An Analysis of Knorr-Bremse

It has long been held that a good faith reliance on timely and competent advice of counsel can negate a charge of willful patent infringement. Such advice of counsel can be used to potentially shield an infringer from having to pay enhanced damages of up to three times the damages under 35 U.S.C. '284 and/or the patentee's attorneys' fees under 35 U.S.C. '285. Similarly, a defendant's failure to obtain advice of counsel until after the company commenced its infringing activities would be evidence of willful infringement. Underwater Devices Incorporated v. Morrison-Knudsen Company, 717 F.2d 1380, 1390 (Fed. Cir. 1983). The practical application of this rule has been fraught with difficulty, however, since assertion of an opinion of counsel as a defense to a charge of willfulness typically involves a waiver of attorney-client privilege as to communications surrounding the opinion. The tension created by this dynamic was exacerbated by an adverse inference that an opinion of counsel was unfavorable if an accused infringer refused to waive privilege and disclose an opinion of counsel in defense of a willfulness charge. Kloster Speedsteel AB v. Crucible, Inc., 793 F.2d 1565, 1580 (Fed. Cir. 1986). The Court of Appeals for the Federal Circuit in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GMBH v. Dana Corp., 2004 U.S. App. LEXIS 19185 (Fed. Cir. 2004) (en banc) abolished the adverse inference rule, but also reaffirmed that one is under a duty of care to avoid infringement.

Thus, under the adverse inference rule, parties that failed to proffer an opinion letter at trial could run the risk of having the court instruct a jury that it could infer that the infringement was willful or wanton. To avoid this adverse inference, an alleged infringer could assert that it relied on the advice of counsel, but in raising this defense, a waiver of the attorney-client privilege would be triggered. Thus, the affirmative duty of care requirement and its enforcement by the adverse inference rule were in tension with the attorney-client privilege and work product immunity.

The recent decision in Knorr-Bremse resolved this tension by holding that adverse inferences are no longer warranted where attorney-client privilege is asserted to protect advice of counsel or where advice of counsel was not obtained. The Federal Circuit, however, reaffirmed the duty of care to avoid infringement. As a consequence, questions remain as to what actions will be sufficient to satisfy this duty of care, and particularly, whether obtaining and producing exculpatory advice from competent counsel, although effectively not required, is nonetheless advisable.

Background of Knorr-Bremse

In Knorr-Bremse, the plaintiff, Knorr-Bremse, a German Corporation, sued two defendants, Dana Corporation and Haldex Brake Products for alleged infringement of a patent on air brakes. At trial, Haldex told the court that it had consulted European and U.S. counsel concerning Knorr-Bremse's patents, but declined to produce any legal opinion or to disclose the advice received, asserting the attorney-client privilege. See Knorr-Bremse at *10. Dana, on the other hand, stated that it had not itself consulted counsel, but instead had relied on Haldex. See id. By applying Federal Circuit precedent, derived from cases such as Kloster Speedsteel, the district court found that “it is reasonable to conclude that such opinions were unfavorable.” The district court went on to conclude that under the totality of the circumstances, the defendants' use amounted to willful infringement of the plaintiff's patent. Based on the finding of willful infringement, the court awarded Knorr-Bremse its attorneys' fees. See id. at *10-11.

Given the importance of the adverse inference issue in this case, the Federal Circuit heard the appeal en banc. The en banc opinion began with a restatement of the court's law on willfulness. The court endorsed the view that “willful infringement” exists because “intentional disregard of legal rights warrants deterrence.” Id. at *12. The court reaffirmed that the “[d]etermination of willfulness is made on the totality of the circumstances” which may include contributions of several factors,” citing with approval the factors 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). Id. at *12-13.

The court then reviewed the historical development of Federal Circuit decisions that gave rise to 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. In discussing its earlier decisions, the court noted that earlier developments in the law of willful infringement were made at a time when widespread disregard of patent rights was undermining national innovation. See id. at *13. However, the Federal Circuit concluded that the “conceptual underpinnings” of the adverse inference precedent “have significantly diminished in force.” As a consequence, the Federal Circuit was now holding 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. at *16.

Four Questions for En Banc Review

Prior to arriving at its decision, the court issued an en banc order requesting the parties to answer four questions in their briefs.

