Knorr-Bremse: The Federal Circuit Overrules Its Precedent and Reshapes Willfulness

Transcription

1 Knorr-Bremse: The Federal Circuit Overrules Its Precedent and Reshapes Willfulness On September 13, 2004, the Court of Appeals for the Federal Circuit overruled decades-old precedent and reshaped the law relating to willful infringement. 1 The court abolished the inference that a legal opinion was or would have been unfavorable if an infringer does not produce exculpatory advice of counsel in response to Emily A. Evans a charge of willfulness. 2 Thus, adverse inferences no longer are warranted where attorneyclient privilege is asserted to protect advice of counsel or where advice of counsel was not obtained. The Federal Circuit signaled its willingness to reassess its willfulness jurisprudence by taking the extraordinary step of issuing an order sua sponte that solicited briefs by amici curiae (and the parties) addressing three questions relating to proving willful patent infringement. 3 The Federal Circuit also invited supplemental briefing from the parties regarding consequences to that case if the court should change the law. 4 An astonishing 24 amici responded, nearly unanimously urging that the adverse inferences drawn from the failure to seek or produce an opinion of counsel in response to a charge of willfulness should be abolished. 5 As discussed below, although the Federal Circuit made a decisive and major change in the law related to willfulness, it reaffirmed the duty of due care to avoid infringement. As a consequence, there are continuing questions regarding what actions will suffice to satisfy this duty and, in particular, whether it still is advisable (albeit no longer effectively required) to obtain and produce exculpatory advice of competent counsel in response to a charge of willfulness. The Facts Knorr-Bremse sued Dana and Haldex for infringement of a patent claiming air disk brakes for commercial vehicles. 6 Haldex made the accused infringing brakes and Dana imported them into the United States. 7 After the suit was filed, the defendants introduced a new brake design. 8 The district court found on summary judgment that the original design literally infringed Knorr-Bremse s patent. 9 The defendants continued to operate trucks containing brakes of the original design, even after it was adjudged to infringe. 10 After a bench trial, the district court found that the new brake design also literally infringed. 11 Emily Evans is a partner in the Palo Alto, California, office of Morrison & Foerster LLP. She can be reached at eevans@mofo.com. Ms. Evans worked on an amicus brief Morrison & Foerster LLP submitted in Knorr-Bremse on behalf of two clients urging abolition of the adverse inferences. BY EMILY A. EVANS Neither defendant proffered an exculpatory opinion of counsel in response to Knorr-Bremse s charge of willful infringement. 12 Haldex said it had consulted counsel but refused to reveal the advice it had received based on the attorney-client privilege. 13 Dana stated that it had not independently consulted counsel but rather had relied on Haldex. 14 Applying existing Federal Circuit precedent, the district court concluded that the undisclosed opinions were unfavorable. 15 Assessing the totality of the circumstances, the district court held that the defendants use of the original brake design constituted willful infringement. 16 Based on that determination, the court found the case exceptional under 35 U.S.C. 285 and awarded attorneys fees with respect to the portion of the litigation relating to the original (but not the new) brake design. 17 The defendants appealed only the determination of willfulness and the ensuing award of attorneys fees. 18 The Court s Restatement of Willfulness The court expressed the view that the concept of willful infringement exists because intentional disregard of legal rights warrants deterrence. 19 It restated its previous position that the statutory basis for willful infringement is found in 35 U.S.C. 284 and 285, permitting courts to enhance damages up to three-fold and to award attorneys fees. 20 The court reaffirmed that the [d]etermination of willfulness is made on the totality of the circumstances that may include contributions of several factors, 21 citing with approval those compiled at Rolls-Royce Ltd. v. GTE Valeron Corp. 22 and Read Corp. v. Portec, Inc. 23 For ease of reference, the Read factors are set forth below: (1) [W]hether the infringer deliberately copied the ideas or design of another[.] (2) [W]hether the infringer, when he knew of the other s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed[.] (3) [T]he infringer s behavior as a party to the litigation. (4) Defendants size and financial condition. (5) Closeness of the case. (6) Duration of defendant s misconduct. (7) Remedial action by the defendant. (8) Defendant s motivation for harm. (9) [W]hether defendant attempted to conceal its misconduct. 24 It is of interest that the Read factors were directed to whether and to what extent damages should be enhanced after a finding of willfulness, not to a definition of willful conduct itself. 25 The Knorr-Bremse court appears to blur that distinction. As stated elsewhere in the Knorr-Bremse opinion, the touchstone of willfulness is whether the infringer acted

