Federal Circuit Overrules Longstanding “Adverse Inference” Rule

Tuesday, October 12, 2004

Publication:Detroit Legal News, Vol. CIX No. 204

In the recent en banc decision of Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmBH v. Dana Corp., Nos. 01-1357, -1376, 02-1221, -1256, 2004 U.S. App. LEXIS 19185 (Fed. Cir. Sept. 13, 2004), the U.S. Court of Appeals for the Federal Circuit overruled the “adverse inference” rule which relates to willful infringement in patent cases.

More specifically, if an accused patent infringer fails to act with due care in avoiding infringement, the infringement may later be deemed by the trier of fact to have been willful. Such a finding may be relied on by the court to increase damage awards – up to treble – and award attorney fees. While a number of factors may be relied on by the trier of fact to determine if the infringement was willful, a primary factor has been whether the accused infringer sought and relied on an opinion of counsel that the accused activities were not infringing. See, e.g., Jurgens v. CBK, Ltd., 80 F.3d 1566, 1572-73 (Fed. Cir. 1996)(Court held that a potential infringer “has an affirmative duty of due care that normally requires the potential infringer to obtain competent legal advice before infringing or continuing to infringe....”(citation omitted)). Accordingly, accused infringers have traditionally sought opinions of counsel in order to ward off later willful infringement claims.

However, an accused infringer in possession of such an opinion has always been faced with the dilemma during discovery of whether or not to rely on and produce the opinion. If the opinion is relied on and produced, the accused infringer waives the attorney-client privilege as to other materials relating to the opinion. If the opinion is withheld – in accordance with longstanding “adverse inference” rule – the trier of fact could infer that the accused infringer had failed to obtain an opinion or had obtained an unfavorable opinion.

According to the Knorr-Bremse decision, adverse inferences are no longer to be drawn if an opinion is withheld based on privilege or even if an opinion was never obtained. As to the former, the court held that to hold otherwise would intrude on the public interest in open attorney/client relationships.

As to the latter, the court held that to hold otherwise would burden businesses with having to seek opinions of counsel regarding “every potentially adverse patent.” However, the Knorr-Bremse court reaffirmed that the “affirmative duty of due care to avoid infringement of the known patent rights of others” still exists.

Accordingly, the present issue facing patent lawyers and their clients is how Knorr-Bremse will affect their future conduct. In light of Knorr-Bremse, future decisions may place more emphasis on other actions taken by an accused infringer to meet the duty of due care in lieu of seeking opinions of counsel.

For example, whether the accused infringer had a “substantial defense” may play a more prominent role in willful infringement determinations. However, until such time, and given that reliance on an opinion of counsel may still be used in opposing a willful infringement claim, it appears that it should be business as usual in procuring such opinions when threatened with patent infringement.

During litigation, if there are concerns regarding any negative aspects of such an opinion, or other materials which may fall within the scope of the resulting waiver if the opinion is produced, the opinion may now be withheld on the basis of privilege without the “adverse inference.” However, like the criminal defendant who decides not to take the stand, a trier of fact could still infer from the withholding of such an opinion that the opinion was negative. In fact, without further guidance from the courts, a patent owner could argue or infer such to be the case in the event an opinion is withheld. Hopefully, to prevent such possibilities, future decisions will disallow any mention of such opinions at trial in the event such opinions are withheld.