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. See 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: “[i]n 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. See 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. See id. at *25. While several amici had raised this question, it was not before the district court and not raised by this case. See 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. See id. The Federal Circuit thus “decline[d] to adopt a per se rule.” Id.

Thus, 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, the Federal Circuit's decision in Knorr-Bremse brings patent law into better harmony with other areas of the law. However, by retaining the duty of care to avoid infringing known patents of others, this decision leaves open the question of what steps, in the absence of exculpatory advice of counsel, would be sufficient to satisfy this duty. Cases making their way up to the Federal Circuit will shed light on this question in the future.

Judge Dyk's Dissent

While concurring with the majority's opinion with respect to the elimination of an adverse inference from an infringer's failure to disclose or obtain an opinion of counsel, Judge Timothy B. Dyk disagreed with the majority's affirmation of the due care standard as quoted from Underwater Devices. In particular, Judge Dyk argued that “enhanced damages” under Section 284 of the Patent Act are in fact “punitive” damages. See id. at *29. Recent Supreme Court precedent has required a threshold finding of “reprehensible” conduct before punitive damages can be awarded. By equating enhanced damages with punitive damages and arguing that “a potential infringer's mere failure to engage in due care is not itself reprehensible conduct,” Judge Dyk viewed the due care standard in patent law as inconsistent with the Supreme Court's punitive damage case law. See id. at *29. Observing that “[p]atent law is not an island separated from the main body of American jurisprudence,” Judge Dyk concluded that “[t]he same requirement of reprehensibility restricts an award of enhanced damages in patent as in other cases.” Id. at *36.

Practical Considerations

Thus, one is left with the practical question of under what circumstances it is still prudent after Knorr-Bremse to obtain an exculpatory opinion of counsel upon learning of another's potentially related patent. Knorr-Bremse says this is not strictly required. However, it may still be helpful 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. Thus, although Knorr-Bremse represents a significant change in precedent in the law of willful infringement, its practical effect will continue to evolve as future decisions address the efficacy of alternative grounds to meet the duty of due care, short of a full-fledged opinion of counsel.

It has long been held that a good faith reliance on timely and competent advice of counsel can negate a charge of willful patent infringement. Such advice of counsel can be used to potentially shield an infringer from having to pay enhanced damages of up to three times the damages under 35 U.S.C. '284 and/or the patentee's attorneys' fees under 35 U.S.C. '285. Similarly, a defendant's failure to obtain advice of counsel until after the company commenced its infringing activities would be evidence of willful infringement. Underwater Devices Incorporated v. Morrison-Knudsen Company , 717 F.2d 1380, 1390 (Fed. Cir. 1983). The practical application of this rule has been fraught with difficulty, however, since assertion of an opinion of counsel as a defense to a charge of willfulness typically involves a waiver of attorney-client privilege as to communications surrounding the opinion. The tension created by this dynamic was exacerbated by an adverse inference that an opinion of counsel was unfavorable if an accused infringer refused to waive privilege and disclose an opinion of counsel in defense of a willfulness charge. Kloster Speedsteel AB v. Crucible, Inc., 793 F.2d 1565, 1580 (Fed. Cir. 1986). The Court of Appeals for the Federal Circuit in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GMBH v. Dana Corp., 2004 U.S. App. LEXIS 19185 (Fed. Cir. 2004) (en banc) abolished the adverse inference rule, but also reaffirmed that one is under a duty of care to avoid infringement.

Thus, under the adverse inference rule, parties that failed to proffer an opinion letter at trial could run the risk of having the court instruct a jury that it could infer that the infringement was willful or wanton. To avoid this adverse inference, an alleged infringer could assert that it relied on the advice of counsel, but in raising this defense, a waiver of the attorney-client privilege would be triggered. Thus, the affirmative duty of care requirement and its enforcement by the adverse inference rule were in tension with the attorney-client privilege and work product immunity.

The recent decision in Knorr-Bremse resolved this tension by holding that adverse inferences are no longer warranted where attorney-client privilege is asserted to protect advice of counsel or where advice of counsel was not obtained. The Federal Circuit, however, reaffirmed the duty of care to avoid infringement. As a consequence, questions remain as to what actions will be sufficient to satisfy this duty of care, and particularly, whether obtaining and producing exculpatory advice from competent counsel, although effectively not required, is nonetheless advisable.

