Knorr-Bremse and the Potential Modification of the Adverse-Inference Rule

The near future may bring fundamental changes to patent practice in the United States. On Sept. 26, 2003, the Federal Circuit ordered, sua sponte, the en banc consideration of the Eastern District of Virginia's decision in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp, 344 F.3d 1336 (Fed. Cir. 2003). In its order, the court sought answers to questions that analyze its current precedent that authorizes the trier of fact to impose an adverse inference of willful patent infringement where accused infringers invoke the attorney-client privilege. On Feb. 5, 2004, the Federal Circuit heard arguments in the appeal. A decision is pending.

Since its adoption, the adverse-inference rule has raised concerns regarding an accused patent infringer's duty of care and the confidentiality and candor of the advice of counsel. Elimination or modification of the adverse-inference rule would significantly affect current opinion practices and litigation strategies given the potential for enhanced damage and attorneys' fee awards if willful infringement is found.

Patentees commonly allege willfulness in patent infringement actions. Proof of willful infringement requires a showing, by clear and convincing evidence, that the accused infringer had knowledge of the subject patent and failed to exercise due care to avoid infringement. A determination of willfulness depends on consideration of the “totality of the circumstances.” Graco, Inc. v. Binks Mfg. Co., 60 F.3d 785, 792 (Fed. Cir. 1995). The Federal Circuit has provided factors (referred to as the “Read factors”) for courts to weigh when considering whether infringing conduct is willful ' including the deliberate copying of ideas, the closeness of infringement and validity issues, and the reasonable reliance on the advice of counsel. Read Corp. v. Portec, Inc., 970 F.2d 816, 826 (Fed. Cir. 1992).

The first inquiry in a willfulness determination is whether the potential infringer had actual knowledge of the subject patent. Upon receipt of notice, the potential infringer has an affirmative duty to exercise due care to determine whether it is engaging in infringing activity. Underwater Devices Inc. v. Morrison-Knudson Co., Inc., 717 F.2d 1380, 1390 (Fed. Cir. 1983). The duty usually requires that the potential infringer, prior to engaging in any possible infringing activity, obtain competent legal advice concluding that the accused activities do not infringe the patent claims or that the patent is invalid. Failure to satisfy this duty of care may expose a potential infringer to a finding of willful infringement and a judgment imposing the award of enhanced damages and attorneys' fees.

The prospect that a court may find willful infringement is of great concern to accused infringers, particularly in view of the large damages and fees characteristic of patent litigation. As such, potential infringers routinely seek defenses that will shield themselves from findings of willfulness, including the reliance on opinions of counsel. Even if the advice of counsel turns out to be incorrect, it can still shield a finding of willfulness provided that the advice is competent. Ortho Pharmaceutical Corp. v. Smith, 959 F.2d 936, 944 (Fed. Cir. 1992). However, reliance on the advice of counsel as a defense to willful infringement waives privilege with respect to the subject matter covered in the opinion. Thus, materials that would ordinarily be protected under the attorney-client privilege are rendered discoverable. The rationale behind imposing a waiver is to provide the patentee with an opportunity to review the materials used to support the opinion or to determine if the accused infringer engaged in “opinion shopping.” In this respect, an accused infringer must decide to either assert the reliance defense and waive privilege or invoke the attorney-client privilege and face a possible finding of willful infringement.

The decision of whether to rely on the advice of counsel as a defense to willful infringement is the touchstone to the invocation of the adverse-inference rule. If an accused infringer fails to produce an exculpatory opinion of counsel, the fact finder may draw an adverse inference that the accused infringer either failed to obtain the advice of counsel or did so and was advised that its conduct infringed the subject patent. John Hopkins Univ. v. CellPro, Inc., 152 F.3d 1342, 1363-64 (Fed. Cir. 1998). Either inference demonstrates a failure to exercise due care, and supports a finding of willfulness. In essence, if an accused infringer fails to provide a competent opinion of counsel, the adverse-inference rule permits the trier of fact to infer that willful infringement has occurred.

