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In The Wake Of In re Seagate Technology, LLC: The Federal Circuit Raises The Standard For Willful Infringement And Enhanced Damages And Heightens The Protection Of Attorney-Client And Work Product Privilege
On August 20, 2007, the Federal Circuit arguably took significant arrows from the quiver of patent owners in litigation and simultaneously provided a considerable new shield to alleged infringers with its ruling in In re Seagate Technology, LLC.[1] In a unanimous en banc decision, the Federal Circuit increased the standard of proof necessary to establish willful infringement, eliminated its previous willfulness standard based upon an affirmative duty of due care, and determined that the waiver of attorney-client privilege and attorney work product protection created by the assertion of an opinion of counsel defense does not extend to trial counsel. These questions in the Seagate case were previously discussed in an article in our January 2007 IP Report entitled Federal Circuit To Consider Extent Of Waiver Of Attorney-Client Privilege For Reliance On An Opinion Of Counsel In In re Seagate. As noted in that article, the standard for willful infringement matters a great deal because a finding of willful infringement can serve as a predicate for an award of enhanced damages and attorneys’ fees to the prevailing patentee.
In re Seagate was a patent infringement dispute that arose in 2000 in the U.S. District Court for the Southern District of New York and involved plaintiffs Convolve Inc. and the Massachusetts Institute of Technology, who alleged patent infringement by defendants Compaq Computer Corp. and Seagate Technology. After the filing of the suit, Seagate had obtained validity and infringement opinions from its opinion counsel that ultimately concluded that the patents in suit were invalid, not infringed, and/or unenforceable. In 2003, Seagate decided to assert these opinions as part of its defense to the allegations of willful infringement. In connection with the defense, Seagate waived attorney-client privilege and work product immunity to the extent of producing the opinions.
Convolve then moved to compel discovery of any communications and work product from Seagate’s other counsel, including its trial counsel. The trial court granted the petition and instructed Seagate to produce all communications regarding legal advice on the issues of infringement, invalidity, and enforceability, including communications regarding the subject matter of the opinions with its trial counsel. The trial court also held that waiver first began when Seagate gained knowledge of the patents, and would last until the alleged infringement ceased. Even more striking was the trial court’s order requiring production of any advice from trial counsel that undermined the reasonableness of Seagate’s reliance upon the opinions.
Seagate filed a motion for a stay and certification of interlocutory appeal, both of which were denied by the trial court. Following the denial, Seagate petitioned the Federal Circuit for a writ of mandamus. Along with granting mandamus for review of the propriety of the district court’s discovery orders, the Federal Circuit sua sponte ordered en banc review of the duty of care standard for evaluating willful infringement.
Elevated Standard For Enhanced Damages
The Federal Circuit’s opinion in In re Seagate overruled the longstanding rule set forth in Underwater Devices Inc. v. Morrison-Knudson Co.,[2] which permitted district courts both to award enhanced damages (up to three times actual damages, plus attorneys’ fees) in instances of willful infringement and to assess potential infringers’ culpability for not adequately policing against their possibly-infringing activity. The affirmative duty of due care arose from this context and in most cases prompted companies to seek legal opinion advice from counsel before undertaking or continuing any activity that they were on notice might be infringing another party’s patent(s).
The affirmative duty of due care and its relation to willful infringement was governed under a “totality of the circumstances” test. Under this standard, the courts focused on the subjective state of mind of the alleged infringer. There were pluses and minuses to such a subjective test. On the one hand, even a mistaken but well-reasoned legal opinion of non-liability could provide a safe harbor against a finding of willful infringement and imposition of enhanced damages and attorneys’ fees. At the same time, potential defendants were arguably provided with an incentive to hide their heads in the sand and not consider potential infringement of third party patent rights, because ignorance of third party patents was often considered indicative of good faith.
Expressly overruling the Underwater Devices standard, the Federal Circuit’s In re Seagate decision held that willful infringement requires a showing of “objective recklessness.” More importantly, the Court stressed that there is no longer a per se affirmative obligation to obtain opinion advice from counsel regarding infringement and invalidity, thus eliminating the affirmative duty of due care as it had previously been applied by courts.[3] Instead, under the Court’s newly-enunciated standard, a two-step inquiry is required to determine whether the alleged infringer’s actions were objectively reckless. First, the patentee must prove by “clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.”[4] This is an objective inquiry and eliminates determinations into the infringer’s subjective state of mind. Second, the patentee must show that the “objectively-defined risk” was known, or should have been known, to the infringer (thus arguably depriving defendants of the “pure heart, empty head” defense of avoiding any inquiry at all into competitors’ patent rights).[5]
The court also noted several other important points that deserve mention. Because the subjective state of mind of an accused infringer is no longer the keystone of the willfulness inquiry, communications between opinion counsel and the accused infringer now become largely irrelevant (as opposed to the situation under the former standard, in which the substance of counsel’s communications to the potential infringer were deemed important to understanding how a reasonable client would have subjectively assessed and acted on such advice). Further, the court noted that willfulness will ordinarily only be determined by an infringer’s pre-litigation conduct, and that post-filing conduct, such as scorched earth litigation tactics, will not be considered.[6]
Nonetheless, the Federal Circuit left certain issues unanswered that will have to be addressed by the progeny of Seagate. These issues include whether courts should use the clear and convincing standard for the second part of the inquiry, what types of evidence can be used to show objective recklessness, and the procedural effects of the new test. The Federal Circuit did, however, provide some guidance in its suggestion that questions regarding infringement or validity sufficient to avoid a preliminary injunction may also suffice to avoid a willful infringement finding.
