Patent Baristas

The Federal Circuit has demonstrated once again that it is not afraid to effect a sea change in patent law jurisprudence in a big way.

Twenty-three years ago, in Underwater Devices v. Morrison-Knudsen Co. (Fed. Cir. 1984) the court declared: “Where . . . a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing. Such an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.”

The consequences in litigation to an accused and then adjudicated infringer for failing to discharge that duty could be a finding of willful infringement, giving the trial court discretion to multiply the damages award (up to 3X) and award the patent owner its attorneys’ fees.

Uncertainty was created as to what constituted “actual notice of another’s patent rights,” and patent attorneys struggled with identifying the circumstances, absent a specific accusation of infringement, that would trigger an affirmative duty. Hoping to provide safe harbor for their clients from such punitive consequences, patent attorneys have been recommending, preparing and billing for formal freedom-to-practice opinions ever since.

In the wake of Underwater Devices and its effects in subsequent cases, the court’s willfulness jurisprudence receded a bit from the apparently unequivocal rule that a person with “actual notice of another’s patent rights” always had to obtain a competent freedom-to-practice opinion in order to have a defense against a charge of willful infringement in subsequent litigation. The test for willful infringement became less centered on whether the accused had obtained a freedom-to-practice opinion, and shifted to a “totality of the circumstances” inquiry. But a duty of “due care” remained.

So until relatively recently, the presence or absence of a freedom-to-practice opinion remained potentially very important in any case in which the adjudicated infringer was on notice of the patent owner’s claim for a substantial period of time prior to commencement of litigation. An accused infringer who for whatever reason would not present one had to sweat out the likelihood that, from the absence of evidence of reliance on advice of patent counsel, the fact finder could be invited to draw an inference that the infringer was a reckless pirate — that despite having notice of the patent owner’s claim, either he had not sought advice of patent counsel, or he had, and patent counsel’s advice was that he was sailing in dangerous waters.

This placed the accused infringer on the horns of a dilemma. “Willfulness” was deemed an issue of the infringer’s state of mind, i.e., whether he had engaged in the infringing activity in “good faith”. Under principles of fundamental fairness, an infringer could not be permitted to assert his good faith reliance on a freedom-to-practice opinion without disclosing all other advice and information he had received on the matter. Thus, assertion of reliance on a freedom-to-practice opinion would effect a subject matter waiver of the attorney-client privilege.

Once an accused infringer asserted his reliance on a freedom-to-practice opinion, he opened the floodgates to intrusive and expensive discovery of all communications with his attorneys on the matter. Recognizing the strain this placed on the attorney-client relationship, in Knorr-Bremse v. Dana Corp. (Fed. Cir. 2004) the court sitting en banc held that it was error to draw the adverse inference against the accused infringer, or to instruct a jury that it could do so.

But the dilemma remained. Even though Knorr-Bremse took the adverse inference weapon away from the patent owner, the accused infringer still had to choose between (a) preserving his privilege and foregoing the right to assert a potentially powerful defense against a willfulness charge, or (b) asserting reliance on a freedom-to-practice opinion and effecting a waiver of his attorney-client privilege (and in some circumstances, attorney work product immunity), of potentially unpredictable scope. If he chose the latter course, intrusive discovery and battles over the scope of the waiver could be expected to lie ahead. Patent litigators appreciate the expense, complexity and burden this collateral litigation can and does create.

Those who have had to give depositions in litigation concerning their freedom-to-practice opinions would probably unanimously agree that this experience is no day at the beach. In In re EchoStar (Fed. Cir. 2006), the court suggested, without expressly holding, that the scope of the waiver might even extend to communications with, and work product of, litigation counsel, regardless of whether opinion counsel and litigation counsel were different people.

Which brings us to the present.

The patent owner in In re Seagate Technology (Fed. Cir. Docket No. 830; 8/20/07) has done accused infringers a favor by trying to push things too far. After accused infringer Seagate asserted reliance on freedom-to-practice opinions, the patent owner aggressively pursued discovery of all communications concerning the matter between Seagate and any counsel, including litigation counsel. The district court ruled that the patent owner was entitled to the discovery. Seagate sought a writ of mandamus from the Federal Circuit, and the court en banc took the opportunity to review and effect a dramatic change of conditions.

After receiving a surge of amicus briefs, considering the original moorings and course of willful infringement jurisprudence, and concluding that it had reached an undesirable place, the Seagate court decided to chart an entirely new course for us. It expressly overruled Underwater Devices. Here is the new course of analysis for willfulness announced in Part I of the court’s opinion:

1) To establish willful infringement, as a threshold matter a patent owner 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;

2) The state of mind of the accused infringer is not relevant to this objective inquiry; and

3) The patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceedings) was either known or so obvious that it should have been known to the accused infringer.

