United States: Federal Circuit Adopts New "Objective Recklessness" Standard For Willful Patent Infringement

Last Updated: August 23 2007
Article by Ray Lupo, Mary Boyle, Paul Devinsky and Brian E. Ferguson

En banc Court also clarified the scope of privilege waiver (that arises when an infringement defendant relies on opinion of independent counsel), essentially eliminating trial counsel communications from the scope of the waiver. This decision should decrease costs for patent infringement defendants during litigation and affect the bargaining power during settlement discussions in favor of defendants (who will now be less fearful of treble damage awards).

The U.S. Court of Appeals for the Federal Circuit, sitting en banc, has held that willful patent infringement requires a minimum showing of "objective recklessness," in stark contrast to the now overruled Underwater Devices Inc. v. Morrison-Knudsen Co. "duty of due care" standard. This change in the law raises the bar for patentees claiming enhanced patent damages for willful infringement and lowers the costs of defending against such claims. The Court also held that the assertion of an advice-of-counsel defense to willful infringement does not waive privilege for trial counsel communications or work product. Thus, a patent defendant is no longer faced with the threat of forfeiting all privilege for trial counsel or communications as the price for reliance on an opinion by independent opinion counsel.

Because the Federal Circuit took the case en banc, it was positioned to reconsider and overrule its prior willfulness precedent as well as to address the privilege waiver issue of first impression. The unanimous Federal Circuit decision, issued on August 20, 2007, in In re Seagate Technology, LLC, fundamentally rewrites the law of willful patent infringement. The matter came to the Federal Circuit on a privilege-waiver issue arising from Seagate’s assertion of an advice-of-counsel defense to willful infringement. Seagate petitioned for a writ of mandamus to vacate district court orders granting discovery of Seagate’s privileged communications with its trial counsel concerning infringement, validity and unenforceability of the patents-in-suit. The Federal Circuit, sua sponte, ordered en banc review of the petition and took the opportunity to create a sea change in its jurisprudence regarding willful infringement.

The en banc order set forth the following questions:

  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?
  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 v. Morrison-Knudsen, 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?

Willfulness

Starting its analysis by addressing the willfulness issue, the Court overruled its seminal 1983 decision in Underwater Devices Inc. v. Morrison-Knudsen Co., thus eliminating the duty of due care mandated by that decision in order to avoid a charge of willful infringement.

Under Underwater Devices and its progeny, willfulness was evaluated based on a potential infringer’s affirmative duty to determine whether or not he was infringing, which included "the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity." A failure to seek and obtain legal advice, or a refusal to disclose the advice, was grounds for an adverse inference that the advice would have been or was unfavorable to the accused infringer. Patent law was unique in the law in allowing an adverse inference to be drawn from a refusal to waive attorney-client privilege. The court noted that three years ago, in Knorr-Bremse, it took a step back from that rule when it rejected the so-called adverse inference rule and the notion that special procedural rules apply to patent litigation.

But Knorr-Bremse reaffirmed the duty of due care. As Judge Dyk pointed out in his separate Knorr-Bremse opinion, this "willfulness" standard, which was similar to negligence, was in apparent conflict with Supreme Court jurisprudence that reserves punitive damages for "reprehensible" conduct. Moreover, as Judge Dyk also pointed out, the due care requirement had produced unintended and undesirable consequences. Companies had become reluctant to review others’ patents since mere awareness of a patent could lead to a de facto presumption of willful infringement in future litigation. Indeed, mere notice of a patent given to a potential defendant could set the stage for a later finding of willful infringement. While it cost the patentee little more than the value of a stamp to send a notice letter enclosing a copy of a patent, the recipient immediately was faced with the decision whether to obtain an opinion of counsel, which could cost tens of thousands of dollars. Meanwhile, all the patentee had to do was sit back and wait, and then sue at some later time. Multiply this scenario by the hundreds of such letters a large corporation might receive each year, and the problem is clear.

The Federal Circuit relied on Supreme Court and copyright law precedent to determine that the proper minimum standard for willfulness is "objective recklessness." To meet this standard, a plaintiff "must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." The infringer’s state of mind is not relevant. In addition, the patentee must further show that "this objectively defined risk … was either known or so obvious that it should have been known" to the potential infringer. The Court indicated in a footnote that "standards of commerce" would be one factor to inform the court’s consideration. The Court left further development of this standard for future cases, but stated that "[b]ecause we abandon the affirmative duty of due dare, we also reemphasize that there is no affirmative obligation to obtain opinion of counsel."

Attorney-Client Privilege

Then, turning to the first enumerated en banc question, the Court held that waiver of attorney-client privilege triggered by the assertion of the advice-of-counsel defense does not extend to trial counsel. While this is not an absolute rule, it applies absent "unique circumstances," such as "chicanery." This holding should eliminate the confusion in the lower courts regarding the interpretation of the 2006 Federal Circuit decision in In re EchoStar Commc’ns Corp. In that case, a panel of the Federal Circuit held that the waiver which followed an accused infringer’s reliance on an opinion of counsel extended to all attorney communications and all work product communicated to the client that addressed the subject of the opinion in issue. Several district courts had interpreted this as extending to communications from trial counsel. The Federal Circuit in Seagate explained that EchoStar did not consider waiver as it relates to trial counsel. Rather, the Seagate Court reasoned that the functions of trial and opinion counsel are different and they give fundamentally different types of legal advice. Classic sword and shield concerns do not apply to trial counsel, and fairness dictates that trial counsel communications be protected against disclosure. "In most cases, the demands of our adversarial system will far outweigh any benefits of extending waiver to trial counsel." The Federal Circuit found strong support for this result in Hickman v. Taylor, in which the Supreme Court emphasized the importance of protecting counsel’s trial strategy from disclosure to the adversary. The Court also explained that allegations of willful infringement are based mainly in prelitigation conduct, so that trial counsel’s advice has little, if any, relevance.

In this case, Seagate asserted reliance on the advice of separate and independent opinion counsel. The advice-of-counsel defense triggered a subject-matter waiver of attorney-client privilege and work product for Seagate’s other communications with its opinion counsel. The plaintiffs, however, also sought discovery of communications with trial counsel, and noticed the depositions of all Seagate’s senior trial attorneys. Seagate argued that such discovery must be denied and that it would disclose Seagate’s trial strategy. The district court granted the plaintiffs’ motion to compel such discovery. This issue was remanded to the district court to be reconsidered in light of the present decision.

Work Product

Turning to the second enumerated en banc question, the effect of waiver on work product, the Court held that since under the rule pronounced in this case waiver does not extend to trial counsel, "absent exceptional circumstances," the same rule must apply to both tangible and intangible work product. The Court also restated the general rule that lawyers’ mental process work product is subject to "nearly absolute protection."

Seagate represents a sea change in the law of willful infringement and a clarification of the scope of waiver intended by EchoStar, but its full impact will only become clear as the case law develops further. The shift to the pre-filing "objective recklessness" standard should make it harder for patent owners to bring and succeed on a charge of willful infringement. Because the Court clarified that there is no affirmative duty to get opinion letters, the costs of doing business and defending against willful infringement should be reduced, and incentives to affirmatively avoid learning of others’ patents should be lessened. In addition, since privilege waiver will not extend to trial counsel absent exceptional circumstances, patent defendants no longer face a dilemma whether to assert an advice-of-counsel defense or risk loss of all privilege for patent litigation strategy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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