Seagate - Willfulness Prof Merges April 22, 2008.

Seagate - Willfulness

Prof Merges

April 22, 2008

Two main topics

• Entire market value rule; convoyed sales

•Willful infringement

Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119 (FC 2003)

Animal feed mixing machine developed after its original machine was found to infringe patent was not available substitute during time of infringement, and thus did not preclude award of lost profits damages; only evidence was that manufacturer did not have necessary equipment, know-how, and experience to make replacement machine at time of infringement.

Lost profits: the “but for” test

• “To recover lost profits as opposed to royalties, a patent owner must prove a causal relation between the infringement and its loss of profits. The patent owner must show that ‘but for’ the infringement, it would have made the infringer's sales.”

• BIC Leisure Prods. v. Windsurfing Int'l, 1 F.3d 1214, 1218 (Fed.Cir. 1993)

Two subdoctrines of importance

• “Entire market value rule” – patented component is key to value of entire market (for multi-component product)

• “Convoyed sales” – add-ons often sold in conjunction with patented item

• Part II of Rite-Hite

• Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995).

Example: convoyed sales

• Juicy Whip, Inc. v. Orange Bang, Inc., 382 F.3d 1367, 1372 (Fed.Cir.2004)

• Non-patented syrup was central to the “visual appearance” of the patented dispenser and therefore could be included in the lost profits analysis

But see . . . • American Seating Co. v. USSC Group, Inc.

514 F.3d 1262, 1270 (Fed. Cir. 2008)

• There was no evidence of a functional relationship between the patented and unpatented goods, instead the two were sold together as a matter of "convenience or business advantage." As such, damages for convoyed sales were unavailable.

Entire market value rule

• Patentee may recover damages based on the value of an entire apparatus or system that contains both infringing and additional, unpatented features

• The entire market value rule may apply in both reasonable royalty and lost profits patent infringement damages computations. Rite-Hite, 56 F.3d at 1549

Entire market value: example

• Paper Converting Machine Co. v. Magna-Graphics Corp., 745 F.2d 11, 23 (Fed. Cir. 1984)

• Damages based on the entire value of highspeed paper-winding equipment, including unpatented “auxiliary equipment,” even though the auxiliary devices were not physically connected to the accused machine and each of the unpatented devices had a separate use and therefore value independent of the patent at issue

Entire mkt rule traditionally LIMITED

• Only applies where all the value of the infringing product is attributable to the patented component

• Garretson v. Clark, 111 U.S. 120, 121-22 (1884)

“[The patentee’s] invention may have been used in combination with valuable improvements made, or other patents appropriated by the infringer, and each may have jointly, but unequally, contributed to the profits. In such case, if plaintiff’s patent only created a part of the profits, he is only entitled to recover that part of the net gains.” -- Westinghouse Elec. & Mfg. Co. v. Wagner Elec. Mfg. Co., 225 U.S. 604, 615 (1912)

Some modern cases do reflect this idea…

Riles v. Shell Exploration and Production Co., 298 F.3d 1302 (FC 2002)

Damages for patent on platforms for oil drilling, without use of mud mats, could not be based upon a percentage of the cost of infringer's entire platform.

Major issue in patent reform …

• Various proposals, precise wording of “damages apportionment” language

• Holding up reform bill currently . . .

1. Should a party's assertion of the advice of counsel defense to willful infringement extend waiver of the attorney-client privilege to communications with that party's trial counsel? See In re EchoStar Commc'ns Corp., 448 F.3d 1294 (Fed.Cir.2006).

2. What is the effect of any such waiver on work-product immunity?

3. Given the impact of the statutory duty of care standard announced in Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed.Cir.1983), on the issue of waiver of attorney-client privilege, should this court reconsider the decision in Underwater Devices and the duty of care standard itself?

35 USC 284

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d) of this title.

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

“Traditional” Federal Circuit rule

“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.” – Underwater Devices

Optimized Trajectories for MotionControl: Convolve, Inc.

Convolve: curl, wind, or twist together

• Applied to functions: a mathematical “intertwining” of two separate functions

The duty of due care standard has led to punitive damages based on nothing more than a negligent failure to proceed with “due care.” See, e.g., Stryker Corp. v. Davol, Inc., 234 F.3d 1252, 1259 (Fed. Cir. 2000) (declining to overturn jury finding of willful infringement when evidence indicated that reliance on advice of counsel was “unreasonable”)

But the duty of due care standard shifts to the defendant the burden of demonstrating that it has acted with sufficient care to forestall a finding of willful infringement. See Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmBH v. Dana Corp., 383 F.3d 1337, 1349 (Fed. Cir. 2004) (en banc) (Dyk, J.) (this “effectively shifts the burden of proof on the issue of willfulness from the patentee to the infringer”).

Seagate opinion

• Over the years, we had held that an accused infringer's failure to produce advice from counsel “would warrant the conclusion that it either obtained no advice of counsel or did so and was advised that its [activities] would be an infringement of valid U.S. Patents.” Knorr-Bremse, 383 F.3d at 1343 -- at 15

P 16

• Just recently, the Supreme Court addressed the meaning of willfulness as a statutory condition of civil liability for punitive damages. Safeco Ins. Co. of Am. v. Burr, --- U.S. ----, 127 S.Ct. 2201, 167 L.Ed.2d 1045 (2007)

• [T]he Court concluded that the “standard civil usage” of “willful” includes reckless behavior. Id. at 2209

• In contrast, the duty of care announced in Underwater Devices sets a lower threshold for willful infringement that is more akin to negligence. This standard fails to comport with the general understanding of willfulness in the civil context, Richland Shoe Co., 486 U.S. at 133, 108 S.Ct. 1677 (“The word ‘willful’ ... is generally understood to refer to conduct that is not merely negligent.”), and it allows for punitive damages in a manner inconsistent with Supreme Court precedent

P 17

Accordingly, we overrule the standard set out in Underwater Devices and hold that proof of willful infringement permitting enhanced damages requires at least a showing of objective recklessness. Because we abandon the affirmative duty of due care, we also reemphasize that there is no affirmative obligation to obtain opinion of counsel.

• When opinions are sought, NO waiver of attorney-client privilege with respect to trial counsel