Patent Infringement Warranties in BPO
October 9, 2009 by Bierce & Kenerson, P.C.
Today, virtually any contract, including a business process outsourcing contract, for the delivery of goods, services or licensed rights in applied technology contains an indemnification clause concerning possible infringement of third-party intellectual property rights. In the initial draft of the agreement, the typical clause provides for unlimited indemnification for patents, copyrights, trademarks and trade secrets. Increasingly, the suitability and evidentiary issues in such clauses are getting careful scrutiny. A recent U.S. federal judicial decision revoked a twenty-year old common law precedent relating to the measures that must normally be taken in order to eliminate certain special statutory damages and liability for attorneys’ fees.
Ordinary Infringement of a Patent.
Patent holders face a challenge in protecting their rights. The U.S. patent law ordinarily imposes actual damages for patent infringement.
Patent holders must think twice about suing for infringement. The stakes are high.
- Legal Fees.
Ordinarily, the patent holder has no right to recover its attorneys’ fees. The patent holder will have a significant amount at stake in order to justify paying the huge expense of attorney’s fees for complex litigation. - Invalidation of Patent.
Invariably, the patent holder’s infringement lawsuit will invite a counterclaim for invalidation of the patent. As a result, the infringement litigation could risk termination of all license royalties from parties other than the alleged infringer.
Willful Infringement of a Patent.
The patent holder’s risk of an invalidation can be reduced if it raises the stakes in the litigation. It can do so by alleging that the infringement was “willful.” This puts into motion a threat that the alleged infringer will be liable for punitive damages.
Consequences of Willful Infringement.
If the infringement can be shown to have been “willful,” then the court may award attorney’s fees and triple the compensatory damages. 35 U.S.C. § 284 (“the court may increase the damages up to three times the amount found or assessed”); 35 U.S.C. § 285 (“the court in exceptional cases may award reasonable attorney fees to the prevailing party”).The Definition of “Willful” Patent Infringement.
In determining whether a patent infringement was “willful,” the court must balance the totality of the circumstances. Many circumstances may be taken into consideration. See compilation in Rolls-Royce Ltd. v. GTE Valeron Corp, 800 F.2d 1101, 1110 (Fed. Cir. 1986) and Read Corp. v. Portec, Inc., 970 F.. 2d 816, 826-27 (Fed. Cir. 1992). “Willfulness” is not an absolute, based on “all or nothing,” but is a matter of degree. Knorr-Bremse Systeme fuer Nutzfahrzeuge GmBH v. Dana Corporation, __ F.3 __, NYLJ (Sept. 24, 2004), p. 21, cols. 1-4, p. 22, cols. 1-2 (2nd Cir. 2004) Judge Newman.The Service Provider’s Defensive Strategy: Get an Attorney’s Opinion.
Under a 1983 decision by the U.S. Court of Appeals for the Federal Circuit, judicial precedent required that, as a precaution, the potential infringer of a patent should obtain a review by a patent lawyer of the patents at issue. Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed. Cir. 1983). In the context of a flagrant disregard for the patent owner’s demand for payment of a royalty for infringing presumptively valid patents, that court ruled that “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,” including “the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. Id. at 1389-90.The “duty” or “best practice” of getting a legal opinion is not specified in the patent statute. Instead, the defensive strategy was raised to the level of a common-law duty by interpretation of the patent statute. Courts applied the common law rule as a matter of evidentiary procedure. This applied specifically to cases where a patent holder had warned the potential infringer and asked that the infringement cease.
Change in Common Law.
This “legal opinion” requirement was applicable as judicial precedent from 1983 to 2000. In September 2004, the same court, in the Knorr-Bremse decision, overruled this precedent because the evidentiary principle promoting caution violates an even more fundamental principle, the attorney-client privilege. The court ruled that, while the issue is not one of legal privilege, it is the related issue “whether there is a legal duty upon a potential infringer to consult with counsel, such that failure to do so will provide an inference or evidentiary presumption that such opinion would have been negative” and would have concluded the potential infringer had no right to use the patented process.Having framed the issues, the Knorr-Bremse court decided that, as a matter of public policy, it is so important to continue the general principle that courts should decline to impose, as a procedural rule of evidence, any “adverse inference” on invocation of the attorney-client privilege. Expanding this principle to the treble-damage and attorney’s fee provisions of the patent law, the court concluded that no such adverse inference may be drawn:
- when the potential infringer (such as an service provider in outsourcing) invokes attorney-client privilege, and/or attorney work-product privilege, or
- when the potential infringer fails to consult with counsel.
Impact on Outsourcing.
This decision eliminates a negative presumption against potential infringers of U.S. patents. Since the U.S. patent law permits registration of patents on business methods, this judicial decision will make it easier to defend, and harder to prosecute, business method patent infringements. The impact on the ordinary business process outsourcing should be small, but it will give some comfort to service providers. When notified of an alleged infringement, consultation with an attorney will still be highly advisable, but no adverse presumption will apply if no consultation occurs.
Forensic Investigations: Distinguishing Ordinary Outsourced Investigation from Privileged Investigation
October 9, 2009 by Bierce & Kenerson, P.C.
