Summary
The air disk brakes manufactured by Knorr-Bremse are used in heavy commercial vehicles, such as 18-wheelers. Dana and Haldex agreed to sell together in the United States an air disk brake manufactured by Haldex in Sweden. Id. at 1341. Dana and Haldex imported into the United States approximately 100 units of a Haldex brake designated the Mark II model, which was installed in approximately 18 trucks between 1997 and 1999. Id.

In December 1998, Knorr-Bremse orally notified Dana of patent disputes with Haldex in Europe involving the Mark II and told both Dana and Haldex that patent applications were pending in the United States. Further, on August 31, 1999, Knorr-Bremse notified Dana in writing of infringement litigation against Haldex in Europe and that its United States patent had been issued on July 27, 1999. Knorr-Bremse filed suit on May 15, 2000, and in September 2000, Haldex presented to the court a modified brake design, designated the Mark III, and moved for a summary declaration of non-infringement by the Mark III. Knorr-Bremse moved for summary judgment of literal infringement by the Mark II and infringement by the Mark III either literally or under the doctrine of equivalents. The district court granted Knorr-Bremse’s motion for summary judgment of literal infringement by the Mark II and set for trial issues regarding the Mark III. Following a bench trial, the district court ultimately found literal infringement by the Mark III. Id. at 1341-1342.

On the willful infringement issue, Haldex claimed that it had consulted both European and United States counsel concerning the patents, yet it declined to produce any legal opinion or disclose the advice received, asserting the attorney client privilege. Dana stated that it had relied on the advice received by Haldex.[1] The trial court determined that the opinions received by Dana and Haldex were unfavorable and concluded that the totality of the circumstances compelled the conclusion that the use of the Mark II brake, including Dana’s use of the Mark II after a judgment of infringement, amounted to willful infringement of the patent. As a result of that finding, the court made a further finding that the case was “exceptional” under 35 U.S.C. § 285 and awarded Knorr-Bremse attorney fees for that portion of the litigation related to the Mark II brake. Id. at 1342.

On appeal, the Federal Circuit, en banc, observed that “willful” conduct is more than mere negligence and that “willful infringement” is a statement that patent infringement is disfavored and that intentional disregard of legal rights warrants deterrence. Id. The court explained that a determination of willfulness is made on a consideration of the totality of the circumstances, that fundamental to a determination of willful infringement is the duty to act in accordance with law, and that reinforcement of that duty was a foundation of the formation of the Federal Circuit Court “at a time when widespread disregard of patent rights was undermining the national innovation incentive.”   Id. at 1342-1343.

The court then traced the development of the Federal Circuit case law regarding the requirement that a potential infringer exercise due care to determine whether or not he is infringing other patents, beginning with Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed.Cir. 1983), which quoted the infringer's attorney, who, without asking a patent counsel to review the patents at issue, advised the client to refuse to discuss payment of a royalty and further advised that courts had found "patents claimed to be infringed upon invalid in approximately 80 percent of the cases." Knorr-Bremse at 1343, quoting Underwater Devices at 1385. As a result of this flagrant disregard of presumptively valid patents, the Federal Circuit established a potential infringer's duty of due care to determine whether or not he is infringing another’s patent rights, including “the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.”   Knorr-Bremse at 1343, quoting Underwater Devices at 1389-90.

Knorr-Bremse then discussed Kloster Speedsteel AB v. Crucible Inc., 793 F.2d 1565 (Fed.Cir. 1986) and Fromson v. Western Litho Plate &   Supply Co., 853 F.2d 1568 (Fed.Cir. 1988) for the general rule established in those cases that an infringer’s reliance on attorney-client privilege as to the advice of counsel leads to an inference “that either no opinion was obtained or, if an opinion were obtained, it was contrary to the infringer’s desire to initiate or continue its use of the patentee’s invention.” Knorr-Bremse at 1343, quoting Fromson at 1572-1573. Finding that this precedent has resulted in inappropriate burdens on the attorney-client relationship, the Federal Circuit explained that the “conceptual underpinnings” for Kloster and Fromson have diminished in force and consequently overruled those cases. Id. at 1343-1344.

The court then explained its holding by addressing whether, when the attorney-client privilege and/or work-product privilege is invoked by a defendant in an infringement suit, it is appropriate for the trier of fact to draw an adverse inference with respect to willful infringement. Observing that the attorney-client privilege is “the oldest of the privileges for confidential communications known to common law,” the court found that the inference that withheld opinions are adverse to the client’s actions can distort the attorney-client relationship and held that there should be no risk of liability in disclosures to and from patent counsel, because such a risk would intrude upon full communication between attorney and counsel, and, ultimately, the public interest in encouraging open, confident relationships between a client and an attorney. Id. at 1344. Accordingly, the assertion of the attorney-client and/or work product privilege and the resulting withholding of the advice of counsel no longer entail an adverse inference as to the nature of the advice. Id   at 1345.

This ruling also applies in situations in which the defendant did not obtain legal advice, based on the fact that the burdens and expense associated with early and full study by counsel of every potentially adverse patent of which the defendant has knowledge can be significant. Accordingly, although there remains an affirmative duty of due care to avoid infringement of known patents, “the failure to obtain an exculpatory opinion of counsel shall no longer provide an adverse inference or evidentiary presumption that such an opinion would have been unfavorable.”   Id. at 1345-1346.

The court then discussed the consequences for the case at bar, ordering that, because the district court’s finding of willful infringement was based on several factors in addition to the adverse inference regarding the attorney-client privilege, the case should be remanded to the district court for a “fresh weighing of the evidence” to determine whether there was a willful infringement. Id. at 1346. Importantly, the court specifically did not address the question of whether the trier of fact can or should be told whether or not counsel was consulted as part of the totality of the circumstances being considered.

Finally, the court held that the existence of a substantial defense to infringement is merely one of the factors to be considered among the totality of the circumstances.

Justice Dyk filed a separate opinion concurring in part that the adverse inference arising from an infringer’s failure to disclose or obtain an opinion of counsel should be eliminated. The dissent focused on the argument that an infringer’s failure to engage in due care should not lead to an award of punitive damages and should be completely eliminated as a factor in the willfulness rubric. Id. at 1348-1352.

Significance of the Case
This was not a case in which the defendants asserted an advice of counsel defense and thereby waived privilege. It was one in which one of the defendants acknowledged, truthfully, that it had consulted counsel but declined to explain or rely upon the advice it received from that counsel. Hopefully, this change in Federal Circuit law will encourage clients to have more frank and open discussions with their attorneys than they would have had if they were concerned about potential adverse inference instructions in the future. Given the many recent attacks on attorney-client privilege as an obstacle to the truth, it is comforting to see a court give appropriate value to the privilege.

[1] It is important to note that Haldex did not assert the “advice of counsel” defense which would have waived any claim of attorney client privilege.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.