How to Prove Reasonable Royalty Damages after Uniloc
In-House Counsel's Role in Avoiding Willful Patent Infringement
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In-House Counsel’s Role in Avoiding Willful Patent Infringement
by
Timothy T. Hsieh and Franklin D. Ubell*
I. INTRODUCTION
The Federal Circuit’s decision in the case of In Re Seagate1
implemented a new
“objectively reckless” standard for judging whether patent infringement is willful for purposes of
assessing the propriety of an award of enhanced damages. Seagate further held that there is no
longer an affirmative duty to obtain an opinion of counsel regarding infringement or validity of a
patent in question. Hereafter, we discuss actions which In-House counsel can take, post-Seagate,
to avoid findings of willful infringement, highlighting the continued relevance of design around
activities and opinions of counsel. We further point out that Seagate may permit the
establishment of policies and procedures which can greatly reduce the burden on In-House IP
Counsel being created today by an inundation of offers to sell patents and patent portfolios.
II. DEVELOPMENT OF THE LAW OF WILLFUL INFRINGEMENT
Prior to the creation of the Federal Circuit, the doctrine of willful patent infringement was
well established, as reflected for example in classic pre-Federal Circuit cases such as Milgo
Electronic Corp. v. United Telecommunications, Inc.2
That case involved a data modem, the
Milgo 4400/48, which doubled the speed of data transmission over the switched telephone
network. The defendant obtained a 4400/48 modem, secreted it in a locked room, scratched the
serial numbers off and slavishly copied it component by component. When the patent on the
4400/48 issued, the defendant’s Vice President of Engineering wrote to the company President
stating that “Our first engineering opinion is that we cannot get around all of the patent claims
and still design a modem that will be anything like the PM-48 concept.” No opinion of counsel
was obtained, and the result was an award of treble damages and attorney fees.
* Franklin D. Ubell (Frank Ubell) heads the Intellectual Property & Technology Group at the Orange County,
California, office of Greenberg Traurig, LLP. He has over twenty-five years of experience litigating patent and
trademark infringement cases and other causes. Timothy T. Hsieh (Tim Hsieh) is an associate in the Intellectual
Property & Technology Group at the Orange County, California, office of Greenberg Traurig, LLP. A slightly edited
version of this article appears in 34 NEW MATTER 25-28 (2009).
1
497 F.3d 1360 (Fed. Cir. 2007).
2
200 U.S.P.Q. 481 (D.Kan. 1978), aff’d 623 F.2d 645 (10th Cir. 1980).
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A few years later, the Federal Circuit fashioned a standard for evaluating willful
infringement in Underwater Devices, Inc. v. Morrison-Knudsen Co.3
According to that standard,
“Where…a potential infringer has actual notice of another’s patent rights, he has an affirmative
duty to exercise due care to determine whether or not he is infringing. Such 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.”4
The Federal Circuit cited the Tenth Circuit’s
opinion in Milgo as precedent for this standard.
Some thirty years after Milgo, in its decision in In re Seagate, the Federal Circuit
abolished the Underwater Devices test and established a new two-part test comprising an
objective component and a state of mind component.5
According to the Seagate test, to prove
willfulness, a patentee must first show by clear and convincing evidence that: (1) the infringer
acted despite an objectively high likelihood that its actions constituted infringement of a valid
patent.6
Next, the patentee must further demonstrate that: (2) this high likelihood of
infringement was either known, or so obvious that it should have been known, to the accused
infringer.7
The Seagate Court emphasized that, under its new test, there is no affirmative duty to
obtain an opinion of counsel regarding patent validity or infringement.8
While much has been written about the likely impact of Seagate, it is safe to say that
egregious cases such as Milgo will still constitute willful infringement under the new Seagate
test. Evidence of slavish copying and clear literal infringement satisfy the “objectively high
likelihood of infringement” prong of the Seagate test, while knowledge of the patent and
admission of its likely infringement satisfy the state of mind component.
