Privilege, Willfulness & In re Seagate

Any litigation may come back to haunt a company that does not carefully consider the impact of broad discovery rules under the Federal Rules of Evidence. Discovery may lead to disclosure of trade secrets and privileged information that the company would rather keep confidential. Thus, a company should not lightly initiate a lawsuit or take any action that might provide a basis for a competitor to bring a lawsuit against it. Some examples of activities that may give rise to litigation by one’s competitors include advertising, use of trademarks, claims of patent or trademark infringement, licensing activities and sales of products or services that might give rise to a third party patent infringement lawsuit.

While it is prudent to seek the advice of legal counsel prior to making business decisions, the protection provided to legal advice in litigation must be considered in determining how confidential attorney-client communications are used and disclosed. Disclosing attorney-client privileged communications may have far reaching and unintended consequences. While the attorney work product privilege and attorney-client privilege provide some protection for information requested by an attorney in anticipation of a litigation, the privilege ultimately fails to shield some tests, opinions of counsel and reports. The purpose of the attorney work product privilege is to shield work product that is prepared under the direction of an attorney, and the privilege is related to the attorney-client privilege. However, the work product privilege is narrower than the attorney-client privilege, because it only protects work product that would not have been prepared except for the anticipation of litigation.

A recent decision by U.S. District Court Judge Richard J. Sullivan of the Southern District of New York should be a reminder that any advertising claims should be carefully vetted, and business risk analysis should consider carefully the consequences of broad discovery rules. In this decision, the defendant was required to disclose confidential testing information in a lawsuit claiming false advertising under the Lanham Act and the New York Consumer Protection Act . The Procter & Gamble Company (P&G) claimed that advertising claims of Ultreo, Inc. (Ultreo), about the ultrasound wave technology of Ultreo’s ultrasonic toothbrush, were misleading to consumers. P&G sought laboratory and clinical testing and reports of Ultreo that related to the false advertising claims. Ultreo was compelled to produce such reports, and P&G was entitled to consider them in its action for false advertising. Ultreo sought to protect some of the reports from disclosure under attorney work product protections. According to the court, however, it is not enough for a report to be performed in anticipation of litigation. Utreo must be able to show that the reports “would not have been prepared in substantially similar form but for the prospect of litigation.” According to the court, Ultreo failed to meet its burden to show that these reports were shielded by the attorney work product privilege, and Ultreo was compelled to disclose the protocols, data and final results of the studies.

In another example, attorney work product privilege was denied for patent searches conducted in anticipation of litigation, even though attorney advice was obtained based on the searches. The defendant in Takeda was found to have regularly conducted patent searches in the course of its business. Thus, the court held that the specific patent search results and related strategies were not shielded by the attorney work product privilege. While the Takeda decision is not applicable to attorney advice based on the results, a party can infer a great deal from a patent search and patent search strategy, when it is disclosed in litigation discovery.

Reasonably relying on a sound, pre-litigation written opinion prepared by competent patent counsel provides a degree of immunity to charges of willfulness, but potentially opens up any pre-litigation advice about infringement and invalidity by litigation counsel to discovery by the plaintiff. A written opinion of counsel relating to invalidity or infringement is protected by attorney-client privilege only if the written opinion is kept secret. A defendant is immunized against willful infringement based on reasonable reliance on the written opinion of an experienced patent attorney, showing that all of the claims at issue in the patent litigation are either invalid or not infringed. It should come as no surprise that use of a defendant’s reliance on a pre-litigation “opinion of counsel” as a defense to willful infringement strips the attorney-client privilege and work product privilege for the opinion, because the plaintiff is entitled to investigate if the reliance on the opinion was reasonable. Use of this defense, makes all related opinions discoverable by the plaintiff and not just the one chosen by the defendant, because the other opinions might make it more or less reasonable for the defendant to rely on the opinion offered.

However, an opinion by the U.S. Court of Appeals for the Federal Circuit in In Re Seagate overturns longstanding precedent and sets a standard of “objective recklessness” for determining if a defendant’s infringement is willful and subject to enhanced damages, and the same decision shields post-litigation opinions of litigation counsel from discovery. While the standard in Seagate is likely to diminish the risk to defendants of an award of enhanced damages, which may be up to three times the actual damages, some companies will still seek pre-litigation opinions of noninfringement and invalidity as a defense against possible charges of willful infringement. Formal opinions of counsel may be required in certain deals licensing patented technology or in mergers and acquisitions, for example. In addition, a reasonable reliance on a sound opinion of counsel is likely to be an even more effective defense against willfulness under the heightened standard of objective recklessness than it was previously.

A standard of “objectively unreasonable” in a concurring opinion is different from the standard of the majority opinion, which requires the plaintiff to establish “objective recklessness” prior to any subjective determinations. According to the majority opinion of the en banc panel in In re Seagate, an objective recklessness standard should be applied when determining whether enhanced damages for willful infringement are warranted. According to the majority opinion, the “objective recklessness” standard likely lessens the defendant’s burden in rebutting willfulness to only a showing of a “substantial question” as to invalidity and non-infringement, which is the same standard capable of defeating a motion for preliminary injunction. Depending on the standard that the courts ultimately adopt, the likelihood of successfully meeting the threshold for requiring a showing of subjective reasonableness by a defendant may be greatly diminished following In Re Seagate. Whenever the risk of litigation warrants a review of a particular patent, any company that can afford to have a formal written opinion prepared by an independent, experienced patent counsel should consider engaging opinion counsel, prior to making a business decision to sell a product that might give rise to a patent infringement lawsuit.

