Proving Willful Infringement: In re Seagate Technology, LLC

Many complaints for patent infringement allege that a defendant's conduct is willful, justifying an award of enhanced damages. The Seagate Technology decision substantially increases the difficulty of proving willful infringement. In re Seagate Technology, LLC, 2007 WL 2358677 (Fed. Cir. 2007).

For many years, Federal Circuit precedent following Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983), placed on a potential infringer with actual notice of another's patent an affirmative duty to determine whether infringement is occurring. The affirmative duty included the duty to seek competent legal advice from counsel before starting the possibly infringing activity. If a defendant did not disclose an exculpatory counsel's opinion, Federal Circuit precedent allowed an adverse inference to be drawn, namely that no opinion had been obtained, or that the opinion was adverse. A party defending an allegation of willful infringement would thus face a difficult decision ' maintain the attorney/client privilege as to counsel's advice and opinions on infringement and validity and risk a finding that it had failed to exercise due care, or rely on the advice but waive privilege as to the opinion, the communications with opinion counsel, and that counsel's work product.

In 2004, the Federal Circuit reversed the rule allowing an adverse inference to be drawn from not producing an exculpatory opinion, recognizing the inordinate burden the rule placed on the attorney/client relationship. Nevertheless, in cases in which the defendant relied on advice of counsel, the scope of the waiver of privilege remained a problem and some district courts permitted discovery of all counsel's opinions and work product, not just those of opinion counsel.

The Seagate Technologies Decisions

In Seagate Technologies, the defendant relied on three opinions provided by counsel at three different times, all subsequent to the filing of the lawsuit. The opinions were from opinion counsel who operated separately and independently of Seagate's trial counsel at all times. Nevertheless, the district court ordered production of all communications between Seagate and its trial counsel on validity, infringement, and enforceability of the asserted patents, and trial counsel's entire work product. It also permitted the deposition of trial counsel.

The Federal Circuit, in a mandamus review of the discovery order, first addressed its test for willful infringement and whether the affirmative duty of due care standard comported with the Supreme Court's view of what constitutes willfulness in civil cases. In copyright infringement, under the Fair Credit Reporting Act and the Fair Labor Standards Act, the Supreme Court had equated willfulness with reckless disregard. Recognizing that the Underwater Devices duty of due care, 717 F.2d at 1389-90, more closely approximates a negligence standard than the Supreme Court's willfulness cases, which required something more reprehensible than mere negligence, the Federal Circuit overruled its existing test for willful infringement. The new test set out in Seagate Technologies required that a patentee show the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. Because this standard is objective, the state of mind of the infringer is not relevant to its determination. The requirement for proof by clear and convincing evidence applies to the objective test. In addition, the patentee must prove that the objectively defined risk was either known to, or should have been known to, the infringer.

The court gave little guidance as to how to determine whether conduct constituted reckless disregard of an objectively high likelihood of infringement, observing that while the term reckless is not 'self-defining,' it would leave to future cases the task of developing the application of the standard.

Answering a challenge from the patentee that it was improper to decide the test for willfulness in a mandamus proceeding about the scope of waiver of privilege and before the trial court had ruled on whether the defendant's actions were willful, the Federal Circuit noted that the correct test for willfulness affects the allowable scope of discovery because it determines what evidence is relevant.

Turning to the scope of the waiver, the Federal Circuit accepted that relying on the advice of opinion counsel necessarily requires a waiver of privilege as to all attorney/client communications with opinion counsel on the subject of the opinions and the work product of that counsel. Certainly, it would be unfair to allow the defendant to rely on exculpatory material from opinion counsel, while maintaining privilege as to communication in which that counsel expressed a more sanguine view of the defendant's liability. At issue, however, was the district court's ruling that the waiver extended to communications and work product of trial counsel, with whom opinion counsel had no connection. The Federal Circuit noted that the adversarial function of trial counsel, to prepare and implement litigation strategy after suit is filed, differs fundamentally from that of opinion counsel, charged with providing an objective assessment of the risk of infringement, allowing the client to make an informed business decision on whether to proceed with the possibly infringing acts. This difference in function avoids the sword and shield concerns discussed above that mandate the production of all communications with and the work product of opinion counsel. Thus, fairness does not require the waiver of privilege as to communication with trial counsel.

