CASRIP Newsletter - Spring/Summer 2006, Volume 13, Issue 2
Using Advice of Counsel to Fight Willful Damages: Liquid Dynamics and EchoStar
By Signe H. Naeve 
Two recent cases have refined the landscape of willfulness defenses following the Federal Circuit's opinion in Knorr-Bremse, which held that a negative inference could not be drawn from a party's failure to produce or obtain an exculpatory opinion from counsel regarding validity or infringement. On June 1 in Liquid Dynamics Corp. v. Vaughan, the Federal Circuit held that a non-infringement opinion from counsel may be discounted by a jury weighing willfulness if the client failed to provide material information. One month earlier, in In re EchoStar Communications Corp., the Federal Circuit held that a defendant waives the attorney-client privilege for opinions from outside counsel when it submits opinions from in-house counsel to fight an assessment of willful damages. The waiver does not apply to work product that was never communicated with the client, however.
II. Stirring the Pot: Liquid Dynamics
Good faith, and a defense against treble damages for willfulness, can generally be shown by obtaining legal advice from counsel regarding patent validity or infringement. If this advice is incompetent, however, then a jury may discount its usefulness when assessing the party's good faith. In Liquid Dynamics, the Federal Circuit determined that the defendant had not disclosed pertinent information to its patent counsel. Hence, the jury could use this concealment to discount the counsel's non-infringement opinion and the inference of good faith.
Liquid Dynamics owns patent No. 5,458,414 ("'414 patent"), which involves "a system of pumps and stir mixtures of solids and liquids in large 1,000,000-gallon tanks." "The invention is primarily directed to applications for mixing wastewater and manure." Specifically, this case involved the structure of slurry tanks, which are used to store and process chemicals and organic waste, such as manure, until it is used as fertilizer. Because it can be expensive to continuously stir the liquid and solid mixture, tank designers seek to design tanks that will allow settling to occur and then remixing when necessary.
To solve this problem, Liquid Dynamics' '414 patent encompasses a "substantial helical flow" that has been construed as "all flow patterns that are generally, though not necessarily perfectly, spiral, and that fill much, though not necessarily all, of the tank's volume." Liquid Dynamics was negotiating with a third party, Augusta, to supply it with the "Jetmix system," the product covered by the '414 patent. During the negoitiations, Liquid Dynamics fired Flichard Behnke, a "sales engineer who had been 'intimately involved' with the Augusta design and negotiations."
Defendant Vaughan is also in the slurry business; he designs "chopper pumps," which mix solids in large tanks. Vaughan hired Behnke after he was fired from Liquid Dynamics. Vaughan then submitted engineering drawings to Augusta, which Liquid Dynamics claimed were directly copied by Behnke from Liquid Dynamic's earlier drawings. The only difference was that the Jetmix design had six nozzles whereas the Vaughan design had twelve.
Liquid Dynamics accused Vaughan of willfully infringing the '414 patent and Vaughan sought advice from patent counsel. Around this time, Vaughan also commissioned two computational fluid dynamics ("CFD") studies to analyze the flow patterns in the tanks. Based upon the information provided by Vaughan, patent counsel returned a non-infringement opinion. Vaughan had not provided counsel with the complete CFD analysis, however, and had informed counsel that the vertical vector plots in the studies did not show anything of significance. Without this information, patent counsel's opinion was flawed. Thus, the court determined that the non-infringement opinion could be discounted by the jury.
Without the opinion, the jury could find willfulness from Vaughan's other actions. Vaughan's engineering manual included drawings similar in detail to the Augusta tank layout. Indeed, Vaughan's engineering drawings were virtually identical to Liquid Dynamic's job proposal to Augusta. Most importantly, Vaughan hired Behnke after he was fired from Liquid Dynamics and used him to establish a nozzle angle for Vaughan's Rotamix system based upon Behnke's knowledge of Liquid Dynamic's Jetmix system covered by the '414 patent.
This case is significant in that if a party seeks an opinion from counsel and intends to rely upon that opinion to defend against willful infringement, the party must provide all pertinent information to counsel. The Federal Circuit reached a similar conclusion in Goodwall Construction Co. v. Beers Construction Co. in 1993, holding that a jury could have concluded that the infringing party concealed incriminating evidence from counsel. Goodwall came before the critical Knorr-Bremse case, however, wherein the Federal Circuit held that a negative inference could not be drawn from a party's failure to produce or obtain an exculpatory opinion from counsel regarding validity or infringement.
Taking the Knorr-Bremse holding one step further, and remaining consistent with Goodwall, the Federal Circuit has thus affirmed the importance of the competency of counsel's opinion if it is being submitted to defend against willfulness. Thus, under Knorr-Bremse, no negative inference will be drawn if no opinion is sought or produced. However, in accordance with Goodwall and now reaffirmed in Liquid Dynamics, if a party relies upon a non-infringement opinion, it will be discounted if material information was withheld from counsel.