3
717 F.2d 1380, 1389-90 (Fed. Cir. 1983).
4
Id.
5
In re Seagate, 497 F.3d 1360 (Fed. Cir. 2007).
6
Id. at 1371.
7
Id.
8
Id.
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III. POST-SEAGATE DECISIONS
Since Seagate, courts have recognized the continuing vitality of the pre-Seagate “totality
of the circumstances test” for evaluating whether infringement was willful.9
Factors relevant
under that test include:
1. Bad faith commercial conduct, such as putting off the patentee so as to allow
profitable infringement to continue;
2. The closeness or complexity of the legal and factual questions presented;
3. Whether the infringer promptly sought and obtained competent legal advice;
4. An infringer’s bad faith in litigation; and
5. Whether there was an independent invention or attempts to design around the
patent, as opposed to copying.
These factors have been used by a number of pre-Seagate courts.10
A number of post-
Seagate cases have also followed the “totality of the circumstances” approach.11
9
See e.g. Eastman Kodak Co. v. AGFA Gevaert N.V., 560 F.Supp. 227 (S.D.N.Y 2007).
10
See e.g., Chiron Corp. v. Genetech, Inc., 268 F.Supp.2d 1117, 1120 (E.D.Cal. 2002).
11
See Arlington Indus, Inc. v. Bridgeport Fittings, Inc., 2009 U.S. Dist. LEXIS 7911 at *49 (M.D. Pa. Feb. 4,
2009)(“Proper adjudication of the willful infringement issue requires the factfinder to examine the totality of the
circumstances.”); Honeywell Int’l Inc. v. Universal Avionics Systems Corp., 585 F.Supp. 2d 636, 641-42 (D. Del.
2008)(“Although [Seagate] provided little, if any direction, on how to apply the new standard, it did not specifically
abandon other factors previously applied to the willfulness issue, including analysis of willfulness under the totality
of the circumstances. Use of this approach is supported by footnote 5 in the Seagate opinion which acknowledges
that standards of commerce would be an acceptable factor to consider, along with the historical recognition of trial
courts having substantial discretion to enhance infringement damages depending on the circumstances of a case.”);
Trading Technologies Int’l, Inc. v. eSpeed, Inc., 2008 U.S. Dist. LEXIS 295 at *4 (N.D. Ill. Jan. 3, 2008)(“We agree
with the plaintiff that the court’s decision in Seagate did not alter the requirement that the totality of the
circumstances must be taken into account when determining whether infringement was willful.”); Minks v. Polaris
Indus., Inc., 546 F.3d 1364, 1380 (Fed. Cir. 2008)(citing a jury instruction from the M.D. Fla. that uses the “totality
of the circumstances” in determining willfulness); Lucent Technologies, Inc. v. Gateway, Inc., 2007 U.S. Dist.
LEXIS 95934 at *11-12 (S.D. Ca. Oct. 30, 2007)(“Seagate does not suggest that the Federal Circuit intended to
jettison the general approach of viewing willfulness under the totality of the circumstances…Retaining a totality of
the circumstances inquiry is also encouraged by the long tradition of giving trial courts discretion to enhance
infringement damages based on the specific circumstances of a case…One obvious caveat to examining the totality
of the circumstances is that the accused infringer’s state of mind is not relevant to the first threshold step in the
Seagate test.”); Informatica Corporation v. Business Objects Data Integration, Inc., 527 F.Supp. 2d 1076, 1083
(N.D. Ca. 2007); Depomed, Inc. v. Ivax Corp., 532 F.Supp. 2d 1170, 1177 (N.D. Ca. 2007).
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In the post-Seagate, Eastman Kodak case, the Court found that the defendants “were
conscious of the need not to infringe and made a bona fide effort to avoid infringement by
attempting to design around the claimed invention.”12
In particular, patent agents were
employed to study the patents in question and their prosecution histories.13
However, no outside
counsel non-infringement opinions were obtained.14
Despite the failure to offer exculpatory opinions, the Kodak Court found that the accused
infringers had not acted objectively recklessly, particularly in view of the fact that the defendants
had openly sold their products for six years and received no accusations of infringement despite
Kodak’s testing of at least one of the accused products.15
Given this background, what can In-
House Counsel do post-Seagate to assist in avoiding willful patent infringement?