After announcing this new analytical course, the Court cut us loose, stating, “We leave it to future cases to further develop the application of this standard.”

In Part II of its opinion in Seagate, the court after thoughtful consideration ruled that any waiver effected by assertion of reliance on a freedom-to-practice opinion generally should not extend to communications with litigation counsel. With the caveat that the holding is premised on the facts of the case in which opinion counsel and litigation counsel “operated separately and independently . . . at all times,” this is probably the less remarkable feature of the decision. Based on discomfort with a broader scope of waiver manifest in some district court opinions and the practical implications, the decision was anticipated by litigators in the wake of EchoStar.

The Court based its holding on the substantially differing functions of and issues facing opinion counsel and litigation counsel, and concern that allowing intrusive discovery of attorney-client communications and attorney work product of litigation counsel is of unlikely value since it is usually the infringer’s conduct prior to, not after commencement of litigation that is under scrutiny: When a complaint is first filed alleging willful infringement, it can only be referring to pre-litigation conduct.

Is the freedom-to-practice opinion still important? Try to parse the court’s statements. What appears to matter now are whether the patent owner’s case for infringement of a valid patent was pretty darn strong, viewed in hindsight after final adjudication, and whether the infringer knew or had reason to know of the strength of the case prior to litigation, i.e., without benefit of hindsight (i.e., at the time decisions to proceed or continue with the infringing conduct were being considered, prior to litigation). Hmmm.

The potential role of the freedom-to-practice opinion might now to be to support an argument that the infringer did not know or have reason to know of the risk that the case would be found to be strong after final adjudication. Those who want and are willing to pay for the insurance of a freedom-to-practice opinion when litigation looms on the horizon will probably still want to obtain one.

But the absence of a freedom-to-practice opinion would appear to be far less significant than it was before, unless some meaningful period of time prior to commencing litigation the patent owner presents the accused infringer with a detailed infringement analysis making a well-reasoned and solid demonstration of the strength of the case that proves to be prescient. The Seagate court expressly overruled Underwater Devices. Accordingly, if he wants to maximize his chances of a finding of willful infringement, the patent owner is well-advised to present a well-reasoned case to the accused infringer a meaningful period of time before launching litigation.

Having taken that step, the patent owner would be justified in arguing to the fact finder that he made it “known or so obvious that it should have been known” to the accused infringer that a strong case existed. Without having first taken that step, the patent owner would not seem to be well-situated to charge an accused infringer with willfulness for not obtaining a full-blown freedom-to-practice opinion. In other words, a casual accusation of infringement or general knowledge of potential coverage by a competitor’s patent would not appear to be sufficient to trigger an affirmative duty of care on the part of the accused infringer.

Well-reasoned freedom-to-practice opinions will continue to have their place outside the context and purposes of litigation. Clients need them to help them make decisions whether to invest in technology or engage in an activity, to avoid litigation, or to assess the strength of their positions in litigation — not just to defend themselves against charges of willfulness. Anticipating the possibility that they would be offered as evidence, patent attorneys started routinely making them very formal in organization, analysis and appearance after Underwater Devices. When litigation is anticipated, Seagate should not change that, nor should it change the attention that is paid to issues created when the same firm or attorney proposes to serve as both opinion counsel and litigation counsel.

However, in the event a case for infringement of a valid patent appears very strong, in hindsight after adjudication, any freedom-to-practice opinion asserted may come under even more intense scrutiny for competence and thoroughness before it will be accepted as good proof that a strong case was not known or obvious to the infringer. One wonders whether, absent an intervening change in substantive law, there can be reconcilable coexistence of a strong case for infringement of a valid patent, and a competent and thorough attorney opinion finding otherwise. In other words, opinion counsel and a disagreeing court can’t logically both reach legally sound and correct, substantially certain but disagreeing conclusions.

Regardless, it appears that Seagate signals a receding of the tide of willful infringement litigation. The decision appears to be intended by the court to make a willfulness case substantially more difficult to prove. In view of the complexity and high reversal rate on claim construction issues in patent infringement cases, how can it be argued in any but the simplest and clearest of cases (is there such a thing?) that an accused infringer knew or should have known of a strong case before litigation and adjudication? This would seem to require proof that the infringer was omniscient. Whether this logical conundrum was intended by the court or not, the effect will be to remove risk for accused infringers and shift some of the burden back to patent owners.

The Federal Circuit appears to think this is a good thing. Whether we think so will depend on whether we tend to sympathize with patent owners or with accused infringers.

With apologies for the strained attempt to maintain a nautical theme – Seagate Technology makes computer hard drives.

Today’s post comes from Guest Barista Bill Gallagher, a registered patent attorney in Frost Brown Todd’s Cincinnati office.