The Federal Circuit at 25 years: A Court on a Mission

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1 The Federal Circuit at 25 years: A Court on a Mission Roderick R. McKelvie April, 2007 I. Introduction The Court of Appeals for the Federal Circuit opened for business in October, As Chief Judge Markey wrote, this was a court on a mission. The field of patent law had become glaringly chaotic and the opinions of all regional circuits were setting forth widely varying versions of all the patent laws. Therefore, Congress created the Federal Circuit as a National Court having responsibility for contributing to uniformity and clarity in national law. See The First Two Thousand Days, Report of The United States Court of Appeals for the Federal Circuit, , by The Honorable Howard T. Markey, Chief Judge at pages 2 and 3. One gets the sense from reading early Federal Circuit decisions that the judges of the court saw the need to act promptly as one element of their mission. That is, this looks to have been a court in a hurry. It is as if the judges had the opinions ready to go. All they needed were the cases to decide. In some senses this drive to move quickly to establish clear and uniform patent laws has been a success. Certainly, it has been a success insofar as there appears to be a correlation between the court s support of our patent system and the innovation that is a driving force in the strength of our economy. However, this early jump from the starting blocks came at the expense of the discipline of the court following the common law model for deciding cases, where judges decide cases based on the facts in issue, and where the law can be found in the holding of the

2 case, rather than the dicta. And it suggested that this court and the law it is responsible for are different. Twenty-five years later, we see that this initial impatience has undermined the court s ability to meet its goals of clear and uniform patent laws. It has encouraged a culture where certain of the judges of the court reach out and speak through dicta to matters not before the court. And it has produced bad decisions that are well outside of the mainstream of the law. Those decisions have, in turn, set the district courts off course, as the district court judges have struggled with trying to implement the court s decisions. As judges and lawyers have begun to accept that patent law just may be different, they continue to push the court away from the mainstream, away from the principles that other courts look to in resolving disputes. One of the messages we have been hearing from the Supreme Court and the District Courts recently has been that patent law and patent cases are not that different. This must present a dilemma for the current Federal Circuit judges: How can one get the court back on track, back in the mainstream of the law, without using the same tools and repeating the same errors that got the court where it is? That is, if one is patient and respects the common law tradition of resolving cases based on the facts presented, a judge may demonstrate by each decision how it is cases should be decided, but that judge may despair that he or she will never catch up and undo some of the harm done to the law in the court s early rush to clarify the law. In this paper, I look at one case, Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F. 2d 1380 (Fed. Cir. 1983), as a vehicle to demonstrate my point. Then, I turn to options the current judges of the Federal Circuit have to get the court on the right track. 2

3 II. The Federal Circuit Sets its Own Course: Underwater Devices and the Affirmative Duty of Care The court opened in October of On September 23, 1983, it issued its decision in Underwater Devices, the decision where the court found an alleged infringer has an affirmative duty to exercise due care to determine whether or not it is infringing a patent and that the affirmative duty included the duty to seek and obtain competent legal advice from counsel. In a non-jury case, the trial judge had found the defendant liable for infringement. In finding the defendant willfully infringed, the judge measured the defendant s conduct by the traditional common law standard for punitive damages, whether the plaintiff had demonstrated the defendant s infringement was willful and wanton. The defendant had offered into evidence documents showing a pre-infringement review by in-house counsel, but it is unclear from the judge s decision whether the defendant relied on the defense of good faith reliance on the advice of counsel, or what was then sometimes called the defense of honest doubt. See, Underwater Devices, Inc. v Morrison-Knudsen, Company, 217 U.S.P.Q (D.HI 1982). On appeal, the Federal Circuit affirmed the judgment. It its opinion, the court nodded in the direction of the standard of review, noting that willfulness is a finding of fact subject to the clearly erroneous standard. The court did not find the trial judge had applied the wrong standard. Nor did it find the facts of record were not sufficient to support the judgment. Instead, the court announced a new and higher standard of care, and then affirmed the judgment. Where, as here, 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. See Milgo Electric Corp. v. United Business Communications, Inc., 623 F. 2d 645, 666, 206 USPQ 481, 497 (10th Cir ) cert. denied, 449 U.S. 1066, 66 L. Ed 2d 610, 101 S. Ct. 794 (1980). 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. See General Electric, supra, at

