A Reasonable, Balanced Answer to In Re Seagate Tech.

Michael J. Bonella, a partner in the Philadelphia office of Woodcock Washburn LLP, focuses his practice on complex patent litigation. He can be reached at bonella@woodcock.com.

In January 2007, the Federal Circuit decided sua sponte to request briefing from the parties in In Re Seagate Tech., LLC ¹ on three questions regarding willful infringement:

(1) Should a party’s assertion of the advice-of-counsel defense to willful infringement extend waiver of the attorney-client privilege to communications with that party’s trial counsel? ²

(2) What is the effect of any such waiver on work-product immunity?

(3) Given the impact of the statutory duty of care standard announced in Underwater Devices, Inc. v. Morrison-Knudsen Co., ³ on the issue of waiver of attorney-client privilege, should this court reconsider the decision in Underwater Devices and the duty of care standard itself?

The answer to the first two questions could have profound implications on patent litigation strategy, and the answer to the third could have significant implications on the value of patents.  This article proposes reasonably balanced solutions that consider rights of both patentees and of accused infringers.  Because a change in the duty-of-due-care standard can affect many of the difficult issues of trial-counsel waiver, this article first addresses that duty.

A Better Understanding of the Affirmative Duty of Due Care

The Federal Circuit’s sua sponte decision to reconsider the affirmative duty suggests that it may eliminate it entirely.  By way of background, Underwater Devices and subsequent Federal Circuit cases posited that when a party becomes aware of the patent rights of others, it has an affirmative duty to determine whether its proposed or continuing activity would infringe a valid claim of the patent.  That duty arose whether the party was directly charged with infringement or notified of its existence by the patentee, or simply became aware of it on its own.  But elimination of the duty makes little sense because it simply begs the question of what is willful.  If, for example, an infringer receives actual notice but does nothing, even in the absence of an affirmative duty as posited in Underwater Devices, the question would remain whether any subsequent infringement was willful.  Thus, as a practical matter, the willfulness inquiry itself would consider whether an accused infringer exercised due care.

A proposed justification today for eliminating the duty is that it was announced by the Federal Circuit shortly after its creation, at a time when patents were not well respected, but now, some twenty-five years later, the duty is no longer needed.  But this argument makes little sense.  Indeed, elimination of the duty entirely could encourage accused infringers to do nothing, to take their risks in litigation, or at least wait until litigation to act.

Rather than eliminating the duty, the Federal Circuit should adjust the contours of the duty and what triggers it to address problems that have arisen by its rigid application.  The main problem is that some patentees are armed with an arsenal of related patents having hundreds of patent claims.  The cost of a competent opinion on each claim of a complex patent portfolio could be in the hundreds-of-thousands of dollars.  For smaller companies, the cost of such an opinion may be prohibitive.  Even for larger companies, the cost of analysis of each claim may become so large, relative to the risk of being sued, that a reasonable “business” decision would be not to pay for legal advice.

Under such circumstances, the rationale behind the affirmative duty of due care breaks down.  The reason for the duty is to make sure that patent rights are protected and infringers are encouraged to take steps to avoid infringement, such as designing around patents.  But when patent claims are so numerous and complex, the task of forming a good-faith belief with respect to every claim is, as a practical matter, too onerous and accused infringers cannot reasonably be expected to consider each and every claim.  Rather than being encouraged to respect these large patent portfolios, the cost involved actually encourages accused infringers to ignore them.

The problem lies in that actual notice of a large patent portfolio is not really notice.  A practical solution is to require the patentee to shoulder some of the burden by identifying for the notice recipient the particular product or process being accused and further identifying a limited, reasonable number of claims (e.g., no more than 5 claims per patent, or some other reasonable limitation), possibly with an explanation of the basis for the patentee’s belief that the patents are relevant in the first place.  The accused infringer can obtain competent legal advice regarding those claims.  If the patentee’s notice does not meet this standard, there should be no willfulness as a matter of law.

