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On September 13, 2004, the Court of Appeals for the Federal Circuit overruled decades-old precedent and reshaped the law relating to willful infringement. Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmBH v. Dana Corp., Nos. 01-1357, -1376, 02-1221, -1256, 2004 U.S. App. LEXIS 19185 (Fed. Cir. Sept. 13, 2004) (en banc). (Please click here to review the decision in pdf format.) The court abolished the inference that a legal opinion was or would have been unfavorable if an infringer does not produce exculpatory advice of counsel in response to a charge of willfulness. Thus, adverse inferences no longer are warranted where attorney-client privilege is asserted to protect advice of counsel or where advice of counsel was not obtained.

The Federal Circuit had signaled its willingness to reassess its willfulness jurisprudence by taking the extraordinary step of issuing an order sua sponte that solicited briefs by amici curiae (and the parties) addressing three questions relating to proving willful patent infringement. Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmBH v. Dana Corp., 344 F.3d 1336 (Fed. Cir. 2003) (en banc). The Federal Circuit also invited supplemental briefing from the parties regarding consequences to that case if the court should change the law. Id. As summarized in a MoFo Update in November 2003, 24 amici responded, nearly unanimously urging that the adverse inferences drawn from the failure to seek or produce an opinion of counsel in response to a charge of willfulness should be abolished. One of the amicus briefs urging abolition of the adverse inferences was submitted by Morrison & Foerster LLP on behalf of two of its clients (see our previous legal update, November 2003).

As discussed below, although the Federal Circuit made a decisive and major change in the law related to willfulness, it reaffirmed the duty of due care to avoid infringement. As a consequence, there are continuing questions regarding what actions will suffice to satisfy this duty and, in particular, whether it still may be advisable (albeit not effectively required) to obtain and produce exculpatory advice of competent counsel in response to a charge of willfulness.

The Court's Restatement Of Willfulness

The court expressed the view that the concept of "willful infringement" exists because "intentional disregard of legal rights warrants deterrence." Id. at *12. It restated its previous position that the statutory basis for willful infringement is found in 35 U.S.C. §§ 284 and 285, permitting courts to enhance damages up to three-fold and to award attorneys' fees. Id. at *12; but see id. at *33-34 (Dyk, J., dissenting) (arguing that there is no statutory basis for the due care requirement). The court reaffirmed that the "[d]etermination of willfulness is made on the totality of the circumstances" that "may include contributions of several factors," citing with approval those compiled at Rolls-Royce Ltd. v. GTE Valeron Corp., 800 F.2d 1101, 1110 (Fed. Cir. 1986) and Read Corp. v. Portec, Inc., 970 F.2d 816, 826-27 (Fed. Cir. 1992). Knorr-Bremse, 2004 U.S. App. LEXIS 19185 at *12-13.

 

Read, 970 F.2d at 827 (citations omitted).

Interestingly, the Read factors were directed to whether and to what extent damages should be enhanced after a finding of willfulness, not to a definition of willful conduct itself. 970 F.2d at 828 ("Inasmuch as a finding of willful infringement does not mandate enhancement of damages, the above factors taken together assist the trial court in evaluating the degree of the infringer's culpability and in determining whether to exercise its discretion to award enhanced damages and how much the damages should be increased.") The Knorr-Bremse court's citation of Read appears to blur that distinction. As stated elsewhere in the Knorr-Bremse opinion, the touchstone of willfulness is whether the infringer acted as a reasonably prudent business person to avoid infringing another's valid patent rights. Knorr-Bremse, 2004 U.S. App. LEXIS 19185 at *26-27. That is a test that goes to the state of mind of the infringer at the time it first learned of the patent or began infringing. In contrast, certain of the Read factors appear to be directed, at least in part, to other time periods (e.g., Nos. 3, 6, 7) and other concerns (e.g., No. 4).

Unlike Read, the section of Rolls-Royce cited by the court does not enumerate willfulness factors. See Rolls-Royce, 800 F.2d at 1110. Rolls-Royce emphasizes that there are no hard and fast per se rules for willfulness and that the district court should consider the totality of the circumstances in deciding whether the infringer had discharged its affirmative duty of due care to avoid infringement. Id.

Significantly, the court reaffirmed that "there continues to be 'an affirmative duty of due care to avoid infringement of the known patent rights of others....'" Id. at *22 (citation omitted); but see id. at *28-41 (Dyk, J., dissenting) (arguing that willfulness should require "reprehensible" conduct not merely a failure to exercise "due care"). The court thus arguably reaffirmed the principle that infringers may not simply ignore patents of which they are aware, hoping they will not be sued.

