attorney-client privilege or work product immunity with respect to trial counsel. (Holding)
IV. What Effect Will Seagate Have?
Seagate is likely to influence patent practice in many respects. First, we expect that defense counsel will look for ways early in the case (and before any waiver decision is made) to test the sufficiency of any claim of willfulness. The testing will likely come in the form of procedural and/or substantive motions, the goal of which will be to get the court to issue some sort of ruling that directly or indirectly suggests that the defendant has raised at least a substantial question as to infringement or invalidity. If such a ruling can be obtained, enhanced damages could be out of the case and some of the patentee’s leverage lost.
The opposite could also be true. Thus, both sides should consider what collateral effect any motion that implicates the strength of an accused’s defense may have on any willfulness claim. The filing of an ill-advised motion could backfire and alter the balance between the parties, and as a result, at least the settlement value of the case. If nothing else, early motions offer one way to attempt to shift the leverage between the parties and could become an effective tool for the party having the overall best position to hasten a conclusion to the litigation.
Additionally, since willfulness now turns in part on the objective record, we expect that patentees will start sending more detailed letters to accused infringers explaining a theory of infringement. Such letters should be explored with counsel and a substantive response sent. The response will hopefully stave off litigation or licensing all together, yet will at least serve the secondary function of creating an objective record supporting the existence of substantial defenses to the patentee’s assertions. Otherwise, a patentee will rely upon any lacking response not only as a basis to plead willfulness, but also to force discovery into the subjective intent behind the defendant’s actions, i.e., a waiver of the attorney-client privilege.
B. Due Diligence Policies
The extent to which Seagate should alter existing due diligence policies regarding opinions depends upon why the policies exist in the first place. Many sophisticated companies investigate the patent landscapes in which they operate or seek to operate (through new ventures or M&A deals) in order to avoid surprises, i.e., to avoid making large investments, only to find that large licensing fees and/or patent litigation confronts their ventures. While these investigations often lead to an awareness of the patent rights of others — and thus (at least formerly) to the expense of obtaining producible opinions of counsel, the advance knowledge and ability to prepare defenses with respect to bothersome patents are viewed as benefits worth the price.
Policies based on this logic are not affected much at all by Seagate. At most, fewer full-blown, written opinions may be needed, although the same underlying, in-depth analysis will be desired. How else would a client gain confidence that its ventures will not be met with licensing demands or litigation? Plus, as mentioned above, in proving willfulness, once the objective standard is met, a subjective “knew or should have known” standard also has to be satisfied before willfulness is proved. In that regard, reliance on opinions of counsel obtained before the accused activity is started and before the filing of any lawsuit, with the necessitated waiver of the attorney-client privilege, retains its usefulness in defending against willfulness.
On the other hand, where any due diligence/opinion policy is premised merely upon making sure that a willfulness claim can be rebutted, Seagate could have a greater effect. That is, where reasonable defenses to an infringement claim are clear on the face of the dispute (such as when explained in response to a “cease and desist” letter), it may make sense to obtain full-blown opinions only in close cases. As well, it may be that the opinion of in-house patent counsel is sufficient — especially where the defenses are clearly evidenced and straightforward.
Assuming such a policy is altered in view of Seagate, we suggest that the requirement for an opinion be relaxed only where (a) the issues are viewed as clear by in-house patent counsel, and (b) such counsel at least (1) creates a record of the clearly provable defenses and (2) makes certain that any needed documents are properly preserved and any needed testimony is identified, if not reduced to a declaration. Where these precautions are satisfied, it becomes a business risk whether enough proof exists to avoid the expense of involving outside counsel. On the other hand, where in-house patent counsel does not exist, we caution against taking business risks without any consultation with outside counsel. Indeed, without such advice, a client can rarely be sure that the needed substantial question about infringement or validity exists.
Finally, given the Federal Circuit’s preference for preliminary injunction motions as a means of curbing post-filing willfulness, a wall of separation between opinion and trial counsel retains its usefulness. Many companies use different law firms altogether, many just different lawyers. Whichever approach is taken, a documented and observed wall will be viewed by many as a “best practice.”
All in all, Seagate does more to decrease the likelihood of treble damages and attorneys’ fee awards favoring patentees than it does to lessen the need for and value of early, competent patent advice. To be sure, money can be saved by obtaining fewer full-blown, written opinions from counsel, but counsel’s underlying analysis retains its value as a means of avoiding or at least minimizing the burden and high costs of patent licenses and/or litigation