IV. IN-HOUSE COUNSEL CAN IMPLEMENT DESIGN AROUND STRATEGIES
As can be seen from the Kodak case discussed above, designing around potentially
infringing patent claims is still an important technique to avoid willfulness findings. In-House
Counsel working with technical staff and outside counsel can develop such strategies. One
common strategy is to study a patent of interest and determine a claim limitation which can be
omitted from the potentially infringing product and to then obtain an opinion of counsel that
omitting the limitation will indeed not infringe.16
In-House Counsel of course would oftentimes like to avoid the expense of obtaining an
outside counsel opinion. Certainly, the Kodak case and Seagate itself suggest that, under some
circumstances at least, proceeding without a formal outside counsel opinion, or relying on an in-
house opinion, would not be “objectively reckless”. Nevertheless, the presence of such an
opinion will still be substantial evidence weighing against a finding of willfulness and may still
prove prudent to procure. Where infringement is known to be likely and unavoidable, an opinion
of outside counsel would still appear essential in preparing to fend off a finding of willfulness.
12
Eastman Kodak, 560 F.Supp. 2d at 303.
13
Id. at 305.
14
Id.
15
See also Honeywell Int’l Inc. v. Universal Avionics Systems Corp., 585 F.Supp. 2d 636, 641-42 (D. Del. 2008)
(granting summary judgment of non-willfulness where pre-suit patent review was conducted but no written opinion
of non-infringement was prepared).
16
See Franklin D. Ubell, “Are You Trying to Design Around My Client’s Patent?”, INTELLECTUAL PROPERTY
TODAY 16-18 (September 2006).
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V. INVALIDITY/NON-INFRINGEMENT OPINIONS SHOULD BE TIMELY
PROCURED AND TIMELY SUPPLIED TO COMPANY DECISION MAKERS
Under the case law, obtaining an invalidity or non-infringement opinion from outside
counsel is only the first step. The opinion needs to be timely procured, provided to company
decision makers at the appropriate time, and relied on by them in deciding to proceed to produce
the product in question. Ideally, procedures and lines of communication should be put in place
to facilitate this series of actions.
A number of cases reflect the likely result of failing to take such steps. For example, in
Chiron Corp. v. Genentech, Inc.,17
the Court denied a Motion for Summary Judgment of Non-
willfulness where In-House Counsel’s notes regarding invalidity were not known to
management. As the Court stated: “If decision makers at Genentech were not apprised of [In-
House Counsel’s] reasons for believing the patent was invalid and not infringed, they cannot be
said to have reasonably relied on the theories disclosed in her notes.”18
In another case, Applied Medical Resources Corp. v. United States Surgical Corp.,19
the
Federal Circuit affirmed a willfulness finding despite the presence in evidence of three written
opinions of counsel because one of the opinions was simply “shipped off in the mail”, another
failed to address pertinent issues, and the third arrived after the infringer began selling the
infringing product.20
As the Federal Circuit observed, “based on this evidence, a jury could have
reasonably concluded that U.S. Surgical paid little if any attention to the opinion letters”.21
Thus, as noted above, opinion letters should to be supplied to decision makers at a time
when production of the potentially infringing product can still be avoided or a design around can
be pursued, and should be reviewed and relied upon by decision makers in determining to move
forward. In-House counsel may also wish to assure that a paper trail of communications and
meeting minutes is created, evidencing compliance with such procedures for reference in future
litigation.
17
268 F. Supp. 1117 (E.D.Cal 2002).
18
Id. at 1121-1122.
19
435 F.3d 1356 (Fed. Cir. 2006).
20
Id. at 1365.
21
Id.