Twenty-four entities filed Amicus briefs in response to the Federal Circuit's reconsideration of the adverse-inference rule. The briefs unanimously request that the rule be eliminated when a party invokes the attorney-client privilege. The following identifies common criticisms of the adverse-inference rule.

Opponents of the adverse-inference rule argue that the rule obviates the fundamental maxim underlying the attorney-client privilege – the public policy goal to encourage candid communication between attorneys and their clients. Opponents contend that requiring a party to waive the attorney-client privilege or face an adverse inference runs squarely counter to public policy that the privilege strives to serve.

One compelling factor for invoking the attorney-client privilege and braving a potential finding of willful infringement is the uncertain scope of the resulting waiver. Generally, when an accused infringer asserts the advice of counsel as a defense to willful infringement, a district court will order the accused to produce all materials that relate to the subject matter disclosed in the opinions, including communications between the client and its counsel. Steelcase, Inc. v. Haworth, Inc., 854 F. Supp. 1198 (W.D. Mich. 1997). However, while this is the norm, it is not absolute. District courts have sometimes allowed broad discovery of work product, including information never communicated to the client. See, e.g., Chiron Corp. v. Genentech, Inc., 179 F. Supp. 2d 1182, 1188-89 (E.D. Cal. 2001). Opponents of the adverse-inference rule argue that the absence of certainty puts both the sanctity of the privilege and the underlying goals it strives to achieve at risk.

Opponents of the adverse-inference rule note that the Federal Circuit is unique among federal appeals courts in permitting the drawing of an adverse inference from the invocation of the attorney-client privilege. Other courts have steadfastly refused to impose such an inference in non-patent contexts.

The adverse-inference rule prevents an accused infringer from selectively using the advice of counsel as a sword to show compliance with the standard of care and a shield to conceal an unfavorable opinion. Opponents, however, argue that the rule undermines this goal, forcing attorneys to prepare opinions with an eye toward litigation. As such, unfavorable opinions are rarely reduced to writing. Indeed, drawing an adverse inference that a withheld opinion contains unfavorable positions is unfounded. An accused infringer, armed with a favorable opinion, may nevertheless invoke the attorney-client privilege for purposes other than the existence of an unfavorable opinion. For example, a favorable opinion may contain confidential commercial information, trial strategies, or other tangentially related confidential information that may be discoverable depending on the court-determined scope of the waiver.

Opponents of the adverse-inference rule also argue that an opinion of counsel should not be required to defend against willful patent infringement. U.S. patent laws encourage persons to challenge the validity and enforceability of issued patents and to design around patented inventions. Opponents of the rule contend that the existence of a substantial defense alone should sufficiently defend against allegations of willfulness. Many corporations have highly skilled engineers and in-house counsel with the know-how to determine the scope of protection and validity of patents. Opponents argue that the adverse-inference rule incorrectly presumes that the accused infringer cannot interpret patent claims. Since claim construction and validity are viewed through the eyes of one skilled in the art, opponents argue that an accused infringer should not have to obtain the advice of counsel to defend against a willfulness allegation.

The Federal Circuit has suggested that trial courts bifurcate the issues of infringement and willfulness to prevent jury confusion and prejudice. However, the trial courts have been reluctant to stay discovery on willfulness since bifurcation risks empanelling a second jury. See, e.g., THK Am., Inc. v. Nippon Seiko K.K., 141 F.R.D. 463, 465 (N.D. Ill. 1991). Even if courts agreed to bifurcate patent matters, increased litigation expenses and judicial delay would be inevitable. Moreover, opponents contend that bifurcation would merely postpone the problems associated with forced waiver.

A fundamental goal of the U.S. patent system is to enable competitors to review and design around patented inventions to further innovation in the area. Opponents of the adverse-inference rule suggest that companies are reluctant to review patented technology as such review may trigger the duty to investigate and risk a finding of willful infringement of competitors. Thus, opponents contend that the adverse-inference rule undermines the goals of the patent system that are intended to preserve fundamental tenets of competition by encouraging the use of the patent system as a source of technical knowledge.