Background of Knorr-Bremse

In Knorr-Bremse, the plaintiff, Knorr-Bremse, a German Corporation, sued two defendants, Dana Corporation and Haldex Brake Products for alleged infringement of a patent on air brakes. At trial, Haldex told the court that it had consulted European and U.S. counsel concerning Knorr-Bremse's patents, but declined to produce any legal opinion or to disclose the advice received, asserting the attorney-client privilege. See Knorr-Bremse at *10. Dana, on the other hand, stated that it had not itself consulted counsel, but instead had relied on Haldex. See id. By applying Federal Circuit precedent, derived from cases such as Kloster Speedsteel, the district court found that “it is reasonable to conclude that such opinions were unfavorable.” The district court went on to conclude that under the totality of the circumstances, the defendants' use amounted to willful infringement of the plaintiff's patent. Based on the finding of willful infringement, the court awarded Knorr-Bremse its attorneys' fees. See id. at *10-11.

Given the importance of the adverse inference issue in this case, the Federal Circuit heard the appeal en banc. The en banc opinion began with a restatement of the court's law on willfulness. The court endorsed the view that “willful infringement” exists because “intentional disregard of legal rights warrants deterrence.” Id. at *12. The court reaffirmed that the “[d]etermination of willfulness is made on the totality of the circumstances” which may include contributions of several factors,” citing with approval the factors 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). Id. at *12-13.

The court then reviewed the historical development of Federal Circuit decisions that gave rise to 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. In discussing its earlier decisions, the court noted that earlier developments in the law of willful infringement were made at a time when widespread disregard of patent rights was undermining national innovation. See id. at *13. However, the Federal Circuit concluded that the “conceptual underpinnings” of the adverse inference precedent “have significantly diminished in force.” As a consequence, the Federal Circuit was now holding 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. at *16.

Four Questions for En Banc Review

Prior to arriving at its decision, the court issued an en banc order requesting the parties to answer four questions in their briefs.

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. See 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: “[i]n 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. See 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. See id. at *25. While several amici had raised this question, it was not before the district court and not raised by this case. See 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. See id. The Federal Circuit thus “decline[d] to adopt a per se rule.” Id.

Thus, 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, the Federal Circuit's decision in Knorr-Bremse brings patent law into better harmony with other areas of the law. However, by retaining the duty of care to avoid infringing known patents of others, this decision leaves open the question of what steps, in the absence of exculpatory advice of counsel, would be sufficient to satisfy this duty. Cases making their way up to the Federal Circuit will shed light on this question in the future.

Judge Dyk's Dissent

While concurring with the majority's opinion with respect to the elimination of an adverse inference from an infringer's failure to disclose or obtain an opinion of counsel, Judge Timothy B. Dyk disagreed with the majority's affirmation of the due care standard as quoted from Underwater Devices. In particular, Judge Dyk argued that “enhanced damages” under Section 284 of the Patent Act are in fact “punitive” damages. See id. at *29. Recent Supreme Court precedent has required a threshold finding of “reprehensible” conduct before punitive damages can be awarded. By equating enhanced damages with punitive damages and arguing that “a potential infringer's mere failure to engage in due care is not itself reprehensible conduct,” Judge Dyk viewed the due care standard in patent law as inconsistent with the Supreme Court's punitive damage case law. See id. at *29. Observing that “[p]atent law is not an island separated from the main body of American jurisprudence,” Judge Dyk concluded that “[t]he same requirement of reprehensibility restricts an award of enhanced damages in patent as in other cases.” Id. at *36.

Practical Considerations

Thus, one is left with the practical question of under what circumstances it is still prudent after Knorr-Bremse to obtain an exculpatory opinion of counsel upon learning of another's potentially related patent. Knorr-Bremse says this is not strictly required. However, it may still be helpful 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. Thus, although Knorr-Bremse represents a significant change in precedent in the law of willful infringement, its practical effect will continue to evolve as future decisions address the efficacy of alternative grounds to meet the duty of due care, short of a full-fledged opinion of counsel.