This solution balances both parties’ rights.  The importance of patent rights is maintained because the accused infringer must take action to respect the rights or risk willful infringement.  Conversely, the accused infringer is not oppressively burdened with investigating a vague or undefined charge or undertaking an unduly expensive and almost insurmountable task.  

The facts in In Re Seagate Techs. raise another issue regarding the affirmative duty.  The accused infringer received actual notice of one of the two asserted patents at about the time it was sued. ⁴  Thus, In re Seagate Techs.  raises an issue that has plagued businesses for years now:  Whether the duty of due care requires an accused infringer to obtain an “opinion” when it receives actual notice contemporaneously with the filing of an infringement suit, or whether it may rely on the analysis of trial counsel then engaged to defend the action.

Requiring a traditional “opinion” when actual notice is not received until the filing a law suit makes little sense.  The accused infringer’s trial counsel will certainly present defenses and legal advice throughout the litigation upon which the defendant will rely.  Accordingly, obtaining a separate “opinion” for willfulness often becomes an expensive legal exercise.  Further, securing a willfulness “opinion” during a lawsuit raises the always problematic wavier issues regarding trial counsel’s communications that were raised in In Re Seagate Techs. because the “opinion” is being obtained contemporaneously with the prosecution of a law suit.

The Federal Circuit can eliminate this unnecessary burden by reinforcing the good- faith defense standard of Gustafson, Inc. v. Intersystems Indus. Prods., Inc. ⁵  In Gustafson, the Federal Circuit recognized that where actual notice is received contemporaneous with the filing of a complaint, the presentation of good-faith defenses at trial can establish a defense to the willfulness charge.  By reinforcing the good-faith defenses standard as dispositive in this limited situation, and extending it to situations where actual notice is received only shortly before the filing of the suit, the Federal Circuit can eliminate the need for obtaining a traditional “opinion.”  As an additional benefit, adoption of the good-faith defense standard will eliminate many of the thorny trial-counsel waiver issues that arise in this context and which the Federal Circuit is considering in the first two questions that it posed.

The problems with the affirmative duty lie mainly at the fringes.  Rather, than eliminating the duty altogether – because it has served the purpose, albeit with some problems, of maintaining respect for patent rights for the last twenty-five years – the Federal Circuit should adjust the duty, so that problems or undue burdens that arise from its mechanistic application are minimized.

Waiver of Privilege or Work-Product on Trial Counsel Advice Is Too Problematic

The Seagate case also raises the issue of reliance on the advice of traditional “opinion” counsel also waives privileged communications with trial counsel, and if so, to what extent.  The principal argument for extending the waiver to communications with trial counsel is that the accused infringer should not be permitted to use the opinion as both a sword and a shield.  If the accused infringer elects to waive, then arguably fairness dictates that all communications bearing on the same subject matter should be disclosed.

The main opposing arguments are based on policy.  On the one hand, the accused infringer would like to waive privilege and disclose opinion counsel’s opinions to prove that it satisfied its affirmative duty of due care.  But if doing so means that communications with trial counsel relating to the same subject matter are waived, then it also risks disclosing communications regarding litigation strategy and other sensitive documents.  Indeed, one of the problems is in the uncertainty in how broad or narrow courts will construe the subject matter waiver.  Thus, the accused infringer faces a Hobson’s choice: it can either waive “opinion” privilege and risk a waiver, of uncertain scope, of communications with trial counsel as well, or it can choose not to rely on advice of counsel at all, and risk a finding of willful infringement.

Although both arguments have merit, the best answer to these difficult questions, as in most legal questions, depends upon the facts.  A seasoned patent litigator will quickly recognize two factual scenarios that often arise in the willfulness area, each of which dictates different answers.  But answers in both cases can appropriately balance patentee’s rights with those of accused infringers.