Another concern raised by opponents of the adverse-inference rule is the costs the rule triggers. Particularly, reliance on the opinion of counsel requires additional time and money on discovery to provide the parties an opportunity to attack or bolster the opinion. Moreover, in view of the disparate scope of waiver, potential infringers may engage separate opinion and trial counsel to safeguard litigation strategies from discovery. Opponents argue that the costs attributed to the duties imposed by the adverse-inference rule would be better spent on design-around measures. Thus, opponents argue that elimination of the adverse-inference rule would encourage innovation as companies could shift resources toward research and development rather than preventative investigations.

Conclusion

Elimination or modification of the adverse-inference rule would drastically change pre-litigation activities and trial strategies for patent practitioners and their clients that depend on the protections and defenses afforded under the U.S. patent system. While it is uncertain how the Federal Circuit will rule, the court's recent activities suggest that it might modify or abolish the adverse-inference rule in the Knorr-Bremse appeal. First, the court's sua sponte order for an en banc reconsideration of the adverse-inference rule hints that the rule might be modified since only an en banc ruling can overturn Federal Circuit precedent. Further, recent Federal Circuit decisions suggest that the court has been moving away from the rule. Recently, the court has softened its approach, holding that a failure to obtain advice of counsel is not determinative of willfulness. Moreover, Amici uniformly requested the court to abolish the rule when an accused infringer invokes the attorney-client privilege. A majority of the Amici also requested the court to eliminate imposition of the adverse inference where an accused infringer did not obtain the advice of counsel.

While recent Federal Circuit decisions and Amici point to the elimination of the rule, the tone of the February 2004 oral argument was less clear. Several judges seemed reluctant to change the precedent. However, comments at the oral argument suggest that the existence of a substantial defense, even absent an opinion of counsel, would be sufficient to defend against willfulness.

Indeed, the elimination or modification of the adverse-inference rule remains uncertain. Until there is further guidance from the Federal Circuit, patentees and their competitors must proceed with their commercial activities with a cautious eye toward the duties that may be triggered under the current system.

The near future may bring fundamental changes to patent practice in the United States. On Sept. 26, 2003, the Federal Circuit ordered, sua sponte , the en banc consideration of the Eastern District of Virginia's decision in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp , 344 F.3d 1336 (Fed. Cir. 2003). In its order, the court sought answers to questions that analyze its current precedent that authorizes the trier of fact to impose an adverse inference of willful patent infringement where accused infringers invoke the attorney-client privilege. On Feb. 5, 2004, the Federal Circuit heard arguments in the appeal. A decision is pending.

Since its adoption, the adverse-inference rule has raised concerns regarding an accused patent infringer's duty of care and the confidentiality and candor of the advice of counsel. Elimination or modification of the adverse-inference rule would significantly affect current opinion practices and litigation strategies given the potential for enhanced damage and attorneys' fee awards if willful infringement is found.

Patentees commonly allege willfulness in patent infringement actions. Proof of willful infringement requires a showing, by clear and convincing evidence, that the accused infringer had knowledge of the subject patent and failed to exercise due care to avoid infringement. A determination of willfulness depends on consideration of the “totality of the circumstances.” Graco, Inc. v. Binks Mfg . Co., 60 F.3d 785, 792 (Fed. Cir. 1995). The Federal Circuit has provided factors (referred to as the “Read factors”) for courts to weigh when considering whether infringing conduct is willful ' including the deliberate copying of ideas, the closeness of infringement and validity issues, and the reasonable reliance on the advice of counsel. Read Corp. v. Portec, Inc. , 970 F.2d 816, 826 (Fed. Cir. 1992).

The first inquiry in a willfulness determination is whether the potential infringer had actual knowledge of the subject patent. Upon receipt of notice, the potential infringer has an affirmative duty to exercise due care to determine whether it is engaging in infringing activity. Underwater Devices Inc. v. Morrison-Knudson Co., Inc., 717 F.2d 1380, 1390 (Fed. Cir. 1983). The duty usually requires that the potential infringer, prior to engaging in any possible infringing activity, obtain competent legal advice concluding that the accused activities do not infringe the patent claims or that the patent is invalid. Failure to satisfy this duty of care may expose a potential infringer to a finding of willful infringement and a judgment imposing the award of enhanced damages and attorneys' fees.

