United States: "In re Seagate Technology": Closing the Gate on Willful Infringement

Companies accused of patent infringement have another reason to breathe easier. On August 20, 2007, the U.S. Court of Appeals for the Federal Circuit issued an en banc decision making it harder for patent holders to obtain enhanced damages for willful infringement and limiting the scope of waiver resulting from reliance on an opinion of counsel. As a result, the days of including a boilerplate charge of "willful infringement" and seeking enhanced damages in nearly every patent infringement action may be gone. The decision is the most recent in a string of cases affecting the strength of patent rights. The decisions include the U.S. Supreme Court’s recent rulings in eBay, which made it more difficult for patent holders to obtain injunctions, and KSR, which relaxed the requirements for proving that a patent is invalid as obvious.

The context for the Seagate decision hearkens back to the creation of the Federal Circuit in 1982, which was in part motivated by the perception of widespread disregard for patent rights. In its early days, the Federal Circuit strengthened patent rights by announcing that a potential infringer who is notified of another’s patent has an affirmative duty of due care to determine whether or not he is infringing. Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983). Failure to satisfy this duty could lead to a finding of "willful" infringement, and the possibility of treble damages. This led to the now common practice of obtaining an opinion of counsel that a patent is invalid, unenforceable and/or not infringed to discharge the duty. At trial, a party could rely on this opinion from its attorney to try to avoid a finding of willfulness.

However, this framework raised practical concerns. Those concerns largely resulted from an accused infringer’s need to choose between waiving the attorney-client privilege by relying on the opinion, or maintaining the privilege and losing the benefit of the opinion. Until a few years ago, failure to produce an opinion led to an inference that the accused infringer obtained no advice or that the advice was unfavorable. Although the Federal Circuit eliminated this inference, thorny issues remained, such as the scope of waiver created by relying on an opinion.

In In re Seagate, the en banc Federal Circuit unanimously overruled Underwater Devices, eliminating the duty of due care and emphasizing that there is no affirmative obligation to obtain an opinion of counsel. This easing of the burden on potential infringers is accompanied by a new, more difficult standard for proving willful infringement. The Federal Circuit held that the Underwater Devices standard, which it compared to a negligence standard, was too low. The Court declared that proving willful infringement now requires at least a showing of objective recklessness. This entails two elements of proof. First, the patent owner must prove by clear and convincing evidence that the accused infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. Second, the patent owner must also prove that this risk was either known, or so obvious that it should have been known, to the accused infringer.

With this, the Federal Circuit has shifted the burden – with patent owners now needing to show that accused infringers should have known they were acting recklessly, as opposed to accused infringers showing they acted with due care. The Court also coupled the new standard for obtaining injunctive relief, articulated in the Supreme Court’s eBay decision, with the ability to obtain enhanced damages. Specifically, the Court noted that "in ordinary circumstances, willfulness will depend on an infringer’s pre-litigation conduct" and suggested that "a patentee can move for a preliminary injunction" when an accused infringer’s post-filing conduct is reckless. Under the Court’s analysis, a patent holder who does not seek an injunction or who seeks one and fails, may not be able to prove the infringer’s conduct was reckless.

The Federal Circuit admitted that its decision to make these significant changes in the law was motivated in part by practical concerns. While Underwater Devices came at a time when patent rights were viewed as weak, today there is clamor about perceived excesses in patent litigation. The net result of In re Seagate should be fewer enhanced damage awards due to findings of willful infringement. Nevertheless, it remains to be seen how jury instructions will change in the wake of this decision and what conduct juries will expect from patent owners and accused infringers under the new regime. Patent owners may need to provide potential infringers with detailed notice of how they are allegedly infringing to set the stage for showing reckless disregard of their patent rights, but will need to balance this against the risk that such notice will provoke declaratory judgment suits. See SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007). Potential infringers may no longer have a legal duty of due care, but juries may nonetheless expect that the accused infringers at least have attorneys assess potential infringement issues to avoid being reckless.

In re Seagate also addressed the important issue of the scope of the privilege and work-product waiver that occurs when a defendant relies on an opinion of counsel. The Federal Circuit took the opportunity, as is its charge to do so, to bring uniformity to this area of law. The Court observed that district courts have come to three differing conclusions in the scope of privilege waiver when an opinion of counsel is used to oppose an allegation of willful infringement. Some courts have extended waiver to trial counsel, while other courts have not. Other courts have created a hybrid waiver, allowing disclosure of communications only contradicting or casting doubt on the opinion. The primary concern of courts in allowing a broad waiver was that the privilege was being used as both a sword and as a shield – disclosing favorable communications (e.g., a non-infringement opinion), while withholding unfavorable communications (e.g., counsel’s advice during litigation that the client’s non-infringement position is weak).

The Federal Circuit held that asserting the advice of counsel defense by disclosing an opinion of counsel to protect against a willfulness charge does not waive the attorney-client privilege for communications with trial counsel or trial counsel’s work product immunity, absent "chicanery." The Court grounded its reasoning in the idea that the types of advice received from and respective functions performed by trial counsel and opinion counsel are significantly different. Trial counsel focuses chiefly on strategy and presentation of the issues to a fact finder, while opinion counsel provides an objective assessment on which a business can make prudent decisions. Because of this difference in function, the Court felt that concern over the "sword and shield" use of the privilege is alleviated and that it would be unfair to allow discovery of trial counsel’s communications. The Court also reasoned that because a plaintiff must have a good-faith basis under Rule 11 to allege willful infringement, this charge must concern pre-litigation conduct. As such, the relevance of post-filing, trial counsel communications is tenuous at best.

Going forward, this case teaches that trial counsel communications and work product are generally safe from discovery, absent exceptional circumstances.

The Federal Circuit’s Seagate decision means that patent owners likely will no longer allege willful infringement as a matter of course and that proving willful infringement will be more difficult, making enhanced damage awards more uncommon. The decision also alters the calculus for potential infringers contemplating opinions. The new higher standard for willfulness raises the burden of proof regardless of whether an opinion was obtained, while the new strict limits on the scope of waiver reduce the downside of relying on an opinion to rebut allegations of willfulness.

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