United States: Federal Circuit Issues New Rules Concerning Patent Opinions

In a highly anticipated decision, the Federal Circuit acted en banc to hold "that no adverse inference that an opinion of counsel was or would have been unfavorable flows from an alleged infringer's failure to obtain or produce an exculpatory opinion of counsel." Contrary precedent was overruled. Knorr-Bremse Systeme Fuer Nutzf Ahrzeuge GMBH v. Dana Corp., Nos. 01-1357, 01-1376, 02-1221, 02-1256 (Fed. Cir. Sept. 13, 2004).

Background: Knorr-Bremse makes air disk brakes for use in tractor-trailers. Dana and Haldex collaborated to sell an air brake manufactured by Haldex. The district court found literal infringement by one of the brake designs. Haldex said it had consulted counsel about the patents, but refused to produce its counsels’ opinions. Dana relied on Haldex. The issue on appeal was the propriety of an adverse inference that the opinions were, or would have been, unfavorable.

The Federal Circuit addressed the adverse inference rule, requesting briefs on four questions by the parties and amicus curiae. An amicus curiae brief was filed by Kilpatrick Stockton LLP on behalf of the Association of Corporate Counsel ("ACC").

The Decision: The first two questions addressed whether a jury, or court, should draw an adverse inference in an infringement suit where a party accused of willful infringement either claims her counsel’s opinion is privileged, or fails to obtain an exculpatory opinion. In addressing these questions, the Federal Circuit issued a ruling agreeing with the position of our client, ACC, that no adverse interest was appropriate.

According to the Federal Circuit, no adverse inference should arise from invocation of the attorney-client or work product privilege. The attorney-client privilege was important to full and frank communication between client and counsel. An adverse inference could inappropriately "distort the attorney-client relationship, in derogation of the foundations of that relationship." Thus, "a special rule affecting attorney-client relationships in patent cases is not warranted." Of course, a defendant may choose to waive the privilege and rely on counsel’s advice, but assertion of privileges and withholding of the advice of counsel shall no longer entail an adverse inference as to the nature of the advice.

In addressing whether an adverse inference flows from an accused infringer’s failure to obtain an exculpatory opinion, the court framed the issue as whether there is a legal duty to consult with counsel, such that failure to do so will provide an inference or evidentiary presumption that such an opinion would have been negative. Early and detailed study of every adverse patent known to a party entailed burdens and costs that were simply too great. Thus "although there continues to be an affirmative duty of due care to avoid infringement of the known patent rights of others, the failure to obtain an exculpatory opinion of counsel shall no longer provide an adverse inference or evidentiary presumption that such an opinion would have been unfavorable."

Because the Federal Circuit found that elimination of the adverse inference was a material change in the totality of the circumstances assessed by the lower court, the case was remanded for redetermination of the issue. The "totality of circumstances" test for assessing willful infringement played a similar key role when the Federal Circuit addressed the final issue of whether a substantial defense to infringement could alone defeat liability for willful infringement -- even where no legal advice was secured. Precedent included the strength of the defense with other facts among the totality of circumstances. The Federal Circuit found that a jury or district court should be allowed to continue to accord each factor the weight warranted by its strength in any particular case. Thus, a substantial defense will remain important, but not controlling, in assessing liability for willfulness.

Practical Implications: Knorr-Bremse immediately impacts litigation practice and clients’ ability to obtain candid opinions. Free from the specter of the adverse inference, patent counsel may now candidly warn their clients of potential problems. Since a party’s decision to rely on counsel’s advice can no longer be said to have been essentially required by the now defunct adverse inference rule, Knorr-Bremse may also result in courts applying a broader waiver should a party elect to rely on counsel’s advice at trial.

Knorr-Bremse begins what promises to be a lengthy process by which the Federal Circuit will finally attend to its willful infringement jurisprudence. Questions remain on a variety of issues, including what is sufficient to constitute "notice" of infringement. Judge Dyk, writing separately, even raised the issue of whether treble damages were punitive damages that needed to be assessed in the context of recent Supreme Court decisions that focus the inquiry on "reprehensibility" of a defendant’s conduct. In the interim, verification of the importance of the attorney-client privilege should have a positive impact on patent law and practice. If you would like further information about the Knorr-Bremse decision and its implications for patent law, please contact any of our Kilpatrick Stockton patent attorneys.