The court discussed the historical context giving rise to the Federal Circuit decisions permitting an adverse inference if an accused infringer failed to consult counsel or produce an exculpatory opinion of counsel in response to a charge of willfulness. Id. *12-16. It stressed as critical that, when it issued its earlier decisions in this area, there was "widespread disregard of patent rights... undermining the national innovation incentive." Id. at *13. The Federal Circuit concluded that there was "special justification" for overruling its previous adverse inference precedent now because the "'conceptual underpinnings' of this precedent . . . have significantly diminished in force." Id. at *16 (citation omitted).

As a consequence, the Federal Circuit held that "[t]he adverse inference that an opinion was or would have been unfavorable, flowing from the infringer's failure to obtain or produce an exculpatory opinion of counsel, is no longer warranted. Precedent authorizing such inference is overruled." Id.

We address below the questions that received en banc review in Knorr-Bremse, setting out the holdings and the court's reasoning in support of those holdings.

Question No. 1 For En Banc Review

When the attorney-client privilege and/or work product privilege is invoked by a defendant in an infringement suit, is it appropriate for the trier of fact to draw an adverse inference with respect to willful infringement?

The court held that the answer to this question is "no." Id. While "the duty to respect the law is undiminished, no adverse inference shall arise from invocation of the attorney-client privilege and/or work product privilege." Id. at *16-17. The Federal Circuit stressed the importance of the attorney-client privilege to our judicial system. Id. at *17-20. It observed that the inference that withheld opinions are unfavorable "can distort the attorney-client relationship, in derogation of the foundations of that relationship." Id. at *18. The court acknowledged that "the courts have declined to impose adverse inferences on invocation of the attorney-client privilege" in other areas of law, and "conclude[d] that a special rule affecting attorney-client relationships in patent cases is not warranted." Id. at *18-19.

The court clarified that "[a] defendant may of course choose to waive the privilege and produce the advice of counsel" but reiterated that "the assertion of attorney-client and/or work product privilege and the withholding of the advice of counsel shall no longer entail an adverse inference as to the nature of the advice." Id. at *19-20.

Question No. 2 For En Banc Review

When the defendant had not obtained legal advice, is it appropriate to draw an adverse inference with respect to willful patent infringement?

The court held that the answer to this question also is "no." Id. at *21. In particular, it held: "In tandem with our holding that it is inappropriate to draw an adverse inference that undisclosed legal advice for which attorney-client privilege was claimed was unfavorable, we also hold that it is inappropriate to draw a similar inference from failure to consult counsel." Id.

In reaching that result, the court focused on the burdens and costs of the previous effective requirement "for early and full study by counsel of every potentially adverse patent of which the defendant has knowledge." Id. It also was persuaded by the fact that "the issue has occasioned extensive satellite litigation, distorting the 'conceptual underpinnings'" of the previous Federal Circuit cases imposing the adverse inferences. Id. at *22.

Notably, the court emphasized with respect to this question that "there continues to be 'an affirmative duty of due care to avoid infringement of the known patent rights of others.'" Id. at *22 (citation omitted).

Question No. 3 For En Banc Review

"If the court concludes that the law should be changed, and the adverse inference withdrawn as applied to this case, what are the consequences for this case?"

The court vacated the finding of willful infringement and the award of attorneys fees, remanding with instructions for the district court to assess willfulness without the adverse inferences relating to the failure to produce or obtain advice of counsel. Id. at *22-26. It emphasized that "'there are no hard and fast per se rules' with respect to willfulness of infringement," but rather that various factors are to be weighed. Id. at *23 (citations omitted). In the Federal Circuit's view, "[b]ecause elimination of the adverse inference as drawn by the district court is a material change in the totality of the circumstances, a fresh weighing of the evidence is required to determine whether the defendants committed willful infringement." Id. at *24-25. This is notable because the factors as recited by the Federal Circuit all appear to be unfavorable to the defendants.

The court specifically declined to consider the question whether, as part of the totality of the circumstances with respect to willfulness, the jury can or should be told whether or not counsel was consulted. Id. at *25. While several amici had raised this question, it was not before the district court and not raised by this case. Id. This will be an important practical question at the trial level.

Question No. 4 For En Banc Review

Should the existence of a substantial defense to infringement be sufficient to defeat liability for willful infringement even if no legal advice has been secured?

