Willful Infringement and Opinions Of Counsel in the U.S.: The Latest Swing of the Pendulum

By: Jonathan P. Osha

Since the very early days of patent law in the United States, enhanced damages have been available as a punishment for willful patent infringement.  U.S. patent law has taken the view that willful infringement should be treated as a culpable act, and thus should be punished more harshly than unknowing or “innocent” infringement.  This general concept has continued through to the present day, where availability of enhanced damages is codified in the patent statute (35 U.S.C. §284).

While this concept of enhanced damages has continued relatively unchanged, the standard for what is considered “willful”, and the evidence necessary to meet that standard, have varied significantly over time.  Likewise, the importance of obtaining an opinion of counsel and the need of such an opinion to defend against a charge of willfulness have significantly changed based on conflicting court decisions.  This moving target has made it difficult for even the most prudent companies to appropriately measure their risk and to appropriately prioritize their IP budgets.

On June 13, 2016, the U.S. Supreme Court overturned the most recent test for willful infringement that had been established by the Court of Appeals for the Federal Circuit in 2007, thus once again changing the willfulness landscape.  Looking forward, obtaining opinions of counsel – while not mandatory – will have increased importance in protecting against an award of enhanced damages due to willful infringement.

Section 284 of the U.S. patent code provides, inter alia,

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.  When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed.

35 U.S.C. §284 (emphasis added).  This means that after a jury, or the court itself, determines an amount of actual damages that are payable due to infringement of a patent, the court may, at its discretion, increase the amount of those damages up to three times as a punishment for willfulness.  The amount of the increase – whether it be none, two times, or the full three times — is dependent upon the court’s view of the degree of willfulness involved.  Conceptually this is simple, but in practical application it has been quite complex.

It has long been a common practice around the world for a company concerned about possible infringement of a patent by one of its products or methods to obtain an opinion of counsel that analyzes the patent, the accused product or method, and the prior art and reaches a conclusion as to the validity and potential infringement of that patent.  Primarily, such opinions of counsel are informational; they provide reasoned legal guidance to company management so that the company can take prudent steps to avoid infringement and reduce business risk.  In the United States, opinions of counsel serve this purpose as well, but also to a certain extent act as a “shield” against a finding of willful infringement.  In other words, if a company is found to infringe the patent of a third party, it may be required to pay actual damages, but an award of enhanced damages is unlikely if the company can show that it relied on a well-reasoned opinion of counsel that concluded the patent was either invalid or not infringed.

A complicating factor in this willfulness equation is the law of attorney-client privilege.  An opinion of counsel is a communication between an attorney and her client for the purposes of rendering legal advice.  Accordingly, this type of communication is “privileged,” i.e., is protected from discovery by the attorney-client privilege.  However, if an accused party wishes to rely on an opinion of counsel to defeat an accusation of willful infringement, it is necessary to waive that privilege in order to produce the opinion.  That waiver applies not only to the opinion itself, but to all communications relating to the opinion.  Accordingly, even when an opinion of counsel has been obtained, issues of privilege and attorney work product must be carefully considered before using that opinion as part of a willfulness defense and producing that opinion to opposing counsel.[1]

In 1983, the Court of Appeals for the Federal Circuit (“Federal Circuit”) addressed the issues of what constitutes willfulness and when a potential infringer has an obligation to seek advice of counsel.  That decision, Underwater Devices Inc. v. Morrison-Knudsen Co.,[2] applied a low “negligence” standard to proving willfulness, and moreover held that a party having “actual notice of another’s patent rights has an affirmative duty to exercise due care to determine whether or not he is infringing.”  Continuing, the court found that “[s]uch an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.”  In this case, the accused infringer had sought advice of counsel only after it had commenced the infringing activities.  Thus, the infringement was found to be willful.