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VI. IN-HOUSE COUNSEL SHOULD ENSURE THAT ALL RELEVANT
INFORMATION IS SUPPLIED TO OPINION COUNSEL
Of course, the value of outside counsel opinions is seriously undermined when important
facts are withheld from opinion counsel. As one Court stated, “Whenever material information
is intentionally withheld, or the best information is intentionally not made available to counsel
during the preparation of the opinion, the opinion can no longer serve its prophylactic purpose of
negating a finding of willful infringement.”22
In-House Counsel therefore need to be vigilant to
ensure that all relevant information is provided.
VII. IN-HOUSE COUNSEL’S ROLE IN REVIEWING CONTENT OF OUTSIDE
COUNSEL’S OPINION
Once an opinion of counsel is received, In-House Counsel may wish to review the
opinion’s quality. For example, in one case, Eli Lilly and Co. v. Zenith Goldline
Pharmaceuticals,23
the Court found willful infringement where “the opinion letter contained
glaring errors and omissions that both the authors and the recipients should have recognized”.24
In another case, the court found that the opinion’s recipient, an experienced patent attorney,
should have recognized the obvious shortcomings of outside counsel’s opinion.25
Where In-
House Counsel discovers serious shortcomings in outside counsel’s opinion, it may be advisable
to procure an opinion from a different law firm in order to have a cleaner record in the event that
the improved opinion is relied on and the surrounding facts are discovered in subsequent
litigation.
In addition, In-House Counsel should strive to protect the independence of outside
counsel’s judgment and opinion preparation. In one case, the court considered “the fact that
infringer’s In-House patent lawyer reviewed and revised a draft opinion from outside counsel” in
determining that infringement was willful.26
22
Chiron, 286 F.Supp at 1123.
23
2001 U.S. Dist. LEXIS 18361 (S.D. Ind. Oct. 20, 2001).
24
Id. at *77.
25
John Hopkins University v. CellPro, 152 F.3d 1342, 1364 (Fed. Cir. 1998).
26
John Hopkins University v. CellPro, 978 F.Supp. 184, 194 (D. Del. 1997)(analyzed by Chiron, 286 F.Supp. at
1125).
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VIII. IN-HOUSE COUNSEL CAN ESTABLISH LINES OF COMMUNICATION AND
EDUCATE COMPANY EMPLOYEES
For potential patent infringement situations to be detected and avoided, company
employees such as technical and management personnel need to be educated to recognize
potential issues and bring them to the attention of the legal staff. Education can also go far
towards eliminating “smoking gun” statements regarding infringement, such as the statements
that occurred, for example, in the Milgo case discussed at the outset of this article.
IX. RESPONDING TO OFFERS TO SELL PATENTS IN LIGHT OF SEAGATE
Presently, many In-House IP Counsel are being inundated with offers to sell patents or
patent portfolios. Some such counsel are concerned regarding what exposure may arise should it
later be asserted that the company was placed on notice of such patents for purposes of willful
infringement, damages, etc. In view of Seagate’s abolition of the Underwater Devices “duty of
care” standard, In-House Counsel may wish to explore establishing policies and procedures for
handling such letters which would assist in insulating a company from potential willfulness
charges. For example, a company might establish a policy that all such letters or other
communications are to be handled by a particular staff person, for example, one who has no
knowledge of the company’s product designs.
Such a policy would further establish how that staff person would handle various types of
communications, for example, by summarily returning bare offers to sell a list of patents to the
company, while giving different treatment to more detailed letters containing actual infringement
charges or otherwise having more serious ramifications. Once initially established, the policies
and procedures could be reviewed by outside counsel who could provide an opinion that, in
implementing the procedure, the company was not proceeding “objectively recklessly”, but
rather eminently reasonably under Seagate.
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X. CONCLUSION
The proper framework for evaluating willfulness under In re Seagate is presently under
development in the case law. During this period of legal development, In-House Counsel have a
number of proven tools at their disposal to place their companies in the best position to ward off
potential charges of willful patent infringement.