2 as a reasonably prudent businessperson to avoid infringing another s valid patent rights. 26 That is a test that goes to the state of mind of the infringer at the time it first learned of the patent or began infringing. In contrast, certain of the Read factors appear to be directed, at least in part, to other time periods (e.g., Nos. 3, 6, 7) and other concerns (e.g., No. 4). Unlike Read, the section of Rolls-Royce cited by the court does not compile willfulness factors. 27 Rolls-Royce emphasizes that there are no hard and fast per se rules for willfulness and that the district court should consider the totality of the circumstances in deciding whether the infringer had discharged its affirmative duty of due care to avoid infringement. 28 Significantly, the court reaffirmed that there continues to be an affirmative duty of due care to avoid infringement of the known patent rights of others The court thus reaffirmed that infringers may not simply ignore patents of which they are aware, hoping they will not be sued. The court discussed the historical context giving rise to the Federal Circuit decisions requiring 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. 30 It stressed as critical that, when it issued its earlier decisions in this area, there was widespread disregard of patent rights... undermining the national innovation incentive. 31 The Federal Circuit concluded that there was special justification for overruling its previous adverse inference precedent now because the conceptual underpinnings of this precedent... have significantly diminished in force. 32 As a consequence, the Federal Circuit held 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. 33 Below, I address each of the questions that received en banc review in Knorr-Bremse, setting out the holdings and the court s reasoning in support of those holdings. I also discuss the dissent in some detail because it raises some interesting arguments likely to appear in future cases. Finally, I discuss the practical import of Knorr-Bremse. 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. 34 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. 35 The Federal Circuit stressed the importance of the attorney-client privilege to our judicial system. 36 It observed that the inference that withheld opinions are unfavorable can distort the attorneyclient relationship, in derogation of the foundations of that relationship. 37 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. 38 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. 39 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. 40 In particular, it held: In 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. 41 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. 42 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. 43 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. 44 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? 45 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. 46 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. 47 The manner in which the Federal Circuit handled this question may provide some insight into how it will assess willfulness in future cases. According to the Federal Circuit, the district court had based its willfulness finding on the following factors: (1) literal infringement by the original brake design was reasonably clear ; 48 (2) given the quantity and quality of the evidence presented by defendants at trial on [validity]... it cannot fairly be said that defendants... had a good faith belief that the [patent-in-suit] would ultimately be found invalid... ; 49 (3) defendants failed to take prompt remedial action to terminate infringement after the [summary] judgment of literal infringement instead deliberately yield[ing] to market pressures in deciding to continue using the infringing brakes; 50 and (4) although defendants developed the new brake design in a good faith attempt to design around the patent-in-suit, Haldex nonetheless continued to use the [original] brake throughout the design effort including displaying the original design at various automotive conferences (albeit prior to such activity being enjoined). 51 Published in IPL Newsletter Volume 23, Number 1, Fall by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion the

3 In addition, the district court considered Haldex s invocation of attorney-client privilege over its opinion of counsel and Dana s failure to obtain an independent legal opinion, inferring that such opinions were or would have been unfavorable. 52 Because 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. 53 This is notable because the factors as recited by the Federal Circuit uniformly 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. 54 While several amici had raised this question, it was not before the district court and not raised by this case. 55 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. 56 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. 57 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. 