Many providers of finance and accounting (“F&A”) services cover a broad array of managed services. The functions of internal audit, pre-litigation claims and, more specifically, insurance claims processing deserve special attention from a legal standpoint. This article addresses distinctions between ordinary managed services (subject to pre-trial discovery) and “privileged” investigations that are not disclosable to adversaries in litigation. The analysis applies across all forms of business process outsourcing (“BPO”), but is particularly appropriate for F&A, HR specialty outsourcing and Sarbanes-Oxley “Internal” Audit.
Normal Rules of Discovery or Disclosure.
Under American rules of civil procedure, litigants are required to disclose to their adversaries information that could be used as evidence, or that could reasonably be expected to lead to the disclosure of evidence. Ordinary conduct of business, including managed services (or “outsourcing”) is subject to the normal rule.
This rule (sometimes called pre-trial discovery, sometimes called pre-trial disclosure) has several purposes:
- to force each party to identify “reality” and not make any claims or defenses unless justified by the facts.
- to enable a party to discover and use the facts to challenge claims or defenses of its adversary.
- to promote settlements, and thereby reduce the burden of litigation on the court system.
- in criminal cases, to give the accused access to “Due Process” under U.S. Constitutional norms.
Work Product Exception.
Investigations by attorneys or persons under the control of attorneys may be entitled to escape the normal rules of disclosure. Such investigations are conducted in anticipation of litigation. Businesses at risk of liability to third parties, employers and insurance companies investigating claims are entitled to assert the legal privilege to avoid having their investigators be required to testify in pre-trial depositions and otherwise disclose evidence before trial.
As a matter of public policy, such investigations are confidential and privileged, and the investigators are not subject to depositions during the pre-trial discovery process in order to preserve attorney-client communications and to enable to develop attorney work product free of intrusion. The confidentiality and privilege enable clients to obtain legal advice free of risk of disclosure. The attorney-client privilege and attorney work-product privilege to do not, however, protect a client from the duty to testify as to facts witnessed directly by the client outside any attorney-client communication.
A string of recent court decisions has examined the conditions under which an insurance company’s examination of a claim crosses the line from being an investigation performed in the ordinary course of the insurer’s business (and thus not eligible for the legal privilege) or work performed in anticipation of litigation. Travelers Casualty & Surety Co. v. J.D. Elliot & Co. P.C., ____ F.3d ___, NYLJ Oct. 25, 2004, p. 25, cols. 3-4 (S.D.N.Y. 2004), Judge Pitman; Weber v. Paduano, 02 Civ. 3392 (GEL), 2003 WL 161340 (S.D.N.Y. Jan. 22, 2003); Mt. Vernon Fire Ins. Co. v. Try 3 Bldg. Svces., Inc., 96 iv. 5590 (MJL) (HBP), 199998 WL 729735 (S.D.N.Y. Oct. 16, 1998); Am. Ins. Co. v. Elgot Sales Corp., 97 Civ. 1327 (RLC) (NRB), 1998 WL 647206 (S.D.N.Y. Sept. 21, 1998); see also United States v. Adlman, 134 F.3d 1194, 1199 (2d Cir. 1998).
Burden of Proof.
The party asserting the work product protection bears the burden of establishing the applicability of the work product exception. If that party seeks to deny all testimony by an investigator, it must prove the availability of the work product exception at all stages of the investigation, from beginning to end.Standard for Determining When Work Product Exception Applies.
In the Travelers decision, the court noted that there is no “bright line” test for determining when an insurance company’s investigative work is not privileged (i.e., it is merely performed in the ordinary course of business) and when it is privileged as an investigation done in anticipation of litigation. The court rejected the use of a line based on investigation done prior to the filing of any insurance claim.
A first factor is whether the investigator was retained before any decision was made whether the insurance carrier would reimburse its policyholder for an insured loss. If the investigation is conducted before there is any reason to expect litigation from either the policyholder or against potential third party sources of reimbursement (under the principle of subrogation), the investigation does not qualify for the work product privilege.
A second factor is whether there was any actual threat of litigation at the time when the investigator was retained to conduct the investigation. If there is nothing in the file to indicate that litigation is on the horizon, or perceived to be “on the horizon,” the privilege will not apply.
A third factor is whether the investigator is hired by an attorney or merely by the business, employer or insurance company. There should be some showing that litigation counsel has been retained in order to justify work product privilege.
Impact on Outsourcing.
Internal investigations by providers of outsourced services are normally not eligible for work product privilege. Enterprises and their F&A outsourcing service providers should adopt certain “best practices” to preserve work product privilege.
- Identify that Litigation is Anticipated.
If the enterprise customer or the service provider does anticipate any litigation, whether between the two parties or in relation to a third party whose rights might have been injured by an act or omission of the enterprise customer or the service provider, then litigation counsel should be consulted. - Records Management.
The parties should establish a log of “anticipated litigation” and maintain it under the management of lawyers. The records should be clearly marked so that there is no doubt that the investigations are conducted with some specific fear or threat of identifiable litigation “on the horizon.” - Separate the “Ordinary Work” from the “Work in Anticipation of Litigation.”
The enterprise customer and the F&A outsourcing service provider should clearly define the scope (statement of work) to include separate categories of “ordinary work” (the usual managed services) and “work in anticipation of litigation” that could be identified and administered separately. This segregation would insulate the validly privileged internal audit from the non-privileged ordinary operations.