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Sea Change

For the past several years MIT and its licensee, Convolve Inc., have been slogging it out in court with one of the world's biggest computer disc makers--Seagate Technology--for allegedly infringing on three MIT patents for quieter and more energy-efficient disc drives. There are millions of dollars at stake in the case.

However, neither the plaintiff nor the defendant has spent much time on substantive patent issues. Instead, hefty amounts of time and attorneys' fees have been spent wrestling over attorney-client privilege.

This situation is all too common. A plaintiff in a patent suit almost always alleges willful infringement--thus threatening a defendant with treble damages. Alleged infringers usually try to defend themselves by arguing they acted in good faith, relying on advice received from outside counsel. But this advice-of-counsel defense has a major drawback: It may waive defendant's attorney-client and work-product privileges for issues of patent validity and infringement.

How far does this waiver go? How much sensitive, and possibly embarrassing, material must a defendant and its counsel be prepared to show? "The lower courts have been all over the map on that," says Alison Tucher, a litigator at Morrison & Foerster. "It has given rise to extensive side litigation [as in Seagate]."

But these long and costly side battles may soon become rarities, thanks to the Federal Circuit's Aug. 20 ruling in In re Seagate Technology. The unanimous en banc decision completely rewrites the standard for willful infringement, making it much harder for patent owners to assert and prove such infringement.

"The Federal Circuit's decision in Seagate represents a sea change in patent law," says Edward Naughton, an intellectual property attorney in the Boston office of Holland & Knight. "The decision will have many ramifications."

New Test
Seagate overturns Underwater Devices Inc. v. Morrison-Knudsen Co.--a seminal Federal Circuit ruling. In that case the court held that once a company has notice of another's patent rights, it must use due care to determine whether its actions are infringing; otherwise it is guilty of willful infringement. Moreover, it has the burden of proving it exercised due care.

A company could carry this burden by showing it had sought and followed competent legal advice--i.e., relied on an opinion letter from patent counsel. But any company that used this reliance-on-counsel defense waived its attorney-client privilege as to the entire subject area--and possibly waived the work-product privilege too. This allowed the opposing side to demand a variety of sensitive information from the defendant and its counsel. As a result Underwater Devices often forced accused infringers to choose between asserting their privileges and defending against charges of willful infringement.

Now, however, charges of willful infringement may become far less common. The court in Seagate threw out the affirmative duty of due care and established a new, tougher test. "[T]o establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent," the court wrote. "... If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk ... was either known or so obvious that it should have been known to the accused infringer."

In other words, the patentee now must prove that, at the time the defendant acted, there was a high probability the defendant's actions constituted infringement. If there was a reasonable argument that the defendant's actions might not be infringing, this objective test for willfulness is not met. Moreover, even if this objective test is met, there is no willful infringement unless a patentee proves that either the defendant knew there was a high probability of infringement or this risk of infringement was so apparent that the defendant should have known of it.

"[T]he Seagate case raises significant new challenges for patent holders who are seeking punitive damages for willful patent infringement," says Richard Gruner, an IP professor at John Marshall Law School in Chicago.

Changing Landscape
Twenty-four years ago, when the Federal Circuit created its standard for willful infringement in Underwater Devices, businesses routinely ignored others' patent rights. Today, the opposite is true.

"The Supreme Court, the public and many businesses have been concerned about too much protection for patents," Tucher says.

So the Federal Circuit concluded it was time to throw out the unusually broad protection of Underwater Devices.

"[T]he duty of care announced in Underwater Devices sets a threshold for willful infringement that is more akin to negligence," the court wrote. "This standard fails to comport with the general understanding of willfulness in the civil context ... and it allows for punitive damages in a manner inconsistent with Supreme Court precedent."

The Supreme Court may have been a decisive factor in the Federal Circuit's decision to reverse itself. The High Court has taken an unusually large number of patent cases in recent years, continually reversing the Federal Circuit and cutting back on patentees' rights.

"The Federal Circuit knows the Supreme Court is looking at its opinions, so it is not surprising the Federal Circuit has decided to bring its definition of willfulness into alignment with the definition in Supreme Court rulings and other areas of the law," Tucher says.

New Threats
The ruling is a big blow to patent owners, according to most experts.

"This decision fundamentally changes the playing field in patent cases," says Brian Ferguson, a patent litigator at McDermott Will & Emery who represented Seagate in its successful appeal to the Federal Circuit. "Patent owners will no longer be able to hold a hammer of willful infringement over the heads of accused infringers to get favorable settlements."

Without the threat of treble damages, companies may be more willing to market potentially infringing products and services. "[T]he Seagate decision changes the calculus of the economics involved in any decision to commercialize a would-be infringing product," says Michael Dzwonczyk, a patent litigator at Sughrue Mion. "In some cases the decision to infringe may simply involve the acceptance of a reduced profit margin by the infringer if a reasonable royalty is awarded after a finding of infringement."

The economics are further enhanced by that fact that the decision will significantly cut companies' legal costs because they'll need fewer costly opinion letters.

The upside for all companies, though, is that the decision may slash the time and expense of infringement suits.

"There will now be fewer cases alleging treble damages and fewer discovery battles," says James Foster, a patent litigator at Boston's Wolf, Greenfield & Sacks. "The amount of money and energy that has been spent on willfulness will go down markedly."

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