It is interesting that the Federal Circuit, in announcing its new objective recklessness standard, cited to language in the Supreme Court’s decision in eBay Inc. v. MercExchange, L.L.C.[7] That decision made it significantly more difficult for patentees to obtain injunctive relief upon proof of infringement absent a specific showing of additional evidence of irreparable harm, and was a reversal of long-standing Federal Circuit precedent. Combining these two decisions with the recent Supreme Court precedent in KSR International Co. v. Teleflex, Inc.,[8] which lowered the threshold for invalidating patents on the grounds of obviousness, alleged infringers seem to be enjoying a string of favorable rulings from the courts.
Restoration Of The Attorney Client Privilege And Work Product Privilege
Addressing the scope of waiver resulting from the advice of counsel defense, the Federal Circuit found that accused infringers could rely upon the opinions of counsel without waiving the attorney-client or work product privileges with trial counsel.
In reaching this determination, the court cited the varying results that other district courts had reached as to the extent of waiver of the privilege as applied to opinion counsel and to trial counsel. The scope of this waiver had come under scrutiny in the recent In re Echostar Communications Corp. decision, which expanded the waiver for attorney client and work product privilege as a result of the assertion of an advice of counsel defense. After considering the competing interests between disclosure and protection of confidences, the court drew a carefully-considered distinction between the functions of trial counsel and opinion counsel. It noted that trial counsel focuses specifically on litigation strategy and tactics, whereas opinion counsel ideally aims to provide an objective assessment of risk. This being so, the court differentiated between waiver for opinion counsel and denied waiver for trial counsel.
Specifically, the court held that, as a general proposition, the scope of waiver, while it does embrace certain opinion counsel communications, does not “constitute waiver of the attorney-client privilege for communications with trial counsel.”[9] The judges found that efficiency, fairness, and the cause of justice weighed heavily in favor of limiting the scope of waiver.[10] However, the court refused to set an absolute rule, and indicated that trial courts remained free to exercise discretion in unique circumstances “such as if a party or counsel engages in chicanery.”[11]
The court applied a similar rationale to the scope of work product immunity with respect to trial counsel. The court ruled that, in general, relying on an opinion obtained from counsel in the assertion of an advice of counsel defense does not waive work product immunity with regard to trial counsel.[12] Previously, assertion of the advice of counsel defense waived all work product protection on the same subject matter that was communicated to the client.
Even following the clarification of the willfulness standard by the Federal Circuit in In re Seagate, the court has still left a few waiver questions unanswered. In particular, the court refrained from addressing whether the waiver reaches in-house counsel, and left open the possibility of what would happen if opinion counsel and trial counsel were the same. However, in light of the first ruling, there will likely be fewer litigated opinions of counsel and waiver of privilege issues going forward. But while opinions of counsel may no longer be seen as a sine qua non for potential infringers, some, perhaps many, may continue to obtain them -- perhaps out of custom, perhaps in the hopes that they will support a finding that they have satisfied the new objective recklessness test.
Courts that have applied In re Seagate have taken into account the higher standards required for willful infringement. The Federal Circuit noted in a recent case that “legitimate” defenses of noninfringement and “credible” invalidity arguments sufficiently show that the alleged infringer did not act despite an objectively high likelihood that its actions constituted infringement of a valid patent, without discussing the meanings of “legitimate” or “credible.”[13] Another notable case in the Northern District of Illinois stated that relying solely on an invalidity defense by itself does not subject a defendant to a presumption that he acted despite an objective likelihood of infringement.[14] In the Eastern District of Texas, the court recently refused to find willful infringement because defendant’s letters regarding its position on the patents had prompted plaintiff itself to reexamine its patent.[15] Thus, early decisions interpreting In re Seagate at least suggest an increased propensity of the courts to avoid findings of willful infringement.
Because the In re Seagate ruling will take time to work its way through application in the district courts and subsequent appeals, its final impact will take time to assess. However, one thing seems clear. It has become non-trivially more challenging for a patentee to prove a claim for willful infringement under the new standard. The standard is sufficiently stringent that it might arguably even give rise to questions of whether assertions of willfulness, until now routine in almost all infringement cases, might lead to questions of Rule 11 sanctions when the patentee did not have clear evidence in hand before filing its complaint to support an allegation of objective recklessness by the defendant. As with the other recent significant decisions of the Federal Circuit and the U.S. Supreme Court in patent cases, those parties with exposure to patent issues will be closely monitoring the application of the Federal Circuit’s new willful infringement rule.
[1] 497 F.3d 1360 (Fed. Cir. 2007).
[2] 717 F.2d 1380 (Fed. Cir. 1983).
[3] In re Seagate, 497 F.3d at 1371.
[4] Id.
[5] Id.
[6] Id. at 1374.
[7] 547 U.S. 388 (2006).
[8] 550 U.S. __ (2007).
[9] In re Seagate, 497 F.3d at 1374.
[10] Id. at 1373-74.
[11] Id. at 1375.
[12] Id. at 1376.
[13] Black & Decker, Inc. v. Robert Bosch Tool Corp., No. 04-C-5312, slip op. at 6 (Fed. Cir. 2008).
[14] Trading Techs. Intl. v. eSpeed, Inc., slip op. at 1, 2008 WL 63233, at *1-2 (Fed. Cir. Jan. 3, 2008).
[15] TGIP, Inc. v. AT&T Corp., No. 2-06-cv-105, 2007 WL 3194125 (E.D. Tex. Oct. 29, 2007).
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