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Federal Circuit Rethinks Willful-Infringement Standard

The Court of Appeals for the Federal Circuit heard oral arguments in June for In re Seagate Technology, a case that could change the direction of patent litigation in U.S. courts. The hearing was unusual because CAFC decided without prompting from the petitioner to hear the case en banc in response to petition for mandamus from Seagate. The CAFC seldom convenes en banc, and almost never does so without a petitioner's request.

More importantly, the court expanded the inquiry beyond the legal questions the petitioner posed--something courts avoid doing in most cases. Specifically, Seagate asked CAFC to overrule a New York district court's discovery order, which instructed Seagate to produce communications with trial counsel in a patent-infringement lawsuit, Convolve v. Seagate. But CAFC went further, asking whether the court should reconsider its 24-year-old due-care standard for finding willful infringement--which produced Seagate's privilege dilemma.

These circumstances, along with questions from the bench during oral arguments, suggest CAFC is developing a new approach to willful-infringement and enhanced-damages verdicts.

"Since we're sitting en banc, our precedent doesn't necessarily control," said Judge Haldane Robert Mayer. "The jurisprudence of this circuit in the privilege and waiver area looks like a piece of Swiss cheese. Wouldn't it be prudent for us to ... eliminate all those holes?"

The CAFC might scrap the due-care duty entirely or tweak the standard to relieve privilege-waiver pressure. Either way, the outcome will affect legal strategies in infringement lawsuits.

Scope of Waiver

When defendants are found liable for willful infringement, courts can award treble damages and attorneys' fees, creating a strong financial incentive for plaintiffs to add a charge of willfulness to infringement suits.

Such allegations also can put defendants at a strategic disadvantage in court. The CAFC's standard for proving willful infringement--established in Underwater Devices v. Morrison-Knudsen in 1983--imposes an affirmative duty of due care on defendants, requiring them to produce evidence to show they were careful to avoid infringing the plaintiff's patent. This duty opens a path for discovery that can benefit the plaintiff.

"It's a great way for plaintiffs to mine for internal documents they can put in front of a jury when trying to prove infringement," says Barbara Fiacco, a partner with Foley Hoag in Boston. "It becomes a fishing expedition."

To limit such abuses and reduce the risk of willfulness verdicts, manufacturers routinely obtain legal opinions from outside counsel for products that might resemble someone else's patented invention. Such opinions, which cost $10,000 or more to prepare, assert the products in question do not infringe on valid patents. Most are relegated to a file cabinet and used only if the manufacturer gets sued for willful infringement.

Since May 2006, however, such opinions have become more than just a legal cost. In the 2006 case In re Echostar, CAFC said the defendant asserting the opinion-of-counsel defense in TiVo v. Echostar must turn over communications and work product with outside attorneys that helped in-house counsel prepare the non-infringement opinion. In other words, CAFC expanded the potential scope of privilege waivers associated with the opinion-of-counsel defense.

"Echostar said if you rely on in-house counsel advice for the opinion, you've also waived outside-counsel advice," says Denise DeFranco, a partner with Finnegan Henderson. "After that decision, plaintiffs began arguing if the waiver extends to other opinion counsel, it should apply to trial counsel, because it's a subject-matter waiver."

Indeed, the plaintiffs in Convolve v. Seagate relied on Echostar to convince the district court they had a right to review communications with trial counsel, putting privilege on a collision course with the Underwater Devices standard.

"The plaintiffs in Seagate are pushing the bounds of Echostar," DeFranco says.

Willful v. Reprehensible

For In re Seagate, CAFC asked the parties and amici to address three questions, namely: whether an accused infringer who asserts the opinion-of-counsel defense waives privilege over relevant communications with trial counsel; how such waiver affects work-product immunity; and whether the court should reconsider the duty-of-care standard it established in Underwater Devices.

"The court is searching for bright-line rules that work, which is difficult considering all the fact patterns that can occur," Fiacco says. "The easiest line to draw is to say everything the opinion counsel said is discoverable and everything trial counsel said is not discoverable."

Such an approach, however, would leave some questions unanswered. For example, it would create a conflict for in-house counsel working on both infringement opinions and trial strategy. And it could allow defendants to cherry pick only favorable opinions, and conceal adverse evidence discussed with other counsel.

Thus the CAFC might take the more dramatic step of eliminating the duty of due care and redefining the standard for enhanced-damages awards. Comments from the bench suggest CAFC is uncomfortable with the apparent lack of statutory or Supreme Court authority supporting its due-care standard, and judges noted Supreme Court precedent establishes reprehensibility, not willfulness, as the threshold for enhanced damages.

Given the fundamental legal questions it poses, the next stop for Seagate likely will be the Supreme Court. But against the backdrop of recent landscape-shifting Supreme Court decisions in eBay v. MercExchange, Medimmune v. Genentech and KSR v. Teleflex, CAFC seems inclined to anticipate the High Court's constructionist leanings and re-draw the map on willful infringement.

"I think the duty of due care will be eliminated," Fiacco says. "As a result the situations in which you will need opinions will be narrowed."

Editor-at-Large

Michael T. Burr

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