In its long awaited decision, a virtually unanimous en banc panel of judges of the U.S. Court of Appeals for the Federal Circuit overturned 18 years of precedent, revoking the so-called "adverse inference" rule explaining it had resulted in inappropriate burdens on the attorney-client relationship. Knorr-Bremse Systems Fuer Nutzfahrzeuge GmbH v. Dana Corp., Case Nos. 01-1357, -1376, 02-1221, - 156 (Fed. Cir. Sept. 13, 2004).
Evidence of actual copying is rarely available. As a result, courts have focused on whether an accused infringer had a good-faith belief its conduct was proper. Over time, the Federal Circuit imposed an affirmative duty on a potential infringer to act with due care, which included obtaining a competent opinion of counsel. Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380, 1389-90 (Fed. Cir. 1983). The due care and competent opinion of counsel requirement led the Federal Circuit to find a failure to obtain opinion of counsel could warrant an adverse inference that the accused infringer had not obtained an opinion or any such opinion was or would have been adverse. Kloster Speedsteel AB v. Crucible, Inc., 793 F.2d 1565, 1580 (Fed. Cir. 1983). Finally, the Federal Circuit held the failure to introduce an exculpatory opinion of counsel could also lead to an adverse inference. Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1572-73 (Fed. Cir. 1988).
This precedent imposed a significant Hobson’s choice on accused infringers when confronted with allegations of willful infringement. On the one hand, accused infringers who had obtained an opinion from counsel were forced to reveal those opinions and waive the attorney-client privilege and sometimes even attorney work product. On the other hand, accused infringers could elect not to reveal their opinions or not reveal they had obtained an opinion, in which case, the court drew the adverse inference. Faced with this choice, accused infringers more often than not chose to produce the opinions and waive the attorney-client privilege and work product protections.
In Knorr-Bremse, the Federal Circuit after having reviewed at least 24 amicus curiae briefs, overruled the longstanding precedent and has alleviated the Hobson’s choice previously faced by accused willful infringers. The Federal Circuit held that it is improper for the trier of fact to draw an adverse inference when the attorney-client privilege and/or work product privilege is invoked; and it is improper for the trier of fact to draw an adverse inference when an accused infringer had not obtained an opinion of counsel.
The Knorr-Bremse Federal Circuit Decision
Knorr-Bremse sued Dana Corporation and Haldex Brake Products AB alleging infringement of a single U.S. patent. Dana and Haldex had agreed to sell a disk brake in the United States that Haldex originally manufactured in Sweden. More than a year before filing suit, Knorr-Bremse orally notified Dana that Knorr-Bremse was involved in a dispute with Haldex in Europe, and Knorr-Bremse had pending U.S. patents applications. Soon after, Knorr-Bremse notified Dana in writing that Knorr-Bremse was involved in patent litigation against Haldex in Europe, and Knorr-Bremse’s U.S. patent had issued. A year later, Knorr-Bremse sued Dana and Haldex alleging willful infringement of its U.S. patent.
Haldex informed the court that it had consulted European and U.S. counsel regarding Knorr-Bremse’s patents, but it did not produce any opinion or any legal advice it received from counsel, citing the attorney-client privilege. Dana did not itself consult counsel, instead relying on Haldex. The district court, relying on Federal Circuit precedent, determined “it is reasonable to conclude that such opinions were unfavorable.” The district court found the totality of the circumstances compelled the conclusion that the infringement was willful.
In its opinion, the Federal Circuit addressed four separate questions. To the question “[w]hen 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 answered with an emphatic “no.” The Federal Circuit determined an adverse inference should not be drawn but an accused infringer still has a duty to respect the law. Weighing the attorney-client relationship versus the duty to disclose opinions of counsel, the Federal Circuit pronounced “a special rule affecting attorney-client relationships in patent cases is not warranted.”
The Federal Circuit also answered the second question, “when the defendant had not obtained legal advice, is it appropriate to draw an adverse inference with respect to willful infringement,” with a “no.” The Federal Circuit stated this second question was not an issue of privilege, “but whether there is a legal duty upon a potential infringer to consult with counsel, such that failure to do so will provide an inference or evidentiary presumption that such opinion would have been negative.” Consistent with its answer to the first question, the Federal Circuit held “that it is inappropriate to draw a similar adverse inference from failure to consult counsel,” again noting potential infringers have “an affirmative duty of due care to avoid infringement of the known patent rights of others.”
The Federal Circuit also determined that a substantial defense to infringement is not sufficient to defeat liability for willful infringement even if no legal advice has been secured. The Federal Circuit noted that this was a factor to be weighed in the totality of the circumstances analysis but should not be given per se treatment.
Accused infringers are no longer faced with an adverse inference stemming from the choice of not divulging an opinion of counsel or from not having obtained one. Instead, the burden is now on the patentee to demonstrate, under the totality of the circumstances test, that an accused infringer acted willfully. Whether the accused infringer obtained a competent opinion of counsel is now simply one factor to consider in this analysis. Other factors include deliberate copying, concealing infringing activity, infringement where the infringer knows it has only frivolous defenses, infringement designed to injure a competitor and whether the infringer, when confronted with the knowledge of the patent, formed a good-faith belief as to invalidity or non-infringement.
The Federal Circuit’s decision does not ameliorate the prudence of obtaining an opinion of counsel when faced with a non-frivolous patent infringement allegation. Indeed, in appropriate circumstances, a competent exculpatory opinion from counsel can be a powerful tool in defending against a claim of willful infringement.
Prior to Knorr-Bremse, an allegation of willful infringement and the attendant Hobson’s choice were often used to pressure an accused infringer during litigation. Many patent owners used the attorney-client waiver attendant with use of an opinion as leverage to seek broad discovery — even for materials communicated by litigation counsel and attorney work product of litigation counsel. With the demise of the adverse inference rule, many defendants may now choose not to rely on exculpatory opinions (even if they have one). Thus, the patentee’s burden of proving willful infringement or obtaining intrusive discovery has increased significantly. Patentees will now have to focus discovery efforts more on actions taken by the accused infringer to avoid infringement and the other factors listed above. Indeed, the more factual support the patentee can garner through the discovery process tending to establish such willfulness factors the more likely an accused infringer will confront the dilemma of whether to waive privilege and rely on an opinion of counsel. However, in future disputes over the scope of the waiver, courts will now look to the traditional jurisprudence of the regional circuit regarding the scope of the remaining privilege, not to case law articulating special (and intrusive) jurisprudence which was born out of the adverse inference rule regarding litigation of willful patent infringement allegations.