September 2007

In a landmark decision that overturns long-standing precedent, the Court of Appeals for the Federal Circuit (CAFC) unanimously heightened the test to determine whether an infringer is subject to enhanced damages because of willful infringement of a patent. Such enhanced or punitive damages can be up to three times the compensatory damages. The case is Seagate Technology, Misc. no 830 (Fed Cir. August 20, 2007) (en banc).

Under the new standard, reckless infringement will still warrant enhanced damages, but negligent infringement will not generate this penalty. In the words of the Court:

“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.”

Under the previous standard (Underwater Devices vs. Morrison-Knudsen., 717 F.2nd 1380-90 (Fed. Cir. 1983)), a potential infringer that had “actual notice of another’s patent rights” had “an affirmative duty to exercise due care to determine whether of not it is infringing.” This affirmative duty included “the duty to seek and obtain competent legal advice from counsel before the indication of any possible infringing activity.”

Based on this new standard, the Court concluded,”there is not affirmative obligation to obtain opinion of counsel”. Previously, in practice, the infringer had the burden of proof for showing that enhanced damages were not appropriate. This was usually done by having an opinion of legal counsel regarding the pre-litigation conduct. The new recklessness standard means that a potential infringer may avoid getting this opinion of counsel.

This does not mean that the opinion of counsel cannot be the basis for demonstrating compliance with the new, more defendant-friendly standard. However, the new standard focuses less on whether the accused infringer obtained opinion counsel, and more on whether the defendant did what a “hypothetical reasonable company should have done under the circumstances.” In most cases, we suspect that this will normally mean getting an opinion letter from counsel. The reason is that, at the point when any of this matters, the accused is already found to be an infringer. At that point, if the issue were identified, perhaps it would be reckless not to have consulted with legal counsel and get an opinion from them. The opinion letter will not demonstrate the defendant’s state of mind, but will instead be offered as evidence of the “objectively-defined risk”.

The CAFC also restricted the waiver of privilege that could arise from asserting advice of counsel as a defense to a willful infringement claim. If a defendant waives privilege for so-called “opinion counsel,” that does not constitute a waiver for a defendant’s communications with trial counsel. In the words of the ruling:

“We conclude that the significantly different functions of trial counsel and opinion counsel advise against extending waiver to trial counsel.”

This emphasizes the need for keeping “opinion counsel” separate from litigation counsel.

Defendants often complained about unpredictable rulings on the issue of whether one’s infringement was willful. Both aspects of this defendant-friendly ruling changes the economics of patent infringement litigation. With less threat of punitive damages, defendants can more confidently resist the urge to settle.

Fulcrum Inquiry performs damages analyses in intellectual property matters. Depending upon the type of intellectual property and related cause of action, our calculations can include lost profits, reasonable royalties, disgorgement, reverse engineering of trade secrets.