The court held that the answer to this question also is "no." Id. at *26. In particular, it held that existence of a substantial defense to infringement is but one of several factors "to be considered among the totality of the circumstances." Id. at *26-27. The court stressed that the touchstone of the willfulness determination was "'whether a prudent person would have sound reason to believe that the patent was not infringed or was invalid or unenforceable, and would be so held if litigated.'" Id. (citation omitted). That determination is based on weighing several factors, each accorded the weight it warrants based on its strength in a particular case. Id. The Federal Circuit thus "decline[d] to adopt a per se rule." Id.

The Dissent

In the sole additional opinion, Judge Dyk dissented to the extent the majority opinion "may be read as reaffirming that 'where, as here, 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.'" Id. (citation omitted). The dissent argues that recent Supreme Court precedent "has required a finding of reprehensibility as a predicate to an award of punitive damages," id. at *36, and that enhanced damages under 35 U.S.C. § 284 "are a form of punitive damages," id. at 29. In contrast, the dissent argues, "a potential infringer's mere failure to engage in due care is not itself reprehensible conduct." Id. at 32. Observing that "[p]atent law is not an island separated from the main body of American jurisprudence," Judge Dyk concludes that "[t]he same requirement of reprehensibility restricts an award of enhanced damages in patent cases as in other cases." Id at 36.

What Does Knorr-Bremse Mean?

The Knorr-Bremse decision brings patent law better into alignment with other areas of the law by eliminating any adverse inference flowing from the failure to obtain advice of counsel or from the failure to produce an exculpatory opinion based on attorney-client privilege. Eliminating those adverse inferences while at the same time preserving the duty of due care to take reasonably prudent steps to avoid infringement raises the question, however, of what steps would be sufficient in the absence of exculpatory advice of counsel. This awaits further development in cases percolating up to the Federal Circuit.

One result of Knorr-Bremse may be a greater receptivity to noninfringement and invalidity analyses by technical personnel. Engineers, scientists, or other skilled artisans associated with an accused infringer arguably should be deemed capable of comparing patent claims with accused products or processes to assess infringement. After all, "[a] patent specification is directed to one of ordinary skill in the art." Wang Labs., Inc. v. Toshiba Corp., 993 F.2d 858, 866 (Fed. Cir. 1993). Thus, it is presumed that "a person experienced in the field of the invention would understand the scope of the subject matter that is patented when the claim[s] [are] read in conjunction with the rest of the specification." S3 Inc. v. nVIDIA Corp., 259 F.3d 1364, 1367 (Fed. Cir. 2001); 35 U.S.C. §§ 112, para. 2 & 282; see also Exxon Research & Eng'g Co. v. United States, 265 F.3d 1371, 1375 (Fed. Cir. 2001). A reasonably prudent business person arguably could form a reasonable, good faith belief of non-infringement based on such an analysis. See, e.g., Biotec Biologische Naturverpackungen GmbH v. Biocorp, Inc., 249 F.3d 1341, 1355-56 (Fed. Cir. 2001) (affirming finding of no willfulness where accused infringer relied solely on the non-infringement advice of "a world-renowned expert in the art").

Of course, the skilled artisan's opinion must be sufficient to instill a good faith, reasonable belief of noninfringement or invalidity. That may not always happen. Where the totality of the evidence adduced by an accused infringer is insufficient to establish reasonable good faith, willfulness may will be found even without the need of an adverse inference. See UMG Recordings v. MP3.com, Inc., No. 00 Civ 472 JSR, 2000 U.S. Dist. LEXIS 13293, *12-14 (S.D.N.Y. Sept. 6, 2000) (finding willful copyright infringement without adverse inference because "no credible evidence whatever" rebutted plaintiff's proof of willfulness).

Knorr-Bremse raises an important practical question: Is it still necessary to obtain exculpatory advice of counsel upon learning of another's patent that is uncomfortably close to what your company does? The short answer is "no, it's not necessary." The long answer is that it still may be prudent to obtain such advice and to rely on it at trial. First, until the Federal Circuit provides guidance as to what conduct will suffice to meet the duty of due care in the absence of opinion of counsel, there will be uncertainty as to what actions ultimately will be held sufficient to discharge that duty. Second, having a good opinion and a qualified witness may still be the best tactical defense to a charge of willfulness as juries may continue to be favorably impressed by such evidence.

Contrary to some initial reports in the intellectual property press, Knorr-Bremse does not obviate the complexities of relying on an opinion of counsel. Questions regarding the scope of the waiver of privilege attendant a decision to rely will still be hotly litigated, and the developed practice of relying on separate counsel for the opinion and for litigation probably will not change.

Accordingly, while Knorr-Bremse represents an alteration in the patent litigation landscape, the implications of the decision may not be as far-reaching as some had hoped.