New England Biz Law Update
With attorney-client confidentiality generally, and the privilege specifically, under regular attack, it is refreshing to see the full force of the privilege restored in an area in which it has long been unfairly curtailed.
In Knorr-Bremse Systeme Fuer Nutzfdahrzeuge GmbH v. Dana Corp., the Federal Circuit Court of Appeals sitting en banc recently rejected the “adverse inference” rule, which stated that if a patent holder failed to obtain a competent opinion of counsel that the patent was either not infringed or invalid or unenforceable, an adverse inference arose that any infringement subsequently found by the trier of fact was “willful.”
The confidentiality of communications between lawyer and client is at the core of lawyering. The attorney-client privilege, which protects against compelled disclosure of such communications, is a protection built into our judicial system to safeguard that confidentiality.
The privilege is an essential inducement to clients to be complete and candid in the information they provide to their lawyers, information that is vital to effective legal representation. Indeed, in some commentators’ views, the privilege confers on lawyers a marketable credential, a “publicly created asset” that justifies requiring lawyers to repay the public by providing pro bono service. Steven Lubet and Catherine Stewart, “A ‘Public Assets’ Theory of Lawyers’ Pro Bono Obligations,” 145 U. Penn. L. Rev.1245 (1997).
As a matter of jurisprudence, the attorney-client privilege has not enjoyed universal approbation. For example, Wigmore, that giant of the law of evidence, recognized that the privilege is an impediment to the truth-seeking process, and therefore should be limited.
Other, often less-informed, political and journalistic critics have assailed attorneys’ power to invoke the privilege to foreclose inquiry into important communications and information. Attorneys have occasionally been publicly pilloried for standing firm on their obligation of confidentiality and loyalty to their clients.
A much-publicized example involved Frank Armani, a Syracuse attorney reviled for refusing to reveal where two young missing murder victims were buried because a client gave him the information in confidence. In the matter of a Grand Jury Inquiry Concerning Frank H. Armani, 76 Misc. 2d 231, 359 N.Y.S. 2d 231 (1974)).
The latest assaults on attorney confidentiality and the attorney-client privilege have ensued the financial scandals involving Enron and Worldcom, culminating in the passage of the Sarbanes-Oxley Act of 2002, regulations promulgated by the SEC pursuant to that Act, and changes made by the American Bar Association to its Model Rules of Professional Conduct in response to these developments. (See Model Rules 1.6 (b) (2) and (3) and Model Rule 1.13(c), which create exceptions to the lawyer’s duty of confidentiality when necessary to prevent a client from committing a crime or fraud using a lawyer’s services.)
Origins Of ‘Adverse Inference’ Rule
The adverse inference rule was first enunciated by the Federal Circuit in 1983 in Underwater Devices, Inc., v. Morrison-Knudsen Co., 717 F.2d 1380 (1983), and expanded in 1986 in Kloster Speedsteel AB v. The Crucible Inc., 793 F.2d 1565 (1986).
Underwater Devices held that when a party accused of patent infringement, or otherwise made aware of a patent likely to be asserted against it, failed to obtain a competent opinion of counsel that the patent was either not infringed or invalid or unenforceable, an adverse inference arose that any infringement subsequently found by the trier of fact was “willful.”
Such an inference can be costly because a party found to be a willful infringer is exposed to multiple damages and attorneys’ fees.
Kloster Speedsteel expanded the rule by holding that the adverse inference arose even if the accused had obtained an opinion of counsel but, relying on the attorney-client privilege, declined to produce it to the other side and to the court.
This rule had required an accused to choose between producing an opinion that could lead to disclosure of its litigation plans and tactics, design-around strategies, research and development activities, and other sensitive, confidential information, or asserting the privilege and suffering an adverse inference that risked substantially enhanced damages and attorneys’ fees should it lose.
The rule was unfair and unwise.
It was particularly egregious when production of an opinion was held to effect a subject-matter waiver that opened to scrutiny by the other side even more of the lawyer’s files (or other lawyers’ files) through lawyer depositions and ancillary discovery designed to probe the bases of the lawyer’s opinion.
Under the adverse inference rule, a company accused of infringing, or even on notice that it might be accused of infringing a U.S. patent, was virtually forced to expend substantial time and treasure to obtain a formal non-infringement or “clearance” opinion of counsel.
Even if its engineers and other technical advisors skilled in the art of the patent, after comparing the claims of the patent with the elements of the accused product or process, were quite certain that the patent had no relevance to that product or process, the company still risked an adverse inference supporting a finding of willfulness and enhanced damages.