Moreover, in Hickman, the Supreme Court had recognized the high importance to the efficient operation of our adversarial legal system of protecting the confidentiality of trial counsel. Hickman v. Taylor, 329 U.S. 495, 510-11 (1947). Though Hickman focused on work product, not attorney/client communications, the Federal Circuit considered the same important interests were implicated in requiring disclosure of attorney/client communications.

Finally, the Federal Circuit noted that in most cases, willfulness turns on the infringer's conduct before suit is filed. If, as is so often the case, willfulness is alleged in the original complaint, the basis for it must necessarily exist, the court stated, at the time that complaint is filed. Communications with trial counsel after the litigation has started can have little relevance to the willfulness of the infringer's pre-filing conduct. Indeed, the Federal Circuit noted that in Seagate Technologies itself, the advice of opinion counsel could also be of little relevance because it was delivered after the lawsuit was filed.

The Federal Circuit found that similar considerations generally apply to shield work product of trial counsel from discovery, both in terms of production of documents and in terms of discovery of 'nontangible' work product by deposition.

The General Rule

The general rule, the court stated, is that asserting the advice of counsel defense and disclosing the advice of opinion counsel do not constitute waiver of the attorney/ client privilege for communications with trial counsel or of trial counsel work product immunity. The Federal Circuit was careful to note that this is a general rule and that in sufficiently exigent circumstances, broader waiver could be implied.

Although the court justified changing the test for willfulness in the context of this mandamus proceeding because of its effect on the proper scope of discovery, it is not obvious that the decision to exclude discovery of trial counsel communications and work product from discovery would have been different using the Under- water Devices test. The three justifications for this decision ' namely, the different functions performed by opinion counsel and trial counsel, the high importance attached to attorney/client confidence in the context of litigation, and the timing of trial counsel's communications ' would appear equally applicable under the old test. Perhaps, as Judge Pauline Newman stated in her concurring opinion, the court believed that the threat of enhanced damages had been too great a weapon to patentees. Thus, In re Seagate Technologies can be considered as a further retreat from the Federal Circuit's early jurisprudence that treated patents as an endangered species in need of protection from the disapproval of the trial courts. If so, it joins other recent Supreme Court decisions, such as MedImmune, Inc. v. Genentech, Inc., 127 S.Ct. 764 (2007), KSR Int'l Co. v. Teleflex Inc., 127 S.Ct. 1727 (2007), and eBay Inc. v. MercExchange, LLC, 126 S.Ct. 1837 (2006) and the Federal Circuit's decision in In re Echostar Commc'ns Corp., 448 F.3d 1294 (Fed. Cir. 2006) in shifting the balance of power away from patentees.

The en banc opinion was authored by Judge Haldane Robert Mayer and joined by all the judges of the court except for Chief Judge Paul R. Michel and Judge Kimberly Moore who took no part in the consideration of the case. Judge Arthur J. Gajarsa wrote a concurring opinion, in which Judge Newman joined, questioning the court's view that a finding of willfulness is a necessary precondition for the award of enhanced recovery under '284 of the Patent Act.

Judge Gajarsa argued that the plain meaning of '284 of the Patent Act requires that the trial court be allowed to award enhanced damages at its discretion and that a finding of willfulness should not be a precondition for exercising that discretion in favor of the patentee. While enhanced damages may be appropriate under a deterrence theory in the case of willful infringement, Judge Gajarsa argued that other 'circumstances of the case' can also justify enhancing the patentee's monetary recovery. For example, enhancement may be justified where the patentee cannot prove the extent of its damages, particularly if this results from absence of records of the defendant's actions.