III. Opening the Flood Gates: In re EchoStar
In the second case to impact Knorr-Bremse, the Federal Circuit held that a party waives its attorney-client privilege for communication with outside counsel relating to the same subject matter when it introduces an exculpatory opinion from in-house counsel to fight an allegation of willfulness. Work product that was never communicated to the client does not fall within the scope of the waiver, however.
TiVo sued EchoStar for the alleged willful infringement of TiVo's U.S. Patent No. 6,233,389 ("the '389 patent"). After the action was filed, EchoStar solicited legal advice from outside counsel, Merchant & Gould, but elected not to rely upon this advice for its defense. TiVo sought production of documents from both EchoStar and Merchant & Gould concerning EchoStar's alleged infringement. The District Court determined that the scope of the privilege waiver for using the advice of counsel defense extended to communication with Merchant & Gould, including communication either before or after the filing of the complaint and any work product, whether or not the product was communicated to EchoStar. EchoStar petitioned for a writ of mandamus with respect to the Merchant & Gould documents not provided to EchoStar and Merchant & Gould moved to intervene.
The attorney-client privilege protects against disclosure of communication between attorneys and their clients for the purpose of obtaining legal advice while the work-product defense protects against disclosure of an attorney's mental impressions. The attorney-client privilege can be waived in several ways, including reliance on advice of counsel in response to an assertion of willful infringement. "The widely applied standard for determining the scope of a waiver of attorney-client privilege is that the waiver applies to all other communications relating to the same subject matter." Under the broad attorney-client privilege waiver, TiVo sought all communication and work product pertaining to EchoStar's alleged infringement.
Waiver of one privilege does not automatically waive the other, however. In contrast to the attorney-client privilege waiver, the work product waiver is not as broad. In assessing the scope of the waiver, the Court identified at least three categories where work product is potentially relevant to the advice-of-counsel defense. These categories include:
(1) documents that embody a communication between the attorney and client concerning the subject matter of the case, such as a traditional opinion letter; (2) documents analyzing the law, facts, trial strategy, and so forth that reflect the attorney's mental impressions but were no given to the client; and (3) documents that discuss a communication between attorney and client concerning the subject matter of the case but are not themselves communications to or from the client.
With regard to these three categories, the Federal Circuit ruled that the waiver pertained to the first and third categories, but not to the second. The Court reasoned that, "[b]y asserting the advice-of-counsel defense, the accused infringer and his or her attorney do not give their opponent unfettered discretion to rummage through all of their files and pillage all of their litigation strategies."
Thus, by relying upon the advice-of-counsel defense for an opinion obtained from in-house counsel, EchoStar could be forced to produce opinion letters and communication from Merchant & Gould. It could also be compelled to produce documents in Merchant & Gould's possession discussing communications between EchoStar and Merchant & Gould, pertaining to the alleged infringement of the '389 patent. EchoStar could not be compelled, however to produce Merchant & Gould's work product "analyzing the law, facts, trial strategy, and so forth that reflect[ed] the attorney's mental impressions but were not given to [EchoStar]." Therefore, by introducing legal opinions from in-house counsel, EchoStar opened the floodgates, but only part of the way.
IV. Turning the Tides: Federal Circuit Discusses Knorr-Bremse Aftermath
In a recent Judicial Conference held by the Federal Circuit on May 19, a panel addressed the challenges confronting patent counsel since Knorr-Bremse and it was generally agreed that EchoStar provided some helpful clarification. However, there was disagreement regarding footnote four in EchoStar and the tide appeared to be shifting toward wider acceptance of Dyk's dissent in Knorr-Bremse.
Footnote four in EchoStar states:
EchoStar contends that waiver of opinions does not extend to advice and work product given after litigation began. While this may be true when the work product is never communicated to the client, it is not the case when the advice is relevant to ongoing willful infringement, so long as that ongoing infringement is at issue in the litigation.
The concern with footnote four is whether the waiver extends to advice and work product generated after litigation begins. The panel at the Judicial Conference was split on this question. While one participant interpreted this footnote to mean that the waiver would apply to communication after a lawsuit is filed, another disagreed that the Federal Circuit went this far. Both participants agreed, however, that the statement may be dicta and there was a "clear consensus" that "patent infringement cases would take a troublesome turn if trial counsel could be forced to the witness stand to testify on communications regarding infringement, validity and enforceability."
Some of the panelists, meanwhile, were in agreement with Dky's partial dissent in Knorr-Bremse, which had condemned the majority for electing to adopt the willfulness standard from Underwater Devices Inc. v. Morrison-Knudsen Co. It is evident that Knorr-Bremse and its progeny will continue to be discussed and debated with each new situation that arises involving the advice of counsel defense and the standard for asserting willful damages.