First, consider the typical scenario where an accused infringer receives an opinion from nontrial counsel well before litigation begins and forms a good-faith belief based on that advice.  If litigation later ensues, the accused infringer no doubt will have communications with trial counsel regarding the subject matter of the opinion – if not the opinion itself, at least issues of non-infringement, invalidity, and/or unenforceability covered by the opinion.  In this instance, the decision to proceed in light of the patent was made well-before litigation commenced.  Therefore, trial counsel’s advice has little, if any, relevance to the initial opinion’s competency, the decision to rely on it, or the adherence to the advice of the opinion.  Thus, in this situation, a temporal limit on the waiver, to documents and communications from before suit was filed, generally avoids the problem of whether there was any waiver of trial counsel’s advice; trial-counsel’s advice was not the basis under which the duty was addressed.  This temporal limitation properly balances the right of the accused infringer to present a willfulness defense, without intrusion into its trial strategy, with the patentee’s right to probe the veracity of the good- faith belief and the competency of the opinion.

In a second recurring fact pattern, the accused infringer first receives notice of a patent at about the time it is sued and obtains an opinion during the litigation from counsel other than its trial counsel, where trial counsel and opinion counsel work independently.  These facts are presented in In re Seagate Techs. ⁶  As described above, where the accused infringer receives actual notice contemporaneously with the filing of the law suit, the test for willfulness should depend on the presentation of good-faith defenses at trial, not reliance on opinion counsel’s advice.  This would solve the waiver problem because the accused infringer need not waive, and as a practical matter probably will never do so.  Of course, under such a scenario, the separate engagement of opinion counsel may never occur in the first place.

But if the Federal Circuit does not confirm that willfulness can be rebutted by a good- faith defense at trial, opinion counsel often will be engaged.  While the full-disclosure argument has some logical appeal, extending waiver to trial counsel is overbroad.  Not only will there be expensive traditional discovery (privilege logs, in camera inspections of trial counsel’s documents), but also the patentee, as it did in Seagate, ⁷ will seek depositions from opposing counsel.  The patentee can effectively put defendant’s litigation counsel on trial.  The accused infringer’s ability to have open communications with its counsel would be hindered.  Accordingly, as a matter of policy, the best solution is not to extend the wavier to trial counsel so long as “opinion counsel” is separate from trial counsel.

Uncommunicated Trial Counsel Work Product Should Not Be Waived

In In Re Echostar, the Federal Circuit held that uncommunicated work product from opinion counsel is not within the scope of the waiver. ⁸  Thus, it seems likely that the Federal Circuit will hold that trial counsel’s uncommunicated attorney work-product is not waived as well.  Based on the discussion of the issue in Echostar, this is the right result.

Conclusion

The affirmative duty of due care has strengthened the patent system.  Although there has been complaint that it causes unnecessary expenses and raises difficult privilege issues, as a practical matter, the duty will not be eliminated entirely.  It can be tweaked by the Federal Circuit to balance the interests of patentees and accused infringers.

Endnotes

1     2007 U.S. App. LEXIS 2457 (Fed. Cir. Jan. 26, 2007).

2     See In re Echostar Commc’n Corp., 448 F.3d 1294 (Fed. Cir. 2006).

3     717 F.2d 1380 (Fed. Cir. 1983).

4     Brief for Respondent at 4, 6, In Re Seagate Tech., LLC, 2007 U.S. App. LEXIS 2457 (Fed. Cir. Jan. 26, 2007) (No. 830) (after suit had been filed on different patents the accused infringer received notice of a newly issued patent in November 2001 and that new patent was added to the law suit in January 2002).

5     897 F.2d 508, 511 (Fed. Cir. 1990).

6     Brief for Petitioner at 3, In Re Seagate Tech., LLC, 2007 U.S. App. LEXIS 2457 (Fed. Cir. Jan. 26, 2007) (No. 830).

7     Id. at 15.

8     448 F.3d 1294, 1303 (Fed. Cir. 2006).