The prospect that a court may find willful infringement is of great concern to accused infringers, particularly in view of the large damages and fees characteristic of patent litigation. As such, potential infringers routinely seek defenses that will shield themselves from findings of willfulness, including the reliance on opinions of counsel. Even if the advice of counsel turns out to be incorrect, it can still shield a finding of willfulness provided that the advice is competent. Ortho Pharmaceutical Corp. v. Smith , 959 F.2d 936, 944 (Fed. Cir. 1992). However, reliance on the advice of counsel as a defense to willful infringement waives privilege with respect to the subject matter covered in the opinion. Thus, materials that would ordinarily be protected under the attorney-client privilege are rendered discoverable. The rationale behind imposing a waiver is to provide the patentee with an opportunity to review the materials used to support the opinion or to determine if the accused infringer engaged in “opinion shopping.” In this respect, an accused infringer must decide to either assert the reliance defense and waive privilege or invoke the attorney-client privilege and face a possible finding of willful infringement.

The decision of whether to rely on the advice of counsel as a defense to willful infringement is the touchstone to the invocation of the adverse-inference rule. If an accused infringer fails to produce an exculpatory opinion of counsel, the fact finder may draw an adverse inference that the accused infringer either failed to obtain the advice of counsel or did so and was advised that its conduct infringed the subject patent. John Hopkins Univ. v. CellPro, Inc., 152 F.3d 1342, 1363-64 (Fed. Cir. 1998). Either inference demonstrates a failure to exercise due care, and supports a finding of willfulness. In essence, if an accused infringer fails to provide a competent opinion of counsel, the adverse-inference rule permits the trier of fact to infer that willful infringement has occurred.

Twenty-four entities filed Amicus briefs in response to the Federal Circuit's reconsideration of the adverse-inference rule. The briefs unanimously request that the rule be eliminated when a party invokes the attorney-client privilege. The following identifies common criticisms of the adverse-inference rule.

Opponents of the adverse-inference rule argue that the rule obviates the fundamental maxim underlying the attorney-client privilege – the public policy goal to encourage candid communication between attorneys and their clients. Opponents contend that requiring a party to waive the attorney-client privilege or face an adverse inference runs squarely counter to public policy that the privilege strives to serve.

One compelling factor for invoking the attorney-client privilege and braving a potential finding of willful infringement is the uncertain scope of the resulting waiver. Generally, when an accused infringer asserts the advice of counsel as a defense to willful infringement, a district court will order the accused to produce all materials that relate to the subject matter disclosed in the opinions, including communications between the client and its counsel. Steelcase, Inc. v. Haworth, Inc. , 854 F. Supp. 1198 (W.D. Mich. 1997). However, while this is the norm, it is not absolute. District courts have sometimes allowed broad discovery of work product, including information never communicated to the client. See, e.g., Chiron Corp. v. Genentech, Inc., 179 F. Supp. 2d 1182, 1188-89 (E.D. Cal. 2001). Opponents of the adverse-inference rule argue that the absence of certainty puts both the sanctity of the privilege and the underlying goals it strives to achieve at risk.

Opponents of the adverse-inference rule note that the Federal Circuit is unique among federal appeals courts in permitting the drawing of an adverse inference from the invocation of the attorney-client privilege. Other courts have steadfastly refused to impose such an inference in non-patent contexts.

The adverse-inference rule prevents an accused infringer from selectively using the advice of counsel as a sword to show compliance with the standard of care and a shield to conceal an unfavorable opinion. Opponents, however, argue that the rule undermines this goal, forcing attorneys to prepare opinions with an eye toward litigation. As such, unfavorable opinions are rarely reduced to writing. Indeed, drawing an adverse inference that a withheld opinion contains unfavorable positions is unfounded. An accused infringer, armed with a favorable opinion, may nevertheless invoke the attorney-client privilege for purposes other than the existence of an unfavorable opinion. For example, a favorable opinion may contain confidential commercial information, trial strategies, or other tangentially related confidential information that may be discoverable depending on the court-determined scope of the waiver.