58 That determination is based on weighing a number of factors, each accorded the weight it warrants based on its strength in a particular case. 59 The Federal Circuit thus decline[d] to adopt a per se rule. 60 The Dissent In the sole additional opinion, Judge Dyk dissented to the extent the majority opinion may be read as reaffirming that where, as here, a potential infringer has actual notice of another s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing. 61 In Judge Dyk s view, [t]here is a substantial question as to whether the due care requirement is consistent with the Supreme Court cases holding that punitive damages can only be awarded in situations where the conduct is reprehensible. 62 Judge Dyk observed that the majority had properly refrained from addressing this constitutional issue, as it had not been briefed or argued by the amici or the parties, but that he had written a separate opinion to note [his] view. 63 The dissent begins with the premise that enhanced damages under 35 U.S.C. 284 are a form of punitive damages. 64 Next, it agrees that [t]here are many circumstances that may create an appropriate predicate for a finding of willful infringement, and hence punitive damages, including deliberate copying, concealing infringing activity, infringement where the infringer knows that it is infringing or where it knows it only has frivolous defenses, infringement designed to injure a competitor, etc. 65 In Judge Dyk s view, such activities are reprehensible, justifying punitive enhanced damages. 66 In contrast, the dissent argues, a potential infringer s mere failure to engage in due care is not itself reprehensible conduct. To hold that it is effectively shifts the burden of proof on the issue of willfulness from the patentee to the infringer, which must show... that it exercised due care. 67 Moreover, Judge Dyk avers, [t]he duty of care requirement finds no support in the patent damages statute, the legislative history, or Supreme Court opinions. 68 The dissent then analyzes recent decisions of the Supreme Court that have limited the award of punitive damages on due process grounds. 69 Judge Dyk concludes that even where the damages multiple is within accepted bounds, the [Supreme] Court has required a finding of reprehensibility as a predicate to an award of punitive damages. 70 He observes that [p]atent law is not an island separated from the main body of American jurisprudence and posits that [t]he same requirement of reprehensibility restricts an award of enhanced damages in patent cases as in other cases. 71 Judge Dyk appears not to be distinguishing between a determination of willfulness and an award of enhanced damages. Assuming the validity of Judge Dyk s premise, it still may be compatible with the majority opinion. A finding of willfulness does not compel an award of enhanced (punitive) damages. Previous Federal Circuit decisions have emphasized that whether damages are enhanced and to what extent depends on the infringer s culpability. 72 The dissent expresses the view that the imposition of the due care requirement has produced nothing of benefit to the patent system. 73 First Judge Dyk suggests that, in those instances where an accused infringer s conduct is not reprehensible, enhanced damages are unnecessary to protect the patentee because the patentee can secure a preliminary injunction once he has learned of infringement. 74 If the patentee cannot do so because it cannot make the requisite clear showing of success on the merits, the dissent reasons, then there is no reason the patentee should be able to secure punitive damages based on a lack of due care. 75 Second the dissent points out that the due care requirement in the willfulness context is complex and ultimate outcomes are difficult to predict. 76 Judge Dyk argues that the due care requirement has, in fact, been pernicious by foster[ing] a reluctance to review patents, creating a cottage industry of window-dressing legal opinions, imposing substantial legal costs on companies seeking to introduce innovative products, and enhance[ing] [the] ability of holders of dubious patents to force competitors products off the market through the threat of enhanced damages. 77 The dissent closes by pointing out that the ameliorative impact of abolishing the adverse inferences relating to unobtained or undisclosed opinions of counsel is diminished because, Judge Dyk avers, the majority opinion does not address whether a potential infringer can satisfy the requirement of due care without securing and disclosing an opinion of counsel, or, if such an opinion is not absolutely required, whether an adverse inference can be drawn from the accused infringer s failure to obtain and disclose such an opinion. 78 What Does Knorr-Bremse Mean? The Knorr-Bremse decision brings patent law in alignment with other areas of the law by eliminating any adverse inference