It could avoid that risk only by retaining an attorney to do an infringement and/or validity analysis and render an opinion. The rule created a virtual full employment program for patent lawyers.
The stark unfairness of coercing a patent infringement defendant to disclose its opinion of counsel was obvious. Such an opinion could contain a virtual road map for the patent holder that would enable it to structure its accusations and trial strategy against the accused infringer informed by the analytical work done by the author of the non-infringement opinion, and informed as well by the technical information supplied to that counsel by the client’s technical people.
Moreover, if the invention was the subject of a continuation application or the patent was subject to a request for continuing examination, disclosure of an alleged infringer’s opinion of counsel could assist the patent holder in crafting new claims to cover possible design-around avenues under consideration by the accused.
Various amici curiae briefs filed in Knorr Bremse pointed out other aspects of unfairness of the automatic adverse inference, including:
(1) the burden that it placed on small businesses, for whom the several thousand dollars that even an extremely modest opinion of counsel costs constituted a serious budgetary problem;
(2) the rule’s encouragement and enablement of predator patentees to extort royalties from small companies unable to afford to challenge the validity of questionable patents; and
(3) the rule’s effect of shifting the burden of proof to an alleged infringer, despite the statutory requirement that willful infringement be proved by clear and convincing evidence.
A number of the amici curiae argued that the rule was not only unfair, but it was unwise as a matter of policy. By raising an automatic adverse inference against a company that did not immediately, upon learning that a patent might be asserted against its products or processes, commission a full-scale investigation and an opinion of counsel, the rule diverted substantial resources, both management and engineering time and company money, from research and development, the launch of new products, and the upgrading of plant and equipment, into the coffers of law firms.
Moreover, since the obligation to obtain an opinion of counsel arose only when a company learned of the existence of a patent that might have relevance to its products or processes, the existence of the rule discouraged some companies from keeping fully current with newly issued patents in the area of their operations.
Such willful, strategic ignorance undermined a principal rationale of the patent system that goes hand in hand with its encouragement of innovation and creativity – the advancement of public knowledge and art generated by conferring on inventors substantial rights to exclude others from using their inventions for a period of years in exchange for making their inventions public in issued patents.
Finally, a rule that in effect forced a company to run to its patent lawyers whenever a patent comes to its attention as possibly relevant to its products or processes was irrational. It led companies to ignore, bypass, or marginalize their own in-house expertise and experience. As the brief submitted by the defendants in the Knorr-Bremse case sardonically observed, requiring companies to obtain non-infringement opinions from their patent lawyers, rather than asking their own engineers and other personnel skilled in the art of the patent and accused products and processes to evaluate the question of infringement, was tantamount to hiring a real estate lawyer rather than a surveyor to determine where a fence should be erected on a plot of land.
Rule Laid To Rest
The Federal Circuit’s reversal of the adverse inference created by Underwater Devices and Kloster Speedsteel has laid an ill-conceived and ill-begotten rule to rest. It also struck at one of the idiosyncrasies of patent law that its development under a guild of specialists has fostered.
Even such a fierce partisan of patents and patent holders as Judge Newman ultimately recognized that the adverse inference rule imposed “inappropriate burdens on the attorney client relationship” and that the public policy of refusing to allow adverse inferences on invocation of the attorney client privilege “applies to the same extent in patent cases as in other area of law.”
Judge Dyk, concurring in part and dissenting in part, carried that thought further, declaring that “[p]atent law is not an island separated from the main body of American jurisprudence.”
Instead of merely reversing and remanding the question of willfulness to the district court shorn of the adverse inference, he urged that the adjudication of patent disputes be brought more into sync with other areas of law in regard to the whole issue of punitive damages.
To Dyk, allowing willfulness and resulting enhanced, punitive damages to be found based on a mere failure to use “due care” to avoid patent infringement is inconsistent with punitive damages jurisprudence as it has been evolving in cases such as BMW v. Gore, 517 U.S. 559 (1996) and State Farm v. Campbell, 538 U.S.408 (2003).
Now that the court with exclusive appellate jurisdiction over patent disputes has eradicated one egregious instance in which patent law departed from the main body of American jurisprudence, the days of routine willfulness accusations for anything less than the most flagrant and reprehensible disregard of patent rights may be numbered.
J. Charles Mokriski is a partner of Day, Berry & Howard LLP in its Boston office, where he practices in the areas of intellectual property, commercial litigation, and media law. He also teaches Professional Responsibility at Boston College Law School.