Judge Gajarsa finds support for his position in a Supreme Court decision that held that it was error to require a bad-faith finding as a precondition for the recovery of pre-judgment interest. General Motors Corp. v. Devex Corp., 461 U.S. 648, 653 (1983). The Supreme Court noted that while an award of attorneys' fees is expressly limited to 'exceptional' cases, 35 U.S.C. '285, no such limitation is found in the Patent Act's language allowing the recovery of pre-judgment interest. 35 U.S.C. '284. Judge Gajarsa sees no reason for treating enhanced damages, also in '284, differently from pre-judgment interest.

Judge Newman, in her own concurring opinion, expressed a concern that the new standard for willfulness could be thought to allow infringers who acted with intentional disregard to escape an award of enhanced damages and advocated that the standard by which an infringer's conduct be judged should be that of 'fair commerce, including reasonableness of the actions taken in the particular circumstances.' In a footnote, the court's opinion had expressed the view that 'standards of commerce' were likely to be among the factors considered in a court's determination of willfulness under the new test.

Additional Guidance

Practitioners looking for additional guidance as to what will constitute reckless disregard in the context of patent infringement might look to Safeco Insurance Co. v. Burr, No. 06-84 (S.Ct. June 4, 2007), the Supreme Court case relied on by the court. In Safeco, the Supreme Court held that although Safeco had wrongly construed its statutory duty under the Fair Credit Reporting Act, its interpretation was not unreasonable, and indeed had found favor with the district judge. A patent defendant who could point to a plausible interpretation of the claims that excluded the accused product, or could plausibly argue that new prior art rendered the claims obvious, might well avoid a contention that it acted with reckless disregard. If the standard, even in the context of jury instructions, is an objective one, the focus will be more on the reasonableness of the defenses known at the time the infringer becomes aware of the patent and its relevance to its own activities than on the procedures followed in obtaining and relying on opinion counsel's advice and the formality and comprehensiveness of the advice.

John M. Cone is an attorney at Hitchcock Evert LLP, specializing in intellectual property. He can be contacted at [email protected].

Many complaints for patent infringement allege that a defendant's conduct is willful, justifying an award of enhanced damages. The Seagate Technology decision substantially increases the difficulty of proving willful infringement. In re Seagate Technology, LLC, 2007 WL 2358677 (Fed. Cir. 2007).

For many years, Federal Circuit precedent following Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983), placed on a potential infringer with actual notice of another's patent an affirmative duty to determine whether infringement is occurring. The affirmative duty included the duty to seek competent legal advice from counsel before starting the possibly infringing activity. If a defendant did not disclose an exculpatory counsel's opinion, Federal Circuit precedent allowed an adverse inference to be drawn, namely that no opinion had been obtained, or that the opinion was adverse. A party defending an allegation of willful infringement would thus face a difficult decision ' maintain the attorney/client privilege as to counsel's advice and opinions on infringement and validity and risk a finding that it had failed to exercise due care, or rely on the advice but waive privilege as to the opinion, the communications with opinion counsel, and that counsel's work product.

In 2004, the Federal Circuit reversed the rule allowing an adverse inference to be drawn from not producing an exculpatory opinion, recognizing the inordinate burden the rule placed on the attorney/client relationship. Nevertheless, in cases in which the defendant relied on advice of counsel, the scope of the waiver of privilege remained a problem and some district courts permitted discovery of all counsel's opinions and work product, not just those of opinion counsel.

The Seagate Technologies Decisions

In Seagate Technologies, the defendant relied on three opinions provided by counsel at three different times, all subsequent to the filing of the lawsuit. The opinions were from opinion counsel who operated separately and independently of Seagate's trial counsel at all times. Nevertheless, the district court ordered production of all communications between Seagate and its trial counsel on validity, infringement, and enforceability of the asserted patents, and trial counsel's entire work product. It also permitted the deposition of trial counsel.