4 74, 163 USPQ at 261; Marvel Specialty Co. v. Bell Hosiery Mills, Inc., 386 F. 2d 287, 155 USPQ 545 (4th Cir. 1967), cert. denied, 390 U.S. 1030, 20 L. Ed. 286, 88 S. Ct (1968). Underwater Devices, 717 F. 2d at A) the affirmative duty of due care The court relied on the decision in Milgo as support for the proposition that there is an affirmative duty. In Milgo the court upheld a judgment of willful infringement, finding Once UBC had actual notice of Milgo s patent rights, UBC was under an affirmative duty to exercise due care to determine whether or not it was infringing Milgo s patents. Coleman Co. v. Holly Mfg. Co., 269 F. 2d 660, 666 (9th Cir.), cert. denied, 352 U.S. 952, 77 S. Ct. 326, 1 L. Ed. 2d 243 (1959). UBC did not heed the suggestion of its vice president Reed Manning that its modems might be infringing, and made no effort to secure an opinion from patent counsel. Cf. Union Carbide Corp. v. Graver Tank & Mfg. Co., 282 F. 2d 653, 660, (7th Cir. 1960), cert. denied, 365 U.S. 812, 81 S. Ct. 692, 5 L. Ed. 2d 691 (1961) (reliance on opinion of patent counsel that product is not infringing demonstrates good faith.). We hold Rixon s faithful copying of Milgo s modem, coupled with UBC's subsequent knowledge of the existence of the patent, continued sales, and absence of reliance on the advice of counsel, are sufficient to support the court s finding of willfulness in this case. Milgo provides some support for the proposition that an alleged infringer has an affirmative duty to exercise due care, support in the sense that the court in Milgo announces there is such a duty. But the case the court relied on to find this duty, Coleman Company v. Holly Manufacturing Company, 269 F. 2d 660 (9th Cir. 1959), can not fairly be read as finding any such duty. Rather, in Coleman the defendant put the matter of good faith reliance on advice of counsel in issue by asserting it as an affirmative defense to plaintiff s claim of willful 4

5 infringement. The court in Coleman found the defendant had failed to carry its burden of proof, in part because the defendant had failed to give a complete picture of the facts to opinion counsel. The other case cited by the court in Underwater Devices as support for the proposition there is an affirmative duty of care is Union Carbide Corp. v. Graver Tank & Mfg. Co., 282 F. 2d 653, (7th Cir. 1960). However, that case also speaks to the affirmative defense of a good faith reliance on the advice of counsel, with the court finding the defendant had demonstrated its good faith reliance on advice of counsel, even though that advice ultimately proved wrong. That finding overcame the trial judge s finding that the defendant s infringement was willful and wanton. ( In fact, we suppose awareness of the possibility of infringement is always present, or should be, when the manufacture and sale of a new article or product is commenced. It is for that reason that competent patent counsel is called upon for advice and, as shown, that was the course pursued by Lincoln. Union Carbide Corp. v. Graver Tank & Mfg. Co., 282 F. 2d at 662, 663.). This finding of an affirmative duty of care in Underwater Devices is dicta built on dicta, drawn from a misstatement of a defendant s burden when it asserts the defense of a good faith reliance on advice of counsel. That is, in Coleman and Graver Tank the defendant was not offering evidence as to how it satisfied an affirmative duty of care. Rather, in each case the court applied the traditional standard of willful and wanton misconduct. And in each case defendant had elected to assert the defense of a good faith reliance on the advice of counsel. In misreading the cases, the Federal Circuit converted what had been an affirmative defense of good faith into an affirmative duty of care. This decision unhooked the patent law s standard for willful infringement from the traditional standard of willful and wanton misconduct and created a new and unprecedented affirmative duty of care, where the court placed on the defendant the burden to demonstrate due care, and put the defendant at risk for enhanced 5

6 damages for mere negligence in failing to meet that affirmative duty. B) the duty to seek and obtain competent legal advice The Federal Circuit in Underwater Devices cited the decisions in General Electric and Marvel Specialty as the basis for finding that this affirmative duty included the duty to seek and obtain competent legal advice from counsel. Neither decision is authority for that proposition. In General Electric, the trial judge affirmed a Special Master s finding that General Electric willfully and deliberately infringed Sciaky s patents. General Electric had asserted the affirmative defense of honest doubt. The court of appeals noted: But General Electric in effect contends it was entitled to take the action that it took without being found guilty of willful infringement because it has an honest doubt about the validity of Sciaky s patents. In this regard it relies particularly upon a patent clearance by its own patent department and a long subsequent patent opinion from a private patent firm. Of course, we recognize that a good-faith opinion by competent and independent patent counsel may be important evidence to be weighed on the issue of honest doubt of patent validity. General Electric Company v Sciaky Bros, Inc., 415 F. 2d at In rejecting General Electric s appeal, however, the court found a strong factual basis for the Master s and the District Judge s rejection of the honest doubt defense, and that the record supported their finding that General Electric s infringement was both willful and deliberate. General Electric Company v Sciaky Bros, Inc., 415 F. 2d at 1073, The decision in General Electric is not authority for the proposition that a potential infringer has an affirmative duty to seek and obtain competent legal advice from counsel. The other decision the Federal Circuit relied on as support for this duty to consult counsel was Marvel Specialty Company v Bell Hosiery Mills, Inc., 386 F. 2d 287 ( 4th Cir 1967). In Marvel Specialty a Special Master recommended a finding of willful infringement after finding 6

