Flashback Seagate: Indifference to Patent Rights of Innovators

Five years ago today, on Monday, August 20, 2007, while many of us were otherwise preoccupied with the impending doom of the claims and continuations rules promulgated by the Patent Office, the United States Court of Appeals for the Federal Circuit unceremoniously changed the law as it applies to the awarding of willful damages. Sitting en banc in In re Seagate Technology, LLC, the majority of the Court determined that the negligence standard for determining whether to award enhanced damages for willful infringement is not the appropriate standard, but rather that a reckless standard should be and now is the law of the land.

Curiously, the Federal Circuit announced this significant change to the law relating to willfulness in a case that related to a discovery dispute.  Seagate Technology, LLC petitioned the Federal Circuit for a writ of mandamus directing the United States District Court for the Southern District of New York to vacate Orders compelling disclosure of materials and testimony that Seagate claimed was covered by the attorney-client privilege and work product protection.  The Court, per Judge Mayer, would say that this case requires confrontation “the willfulness scheme and its functional relationship to the attorney-client privilege and work product protection.”

The en banc order from the Federal Circuit set out the following questions:

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

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., 717 F.2d 1380 (Fed. Cir. 1983), 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?

Reading these questions in hindsight is almost seems as if the Federal Circuit had already decided what they were going to do prior to any briefing. It almost seems as if the final question, the question ultimately leading to the change in the willfulness standard, was forced into the case so the Federal Circuit could use this dispute as a vehicle for judicial activism.

Whether this was a fabricated or forced issue is now largely immaterial.  The Federal Circuit sitting en back overruled Underwater Devices, which set a lower threshold for willful infringement that, according to the Federal Circuit, was more akin to a negligence standard.  Apparently it was believed that Underwater Devices allowed for punitive damages in a manner inconsistent with Supreme Court precedent.

Leading off the discussion of patent infringement and willful damages, Judge Mayer explained:

Because patent infringement is a strict liability offense, the nature of the offense is only relevant in determining whether enhanced damages are warranted. Although a trial court’s discretion in awarding enhanced damages has a long lineage in patent law, the current statute, similar to its predecessors, is devoid of any standard for awarding them. Absent a statutory guide, we have held that an award of enhanced damages requires a showing of willful infringement.

It stikes me as odd that the district court has discretion in awarding enhanced damages, but at the same time has its hands tied by necessitating a finding of willfulness, which after Seagate requires a level of recklessness.  Call me crazy, but that doesn’t sound like much, if any, discretion really.  But I’m getting ahead of myself.

In any event, after dispatching with Underwater Devices the Federal Circuit announced the new rules, which requires at least a showing of objective recklessness in order to support a finding of willful infringement and, thereby permitting enhanced damages. The Federal Circuit did not stop there though, but rather took the opportunity to explain that because of the abandonment of the affirmative duty of due care, there is no affirmative obligation to obtain opinion of counsel. Thus entered the era of intentional blindness, effectively killing the practice of obtaining an infringement opinion.

With respect to what a patentee must prove in order to establish willful infringement, the Federal Circuit explained:

Accordingly, to 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 state of mind of the accused infringer is not relevant to this objective inquiry. If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer. We leave it to future cases to further develop the application of this standard.

After changing the law of willfulness in a dispute that really did not require such a decision to be reached, the Federal Circuit finally got around to addressing the issue that was actually raised by this particular case or controversy, which was resolving a simple discovery issue. On this discovery issue the Federal Circuit ruled:

[A]s a general proposition, that asserting the advice of counsel defense and disclosing opinions of opinion counsel do not constitute waiver of the attorney-client privilege for communications with trial counsel. We do not purport to set out an absolute rule. Instead, trial courts remain free to exercise their discretion in unique circumstances to extend waiver to trial counsel, such as if a party or counsel engages in chicanery.

Similarly, the Federal Circuit determined that relying on opinion counsel’s work product does not waive work product immunity with respect to trial counsel. However, the district court remains able to find otherwise if a party or counsel engage in chicanery, or, in accordance with the Federal Rules of Civil Procedure there is a sufficient showing of need and hardship.

As we have come to expect in importance decisions, there was a separate opinion authored by Judge Newman. In fact, Judge Newman joined in the concurrence with Judge Gajarsa, and also authored her own brief concurring opinion. In truth, both of these opinions should be properly characterized as concurring in judgment and dissenting with respect to the willfulness dicta. In fact, Judge Gajarsa and Judge Newman would simply do away with willfulness altogether. They pointed out that no where in the statute does the term “willful” appear, rather the statute merely says: “the court may increase the damages up to three times the amount found or assessed.” Thus, the decision to issue enhanced damages should be left to the discretion of the district court.

Nevertheless, as Judge Newman properly recognized, the new law of willfulness adopted by the Federal Circuit in the form of a recklessness standard “appears to ratify intentional disregard, and to reject objective standards requiring a reasonable respect for property rights.”  Yet another of many decisions that have chipped away at the value of a patent.

In the wake of Seagate, why would anyone large corporation attempt to determine whether they will be infringing?  There is real cost associated with bringing a patent infringement lawsuit, so there is always the chance — perhaps a high likelihood — that infringement will go unchallenged.  If there is infringement you will only have to pay a reasonable royalty, and the patentee doesn’t even have the right to a permanent injunction thanks to the Supreme Court’s misguided decision in eBay.  So why would a potential infringer every inquire only to find out and then potentially have their actions deemed to be objectively reckless, thereby supporting enhanced damages?

When we are remembering the cases that have chipped away at patent rights over the last 7 or 8 years I think we too frequently forget to include Seagate.  Perhaps not an earth-shattering sea change, but a decision that has contributed to the indifferent attitude toward the patent rights of innovators.