The Federal Circuit, in a mandamus review of the discovery order, first addressed its test for willful infringement and whether the affirmative duty of due care standard comported with the Supreme Court's view of what constitutes willfulness in civil cases. In copyright infringement, under the Fair Credit Reporting Act and the Fair Labor Standards Act, the Supreme Court had equated willfulness with reckless disregard. Recognizing that the Underwater Devices duty of due care, 717 F.2d at 1389-90, more closely approximates a negligence standard than the Supreme Court's willfulness cases, which required something more reprehensible than mere negligence, the Federal Circuit overruled its existing test for willful infringement. The new test set out in Seagate Technologies required that a patentee show the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. Because this standard is objective, the state of mind of the infringer is not relevant to its determination. The requirement for proof by clear and convincing evidence applies to the objective test. In addition, the patentee must prove that the objectively defined risk was either known to, or should have been known to, the infringer.

The court gave little guidance as to how to determine whether conduct constituted reckless disregard of an objectively high likelihood of infringement, observing that while the term reckless is not 'self-defining,' it would leave to future cases the task of developing the application of the standard.

Answering a challenge from the patentee that it was improper to decide the test for willfulness in a mandamus proceeding about the scope of waiver of privilege and before the trial court had ruled on whether the defendant's actions were willful, the Federal Circuit noted that the correct test for willfulness affects the allowable scope of discovery because it determines what evidence is relevant.

Turning to the scope of the waiver, the Federal Circuit accepted that relying on the advice of opinion counsel necessarily requires a waiver of privilege as to all attorney/client communications with opinion counsel on the subject of the opinions and the work product of that counsel. Certainly, it would be unfair to allow the defendant to rely on exculpatory material from opinion counsel, while maintaining privilege as to communication in which that counsel expressed a more sanguine view of the defendant's liability. At issue, however, was the district court's ruling that the waiver extended to communications and work product of trial counsel, with whom opinion counsel had no connection. The Federal Circuit noted that the adversarial function of trial counsel, to prepare and implement litigation strategy after suit is filed, differs fundamentally from that of opinion counsel, charged with providing an objective assessment of the risk of infringement, allowing the client to make an informed business decision on whether to proceed with the possibly infringing acts. This difference in function avoids the sword and shield concerns discussed above that mandate the production of all communications with and the work product of opinion counsel. Thus, fairness does not require the waiver of privilege as to communication with trial counsel.

Moreover, in Hickman, the Supreme Court had recognized the high importance to the efficient operation of our adversarial legal system of protecting the confidentiality of trial counsel. Hickman v. Taylor , 329 U.S. 495, 510-11 (1947). Though Hickman focused on work product, not attorney/client communications, the Federal Circuit considered the same important interests were implicated in requiring disclosure of attorney/client communications.

Finally, the Federal Circuit noted that in most cases, willfulness turns on the infringer's conduct before suit is filed. If, as is so often the case, willfulness is alleged in the original complaint, the basis for it must necessarily exist, the court stated, at the time that complaint is filed. Communications with trial counsel after the litigation has started can have little relevance to the willfulness of the infringer's pre-filing conduct. Indeed, the Federal Circuit noted that in Seagate Technologies itself, the advice of opinion counsel could also be of little relevance because it was delivered after the lawsuit was filed.

The Federal Circuit found that similar considerations generally apply to shield work product of trial counsel from discovery, both in terms of production of documents and in terms of discovery of 'nontangible' work product by deposition.

The General Rule

The general rule, the court stated, is that asserting the advice of counsel defense and disclosing the advice of opinion counsel do not constitute waiver of the attorney/ client privilege for communications with trial counsel or of trial counsel work product immunity. The Federal Circuit was careful to note that this is a general rule and that in sufficiently exigent circumstances, broader waiver could be implied.