4 flowing from the failure to obtain advice of counsel or from the failure to produce an exculpatory opinion based on attorneyclient privilege. Eliminating those adverse inferences while at the same time preserving the duty of due care to take reasonably prudent steps to avoid infringement begs the question of what steps would be sufficient in the absence of exculpatory advice of counsel. This awaits further development in cases percolating up to the Federal Circuit. One result of Knorr-Bremse may be a greater receptivity to reliance on noninfringement and invalidity analyses by technical personnel. Engineers, scientists, or other skilled artisans associated with an accused infringer arguably should be deemed capable of comparing patent claims with accused products or processes to assess infringement. After all, [a] patent specification is directed to one of ordinary skill in the art. 79 Thus, it is presumed that a person experienced in the field of the invention would understand the scope of the subject matter that is patented when the claim[s] [are] read in conjunction with the rest of the specification. 80 A reasonably prudent businessperson arguably could form a reasonable, good-faith belief of noninfringement based on such an analysis. 81 Of course, the skilled artisan s opinion must be sufficient to instill a good faith, reasonable belief of noninfringement or invalidity. That may not always happen. Where the totality of the evidence adduced by an accused infringer is insufficient to establish reasonable good faith, willfulness likely will be found without the need of an adverse inference. 82 Knorr-Bremse raises an important practical question: Is it still effectively necessary to obtain advice of counsel upon learning of another s patent that is uncomfortably close to what your company does? The short answer is no, it s not necessary. The long answer is that it still may be prudent to obtain such advice and to rely on it at trial, at least for critical products/processes. First, until the Federal Circuit provides guidance as to what conduct will suffice to meet the duty of due care in the absence of exculpatory advice 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. Juries may continue to be favorably impressed by such evidence. Accordingly, while Knorr-Bremse made important changes in the law relating to willful infringement, it remains to be seen how much it will change the patent litigation landscape as a practical matter. Endnotes 1. Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmBH v. Dana Corp., Nos , -1376, , -1256, 2004 U.S. App. LEXIS (Fed. Cir. Sept. 13, 2004) (en banc). 2. Id. at *8, Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmBH v. Dana Corp., 344 F.3d 1336 (Fed. Cir. 2003) (en banc). 4. Id concentrationid=&id=1114&type=5. 6. Knorr-Bremse, 2004 U.S. App. LEXIS at *9. 7 Id. at * Id. at *9. 9 Id. at * Id. at * Id. 12. Id. 13. Id. 14. Id. 15. Id. at * Id. 17. Id. 18. Id. Knorr-Bremse cross-appealed seeking to enjoin defendants from retaining and using test data obtained with the original brake design. Id. The Federal Circuit affirmed the district court s refusal to order destruction of defendants technical data regarding the original brake design because much of the data were obtained before the patent-in-suit issued or related to noninfringing aspects including design-around efforts and safety studies. Id. at * Id. at * Id. at *12; but see id. at *33 34 (Dyk, J., dissenting) (arguing that there is no statutory basis for the due care requirement). 21. Knorr-Bremse, 2004 U.S. App. LEXIS at * F.2d 1101, 1110 (Fed. Cir. 1986) F.2d 816, (Fed. Cir. 1992). 24. Id. at 827 (citations omitted). 25. Id. at 828 ( Inasmuch as a finding of willful infringement does not mandate enhancement of damages, the above factors taken together assist the trial court in evaluating the degree of the infringer s culpability and in determining whether to exercise its discretion to award enhanced damages and how much the damages should be increased. ). 26. Knorr-Bremse, 2004 U.S. App. LEXIS at * See Rolls-Royce, 800 F.2d at Id. 29. Id. at *22 (citation omitted); but see id. at *28 41 (Dyk, J., dissenting) (arguing that willfulness should require reprehensible conduct not merely a failure to exercise due care ). 30. Id. * Id. at * Id. at *16 (citation omitted). 33. Id. 34. Id. 35. Id. at * Id. at * Id. at * Id. at * Id. at * Id. at * Id. 42. Id. 43. Id. at * Id. at *22 (citation omitted). 45. The Court did not solicit amicus briefs with respect to this issue. 46. Id. at * Id. at *23 (citations omitted). 48. Id. 49. Id. (citations & internal quotation omitted). 50. Id. at * Id. at *24 (internal quotation omitted). 52. Id. at * Id. at * Id. at * Id. 56. Id. at * Id. at * Id. (citation omitted). 59. Id. 60. Id. 61. Id. (citation omitted). 62. Id. at * Id. 64. Id. 65. Id. at * Id. 67. Id. at *32.

5 68. Id. at * Id. at * Id. at * Id. 72. See, e.g., Read, 970 F.2d at Id. at * Id. at * Id. at * Id. at * Id. 78. Id. at * Wang Labs., Inc. v. Toshiba Corp., 993 F.2d 858, 866 (Fed. Cir. 1993). 80. S3 Inc. v. nvidia Corp., 259 F.3d 1364, 1367 (Fed. Cir. 2001); 35 U.S.C. 112, para. 2 & 282; see also Exxon Research & Eng g Co. v. United States, 265 F.3d 1371, 1375 (Fed. Cir. 2001). 81. See, e.g., Biotec Biologische Naturverpackungen GmbH v. Biocorp, Inc., 249 F.3d 1341, (Fed. Cir. 2001) (affirming finding of no willfulness where accused infringer relied solely on the non-infringement advice of a world-renowned expert in the art ). 82. See UMG Recordings v. MP3.com, Inc., No. 00 Civ 472 JSR, 2000 U.S. Dist. LEXIS 13293, *12 14 (S.D.N.Y. Sept. 6, 2000) (finding willful copyright infringement without adverse inference because no credible evidence whatever rebutted plaintiff s proof of willfulness).