7 the defendant realized its machine was quite similar to the plaintiff s machine, did not seek the opinion of counsel, and continued using it until being informed of plaintiff s contention as to infringement. The district court judge accepted that recommendation. The court of appeals affirmed with the following comment: We think that the district judge was correct in trebling plaintiff s damages for the period that Bell use the Miracle mender. The allowance of treble damages is largely discretionary. For the period of time that treble damages were allowed and for the period that they were denied, we find, in this record, no abuse of discretion. Marvel Specialty Company v Bell Hosiery Mills, Inc., 386 F. 2d at 293. Again, neither decision stands for the proposition relied on and announced by the Federal Circuit. More significantly, and not surprisingly in light of the lack of precedent on point, this portion of the decision in Underwater Devices and this affirmative duty to seek the advice of counsel, appear to be unique in the law. III. Underwater Devices as Patent Law The decision in Underwater Devices created a new rule in patent law, a rule that was not tied to precedent, a rule that unmoored the patent laws from traditional common law principles and set it off on a new and unique course. Twenty four years later, district courts are struggling with how to implement the decision. A) Difficulties in Implementing Underwater Devices From a trial judge s perspective, what is missing from the Federal Circuit s decision in Underwater Devices? Context. That is, the decision does not show the reader the precedent that compels the result reached in that case. In the typical case, a trial judge working to understand how to implement an appeals court decision can get a sense of the principles at work in that decision by reading the cases cited in the 7

8 opinion and by continuing to read upstream from those cases until one has guidance as to what the principles are and how they have been implemented. District Court judges struggling with how to implement Underwater Devices get little guidance from the precedent relied on by the court. That is because there wasn t any. This problem is compounded because the affirmative duty announced in Underwater Devices was unique to the patent laws. Therefore, the trial judges also lost the benefit of being able to see and learn from what other courts of appeal might say on the topic. As a consequence, as the Federal Circuit steered off on this new course, the trial courts followed. And like so many Darwins, the district court and magistrate judges discovered strange Galapagos-like islands associated with this affirmative duty of care, islands of lost privileges, discovered work product, and the treacherous island of the duty to retain draft opinions. Not everyone may agree that it is fair to describe this diversity of rules and approaches to implementing Underwater Devices as unclear. But it is accurate to conclude that this early decision of the court has not brought uniformity to the patent laws. And one reason why it has not brought uniformity is because the decision is not well-grounded in the law. B) The Federal Circuit has not been able to Guide the Implementation of Underwater Devices Underwater Devices is not just bad law released with little precedent or guidance for the trial courts. It is a decision that has been hard to contain. While the opinion has a significant impact on how companies evaluate infringement claims and on how lawyers try patent cases, because disputes on the scope of the Underwater Devices affirmative duty typically are fought out in the context of discovery battles, which are rarely reviewed on appeal, the Federal Circuit judges have had very few opportunities to correct trial judges who have gone astray, or to help shape the law on how the decision is being implemented. 8