Although the court justified changing the test for willfulness in the context of this mandamus proceeding because of its effect on the proper scope of discovery, it is not obvious that the decision to exclude discovery of trial counsel communications and work product from discovery would have been different using the Under- water Devices test. The three justifications for this decision ' namely, the different functions performed by opinion counsel and trial counsel, the high importance attached to attorney/client confidence in the context of litigation, and the timing of trial counsel's communications ' would appear equally applicable under the old test. Perhaps, as Judge Pauline Newman stated in her concurring opinion, the court believed that the threat of enhanced damages had been too great a weapon to patentees. Thus, In re Seagate Technologies can be considered as a further retreat from the Federal Circuit's early jurisprudence that treated patents as an endangered species in need of protection from the disapproval of the trial courts. If so, it joins other recent Supreme Court decisions, such as MedImmune, Inc. v. Genentech, Inc., 127 S.Ct. 764 (2007), KSR Int'l Co. v. Teleflex Inc., 127 S.Ct. 1727 (2007), and eBay Inc. v. MercExchange, LLC, 126 S.Ct. 1837 (2006) and the Federal Circuit's decision in In re Echostar Commc'ns Corp., 448 F.3d 1294 (Fed. Cir. 2006) in shifting the balance of power away from patentees.

The en banc opinion was authored by Judge Haldane Robert Mayer and joined by all the judges of the court except for Chief Judge Paul R. Michel and Judge Kimberly Moore who took no part in the consideration of the case. Judge Arthur J. Gajarsa wrote a concurring opinion, in which Judge Newman joined, questioning the court's view that a finding of willfulness is a necessary precondition for the award of enhanced recovery under '284 of the Patent Act.

Judge Gajarsa argued that the plain meaning of '284 of the Patent Act requires that the trial court be allowed to award enhanced damages at its discretion and that a finding of willfulness should not be a precondition for exercising that discretion in favor of the patentee. While enhanced damages may be appropriate under a deterrence theory in the case of willful infringement, Judge Gajarsa argued that other 'circumstances of the case' can also justify enhancing the patentee's monetary recovery. For example, enhancement may be justified where the patentee cannot prove the extent of its damages, particularly if this results from absence of records of the defendant's actions.

Judge Gajarsa finds support for his position in a Supreme Court decision that held that it was error to require a bad-faith finding as a precondition for the recovery of pre-judgment interest. General Motors Corp. v. Devex Corp. , 461 U.S. 648, 653 (1983). The Supreme Court noted that while an award of attorneys' fees is expressly limited to 'exceptional' cases, 35 U.S.C. '285, no such limitation is found in the Patent Act's language allowing the recovery of pre-judgment interest. 35 U.S.C. '284. Judge Gajarsa sees no reason for treating enhanced damages, also in '284, differently from pre-judgment interest.

Judge Newman, in her own concurring opinion, expressed a concern that the new standard for willfulness could be thought to allow infringers who acted with intentional disregard to escape an award of enhanced damages and advocated that the standard by which an infringer's conduct be judged should be that of 'fair commerce, including reasonableness of the actions taken in the particular circumstances.' In a footnote, the court's opinion had expressed the view that 'standards of commerce' were likely to be among the factors considered in a court's determination of willfulness under the new test.

Additional Guidance

Practitioners looking for additional guidance as to what will constitute reckless disregard in the context of patent infringement might look to Safeco Insurance Co. v. Burr, No. 06-84 (S.Ct. June 4, 2007), the Supreme Court case relied on by the court. In Safeco, the Supreme Court held that although Safeco had wrongly construed its statutory duty under the Fair Credit Reporting Act, its interpretation was not unreasonable, and indeed had found favor with the district judge. A patent defendant who could point to a plausible interpretation of the claims that excluded the accused product, or could plausibly argue that new prior art rendered the claims obvious, might well avoid a contention that it acted with reckless disregard. If the standard, even in the context of jury instructions, is an objective one, the focus will be more on the reasonableness of the defenses known at the time the infringer becomes aware of the patent and its relevance to its own activities than on the procedures followed in obtaining and relying on opinion counsel's advice and the formality and comprehensiveness of the advice.

John M. Cone is an attorney at Hitchcock Evert LLP, specializing in intellectual property. He can be contacted at [email protected].