However, some companies refrain from introducing a formal written opinion, prepared in advance of litigation, due to the effect of discovery rules on attorney-client privileged communications with their litigation counsel. Prior to In Re Seagate, introducing the opinion of counsel defense opened not only the opinion counsel to scrutiny during discovery but also trial counsel’s advice and opinions were subjected to the same scrutiny in some cases. The court in Seagate balanced the interests in discovery with the attorney-client privilege, allowing for discovery of all pre-litigation opinions provided for making informed business decisions, while drawing the line at discovery of post-litigation advice of litigation counsel. The opinion of In Re Seagate does not address the case when opinion and litigation counsel are one and the same; therefore, advice given post-litigation might be discoverable in determining if the defendant reasonably relied on the pre-litigation advice of the same patent counsel.

For now, if a company might desire to introduce its reliance on a pre-litigation opinion of counsel as a defense to willfulness, then the company should select different firms for post-litigation defense of a patent infringement lawsuit and any pre-litigation opinions of counsel.

There also is an unanswered question about any privilege that is offered for pre-litigation advice of litigation counsel. The opinion in In Re Seagate applies, directly, only to post-litigation advice of litigation counsel. Pre-litigation advice might not be offered any attorney-client and work product privileges. If the company routinely relies on objective assessment of opinions of counsel for making informed business decisions, then the work product privilege probably does not apply. An analogy may be made with the work product privilege in Takeda, for example, which makes patent search strategies and results discoverable based on the routine use of patent searches in making business decisions. Therefore, there is a substantial risk than any pre-litigation opinion of litigation counsel may become discoverable, if the defendant ultimately presents a defense to willfulness based on reliance upon any pre-litigation advice of counsel.

If there is a substantial risk relating to certain specific patents, a company probably should still seek an independent pre-litigation opinion, as an insurance policy against the plaintiff making its showing of “objective recklessness.” A pre-litigation opinion should be provided by an experienced patent attorney from a firm other than the firm that will be chosen to defend any patent infringement litigation.

The primary purpose of any legal opinion should always be for use in making a business decision, preferably prior to infringing a related patent or within a reasonable time after discovering the existence of such a patent. Any opinion that might be used as a defense to willfulness should be a formal written opinion of invalidity or non-infringement or both, because it is more reasonable to rely on a formal, complete, and thorough written opinion than on a less formal opinion. The cost of a formal written opinion, which may be more than twenty thousand dollars per patent and sometimes considerably more, is nevertheless a comparatively inexpensive defense against a debilitating award of enhanced damages. The formality of a written opinion is needed to make it effective in raising an opinion of counsel defense against enhanced damages, if the need arises. However, there is some room for separating out routine legal opinions merely for use in making business decisions and formal legal opinions for defending against a successful showing of objective recklessness in infringing a patent.

The opinion in In Re Seagate makes clear that there is little benefit to preparing a formal written opinion after a patent litigation is commenced.

Since any pre-litigation opinion of litigation counsel may be subject to discovery, in an abundance of caution, litigation counsel might forego pre-litigation analysis and advice. Instead, prior to litigation, the litigation counsel might rely on the formal opinion of a separate opinion counsel from a different firm in advising the client, subject to the caveat that litigation counsel has not formed an independent legal opinion as to invalidity and infringement. At least, it would be best for litigation counsel to refrain from offering any pre-litigation opinions about infringement or invalidity of the claims to any decision maker in the business. Advice by litigation counsel could reasonably be considered in determining whether continued reliance on an opinion earlier prepared by opinion counsel was reasonable under the circumstances. A practical problem arises, because advice from litigation counsel is usually not objective and is often the most pessimistic of advice. Litigation counsel is compelled to present a range of possible outcomes to a client, including the worst possible outcome. The alternative theories of litigation counsel are not intended to be an objective determination of infringement or validity. Instead, litigation counsel should consider the case from all angles, including that most favorable to the plaintiff. Indeed, this is the only way of assessing whether dismissal is appropriate. In light of Seagate, unless the client is willing to cease any infringing activities based on a worst case assessment of litigation counsel, such a frank assessment should probably not be shared with the client until after litigation is commenced, because if presented to the client prior to onset of litigation, such a worst case assessment is possibly discoverable.

The only times that it makes sense for litigation counsel to offer pre-litigation advice regarding infringement and validity is when the client is capable of acting on the advice to mitigate damages and when the client does not have any opinion of non-infringement or invalidity.

Especially if advice of litigation counsel would differ substantially from the assessment of the opinion counsel, sharing of any such advice by the litigation counsel with the client prior to the initiation of a litigation might prevent the unfettered use of an objective opinion, which might otherwise immunize the client against a charge of willful infringement. In the alternative, if the advice of litigation counsel does not differ substantially from that of the opinion counsel, then it is of limited usefulness, and there is no advantage in offering it to the client. If a pre-litigation opinion of counsel is on hand, then any discovery of a litigation counsel’s speculative pre-litigation assessments undoubtedly will be used against the opinion counsel’s assessment, which may well be the more reasoned, objective opinion. Of course, plaintiff’s counsel will present any differences in the two assessments in the most damaging light possible.