Opponents of the adverse-inference rule also argue that an opinion of counsel should not be required to defend against willful patent infringement. U.S. patent laws encourage persons to challenge the validity and enforceability of issued patents and to design around patented inventions. Opponents of the rule contend that the existence of a substantial defense alone should sufficiently defend against allegations of willfulness. Many corporations have highly skilled engineers and in-house counsel with the know-how to determine the scope of protection and validity of patents. Opponents argue that the adverse-inference rule incorrectly presumes that the accused infringer cannot interpret patent claims. Since claim construction and validity are viewed through the eyes of one skilled in the art, opponents argue that an accused infringer should not have to obtain the advice of counsel to defend against a willfulness allegation.

The Federal Circuit has suggested that trial courts bifurcate the issues of infringement and willfulness to prevent jury confusion and prejudice. However, the trial courts have been reluctant to stay discovery on willfulness since bifurcation risks empanelling a second jury. See, e.g., THK Am., Inc. v. Nippon Seiko K.K., 141 F.R.D. 463, 465 (N.D. Ill. 1991). Even if courts agreed to bifurcate patent matters, increased litigation expenses and judicial delay would be inevitable. Moreover, opponents contend that bifurcation would merely postpone the problems associated with forced waiver.

A fundamental goal of the U.S. patent system is to enable competitors to review and design around patented inventions to further innovation in the area. Opponents of the adverse-inference rule suggest that companies are reluctant to review patented technology as such review may trigger the duty to investigate and risk a finding of willful infringement of competitors. Thus, opponents contend that the adverse-inference rule undermines the goals of the patent system that are intended to preserve fundamental tenets of competition by encouraging the use of the patent system as a source of technical knowledge.

Another concern raised by opponents of the adverse-inference rule is the costs the rule triggers. Particularly, reliance on the opinion of counsel requires additional time and money on discovery to provide the parties an opportunity to attack or bolster the opinion. Moreover, in view of the disparate scope of waiver, potential infringers may engage separate opinion and trial counsel to safeguard litigation strategies from discovery. Opponents argue that the costs attributed to the duties imposed by the adverse-inference rule would be better spent on design-around measures. Thus, opponents argue that elimination of the adverse-inference rule would encourage innovation as companies could shift resources toward research and development rather than preventative investigations.

Conclusion

Elimination or modification of the adverse-inference rule would drastically change pre-litigation activities and trial strategies for patent practitioners and their clients that depend on the protections and defenses afforded under the U.S. patent system. While it is uncertain how the Federal Circuit will rule, the court's recent activities suggest that it might modify or abolish the adverse-inference rule in the Knorr-Bremse appeal. First, the court's sua sponte order for an en banc reconsideration of the adverse-inference rule hints that the rule might be modified since only an en banc ruling can overturn Federal Circuit precedent. Further, recent Federal Circuit decisions suggest that the court has been moving away from the rule. Recently, the court has softened its approach, holding that a failure to obtain advice of counsel is not determinative of willfulness. Moreover, Amici uniformly requested the court to abolish the rule when an accused infringer invokes the attorney-client privilege. A majority of the Amici also requested the court to eliminate imposition of the adverse inference where an accused infringer did not obtain the advice of counsel.

While recent Federal Circuit decisions and Amici point to the elimination of the rule, the tone of the February 2004 oral argument was less clear. Several judges seemed reluctant to change the precedent. However, comments at the oral argument suggest that the existence of a substantial defense, even absent an opinion of counsel, would be sufficient to defend against willfulness.

Indeed, the elimination or modification of the adverse-inference rule remains uncertain. Until there is further guidance from the Federal Circuit, patentees and their competitors must proceed with their commercial activities with a cautious eye toward the duties that may be triggered under the current system.