The Underwater Devices decision had the practical effect of requiring companies to seek opinions of counsel almost any time they had actual notice of a potentially infringed patent.  The economic risk of treble damages forced this as a business practice, even for patents that were of marginal relevance.  However, the cost of obtaining opinions of counsel can be quite high, especially where multiple patents are at issue.  This was an issue particularly for small and medium sized entities with smaller IP budgets.  Moreover, the ability of a patent holder to put a company on actual notice of a patent through the simple act (with minimal cost) of sending a single letter, and thereby to impose a significant duty and cost on that company, caused a leverage imbalance between patent holders and the public at large.  This imbalance was further exacerbated by the privilege issues, mentioned above, associated with actually relying on an opinion of counsel to defend against a charge of willful infringement.

Some twenty-four years after Underwater Devices, in 2007 the Federal Circuit revisited this issue en banc and overruled the decision.  Cognizant of the imbalances its prior decision had created, the Federal Circuit swung the pendulum in entirely the opposite direction.  In In re Seagate Tech.,[3]  the court first raised the bar for proving willfulness from the negligence standard to a recklessness standard.  Second, the court imposed a two-step test for proving willfulness.  In the first step, the patent holder was required to show, by clear and convincing evidence, “that the infringer acted despite an objectively high likelihood that is actions constituted infringement of a valid patent.”  If this objective standard was met, then the second step would be applied, requiring the patent holder to show “subjective recklessness,” meaning that the infringer knew or should have known of the infringement.  The net effect of this holding was to make it significantly more difficult to prove willful infringement, and thus correspondingly to reduce – as a business practice – the need for and expense of opinions of counsel in many situations.

In June of 2016, the U.S. Supreme Court issued a decision on two cases addressing the question of willful infringement.  In Halo Electronics, Inc. v. Pulse Electronics, Inc. and Stryker Corporation, et al. v. Zimmer, Inc., the court noted that enhanced damages should not be awarded in a typical infringement case, but instead are designed as “punitive” or “vindictive” sanctions for egregious behavior.  This determination is under the discretion of the court, which while not subject to a precise rule or formula must be guided by sound legal principles.  The court found the Seagate test, requiring a finding of objective recklessness as a first step in every case before enhanced damages can be awarded, to be too strict in that it excludes from discretionary punishment “many of the most culpable offenders.”  Specifically, the court noted, “in the context of such deliberate wrongdoing, it not clear why an independent showing of objective recklessness – by clear and convincing evidence, no less – should be a prerequisite to enhanced damages.”  Id.  The court noted that the Seagate test further aggravates that problem by insulating an infringer from a finding of willful infringement if the infringer (or its counsel) could muster a reasonable – even if unsuccessful – defense at trial even when that defense was completely unknown to the infringer at the time of the infringement.  In the court’s words, “[u]nder that standard, someone who plunders a patent – infringing it without any reason to suppose his conduct is arguably defensible – can nevertheless escape any come-uppance under §284 solely on the strength of his attorney’s ingenuity.”  Accordingly, the Seagate two-part test was overruled.  In conclusion, the court explained,

Section 284 allows district courts to punish the full range of culpable behavior.  Yet none of this is to say that enhanced damages must follow a finding of egregious misconduct.  As with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.  Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test.  Consistent with nearly two centuries of enhanced damages under patent law, however, such punishment should generally be reserved for egregious cases typified by willful misconduct.

By rejecting the clear, albeit strict standard established by Seagate, and emphasizing instead the discretionary authority of the district (trial) court, the Halo decision likely will make it easier to show willful infringement (and essentially moves the willfulness pendulum back to the middle).  Consistent with this – without the protection of the objective first prong of the Seagate test and its requirement of proof by clear and convincing evidence, potential infringers must now take greater care in evaluating infringement risks.  Obtaining opinions of counsel – which have always been an important informational tool to guide business decisions – has now once again taken on increased importance as a defense against accusations of willful infringement.

[1] The interplay between opinions of counsel and attorney-client privilege will be the subject of a later article in this series.

[2] Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983)

[3] In re Seagate Tech., 497 F.3d 1360, 1369 (Fed. Cir. 2007).