9 This means that when they do get an opportunity to speak to these issues, as they did recently in In re EchoStar Commc n Corp., 448 F. 3d 1294 (Fed. Cir. 2006), the judges are tempted to reach beyond the matters in issue and the briefing submitted to the parties, to clarify the law with dicta and general statements on matters relating to the dispute. Thus, in EchoStar the court went beyond the matters in dispute to find the waiver as to an opinion on infringement, also waived opinions as to validity and enforceability of that patent, and suggested the waiver as to advice from opinion counsel would extend to communications with trial counsel. The Federal Circuit has now taken up this issue of the scope of the waiver as to trial counsel in the pending en banc review in the Seagate case. C) Underwater Devices as a Basis for Finding that Patent Cases are Different. Underwater Devices is usually near the top of the list of examples that lawyers and judges cite for ways in which the patent law is different from other areas of the law, both in the sense that the legal principles are different and in that the nature of the matters in dispute require that those principles should be different. The Underwater Devices decision certainly encourages lawyers to believe patent law is different, but in another, less desirable way. That is, it is an example of how in its first few years the Federal Circuit seemed to set its own independent course. The Supreme Court has picked up on this issue and, in recent decisions including Holmes Group, Inc. v Vornado Air Circulation Systems, Inc., 535 U.S. 826 (2001); ebay Inc. v. MercExchange,L.L.C, 126 S. Ct (2006); and Medimmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), has been saying that the Federal Circuit and patent laws are not different, at least not with respect to the general rules that courts apply to decide cases. 9

10 VI. What Can We Expect for 2032?. What should the message be at the 50th Anniversary of the court in 2032? Patience: the Court of Appeals has been a big success. It recovered from some missteps in the early years, with patience, with an appreciation for how its peer courts view issues, and with a focus on the holding of a case. VII.. What Can the Court Do Now? One of the limitations of our common law model of deciding the matters in issue in any particular case, is that it is a very slow way to perform dicta-ectomies on bad law. Nevertheless, even the most prudent of judges on the court must look out over the landscape of the law that has grown up from Underwater Devices and be tempted to stray from that model to step in and stop some of the damage being done. We should be reluctant to encourage a solution that continues to suggest our courts and our law are not part of the mainstream. Nevertheless, we should accept the reality that we need to steer a course to get back to the mainstream and, to get there anytime soon, we may need to turbo charge the engines. Here are a few suggestions: 1. Police Dicta In panel decisions, the court should set the model for the future, writing narrow decisions resolving the matter in issue. 2. Move to the Mainstream a. By Resources In writing decisions, the court should draw on case law from other circuits and incorporate them in its decisions to demonstrate that patent cases are part of the mainstream of the law. By citing this case law, the judges will be encouraging the lawyers to cite these cases in their briefs and to begin to see patent law as part of the mainstream. 10

11 b. By Issue Approach each issue from the perspective of the mainstream and ask, is this an area of the law that should have a unique rule for patent cases? If yes, are the principles we apply drawn from the mainstream of the law? 3. Rely on En Banc Decisions in the Short Term We should accept that it will take too much time and cause too many problems to let certain decisions run their course. As an interim solution, the court should rely on en banc proceedings where the court takes on a particular case in the context of questions to the parties and the community on broader legal principles. This approach worked in Knorr Bremse, as that decision made a real contribution to the law in getting rid of the negative inference. A decision in Seagate can set us back on the right course on willfulness. 4. Re-Establish the Appellate Court Model A. De Novo Review With claim construction and de novo review the court is drifting away from its role as a court to correct errors. It has become a court that reviews summary judgments and claim construction. The Court should reconsider its predilection for de novo review. It certainly seems to be out of the mainstream of the traditional appellate court practices. B. Court of Appeals The court should look carefully at its relationship with the trial courts. Markman is having a significant impact on how patent cases are being resolved in those courts, exacerbating the tendency of judges and lawyers to look at patent cases as different. Separate claim construction proceedings are working their own bifurcation, as they are tending to also pull infringement from the trial, and as judges and lawyers look for vehicles to resolve infringement short of trial. This, in turn, has put pressure on defendants, as it makes a trial on the remaining issues of damages, validity and enforceability much more difficult. We should be 11

12 careful with this. The court should encourage resolution of cases at the trial level on the merits and avoid being pulled into a dance where parties try parts of their case to the appeals courts. The court should insist trial courts avoid short cuts and articulate reasons for their decisions when they do. At the same time, the court should decline to take appeals in cases where one or both parties have incorrectly taken a short cut to appellate review. C. Review Files Other courts of appeal follow the practice of having the district court clerk send up the entire record on appeal, and, before issuing a decision, having one judge review that entire file. This is a good practice. It will counteract the tendency the court may have of viewing a case from the perspective of the relatively small window of an appendix and briefs. (It may also mean significantly more work for law clerks of a judge who has a favorite question: Where is it in the record? ). D. Engage Trial and Magistrate Judges The court should consider other ways to encourage a dialogue with district court and magistrate judges, including establishing committees that review and suggest best practices, model jury instructions, and model rules and procedures for handling patent cases. The court should look to other organizations such as the Federal Judicial Center, the Sedona Conference, and law schools to encourage this dialogue. 12