Your Business May Be Infringing on a Patent. What Should You Do?

What should your company do if it becomes aware of a patent having claims that appear to be relevant to one of its products or receives a cease and desist letter charging infringement?

Enhanced Damage Awards and Awards of Attorney’s Fees in Patent Cases

When a suit for patent infringement is filed, in the event of an adverse judgment, an infringer may be subject to permanent injunction that precludes further infringement and an order to pay the patent owner money damages to compensate for the infringement.

In certain circumstances, the courts have the discretion to increase the amount of the damage award. Under the patent laws “the court may increase the damages up to three times the amount found or assessed.” The damages are enhanced in circumstances where the infringement is said to be “willful.” Additionally, “[t]he court in exceptional cases may award reasonable attorney’s fees to the prevailing party.” A finding that the infringement is willful and that the case is exceptional often go hand in hand. These provisions pose substantial risks in the event a court finds that the accused party infringes the asserted patent(s) and that the infringement was willful or that the case was exceptional since the multiplication of the damages and the patent owner’s attorney fees can involve large sums.

The Evolution of the Law of Willful Infringement

A historical perspective is useful in understanding how the courts have dealt with claims that an infringement was willful.

In 1983, the U.S. Court of Appeals for the Federal Circuit (CAFC) in Underwater Devices v. Morrison-Knudsen Co., held that 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 possible infringing activity.” The 1983 decision of the CAFC was in response to “widespread disregard of patent rights” that was perceived to be “undermining the national innovation incentive.”

The Underwater Devices Court stated that where a defendant, in good faith, relied on a competent opinion of counsel that concluded there was no infringement or that the relevant patent claims were invalid, the opinion would serve as a defense to a charge of willful infringement. Thus, as of the 1983 timeframe, in response to a cease and desist letter charging infringement, the accused infringer was well advised to obtain an opinion of counsel that concluded that there was no infringement or that the asserted claims were invalid if counsel could provide such an opinion. To satisfy the requirement that the opinion be viewed as a “competent opinion of counsel” such opinions usually would involve a thorough analysis of the claims, the patent specification, the Patent Office file history and any relevant prior art.

Competent opinions of counsel routinely served as a defense to charges that an infringement was willful and that a case was exceptional so as to justify increased damages and an award of attorney fees.

The CAFC revisited the law of willful infringement in 2007 in In re Seagate Technology, LLC. In the Seagate case, the Court held that “to establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.” The Seagate Court thus equated “willfulness” to reckless behavior; i.e. a reckless disregard to the patent owner’s rights, and expressly abandoned the duty of due care requirement along with the associated affirmative obligation to obtain an opinion of counsel enunciated in the Underwater Devices case. As a consequence of the Seagate decision, it became more difficult for patent owners to obtain enhanced damage awards and parties charged with infringement were more reluctant to seek opinions of counsel and incur the costs associated therewith. Instead, when charged with infringement, parties often asserted that their conduct was not objectively reckless based on internally generated theories or theories developed during the litigation. With the Seagate decision, the pendulum had swung in favor of parties accused of infringement and enhanced damage awards were more difficult to obtain.

In 2016, the Supreme Court, in Halo Electronics, Inc. v. Pulse Electronics, Inc., considered the requirements for a finding of willful infringement. As a result of this decision, the pendulum once again swung in favor of the patent owner. The Halo Court stated that the Seagate test reflected “a sound recognition that enhanced damages are generally appropriate ... only in egregious cases” but that the Seagate test was unduly rigid and “impermissibly encumbers” the discretion granted to the district courts. The Supreme Court in Halo equated willfulness with egregious conduct without setting forth a more explicit standard and explained that “[a] patent infringer's subjective willfulness, whether intentional or knowing, may warrant enhanced damages, without regard to whether his infringement was objectively reckless.” The Halo Court also rejected the requirement that willfulness be proved by clear and convincing evidence as had been the standard of proof applied for decades and held that “the statute at issue supplied no basis for imposing a heightened standard.” Thus, post Halo, patent owners may satisfy their burden of proof for a finding of willful infringement by showing egregious behavior by the infringer with proof by a preponderance of the evidence rather than by the heightened clear and convincing evidence standard. Left open for interpretation was what actually constitutes egregious behavior. Given this context, following the Halo decision, opinions of counsel appear once again to take on greater importance as is it less likely that an accused infringer, having sought and obtained a competent opinion of counsel as to non-infringement or invalidity, would be found to have engaged in egregious behavior so as to justify enhanced damages.

Conclusion

As a result of the Halo decision, in response to receipt of an assertion that a product infringes another’s patent rights, or upon recognition that the claims of an issued patent could potentially be relevant to a company’s business, the matter be referred to patent counsel to assess the patent claims with respect to their applicability and/or validity. Patent counsel may then consider whether, given the circumstances, an opinion of counsel can or should be provided. The costs associated with the preparation of such an opinion are typically far less than the additional amount payable to a patent owner should enhanced damages or attorney fees be awarded following an adverse judgment.

Introducing a New Product? Should a Freedom to Operate Study Be Undertaken?

When developing a new product, companies will frequently engage counsel to perform a “freedom to operate” study in an effort to identify patents that might raise a risk of patent infringement following the introduction of the product. While there is nothing fundamentally wrong with this approach, there are pros and cons associated with the decision to proceed with such a study that are frequently not considered. What should be done if you find a patent or pending application that includes claims that might cover the product? Would the company have been better off had it not engaged counsel to perform the study initially?

The Law of Willful Infringement
As a prelude to this discussion, it is important to understand the laws applicable to willful infringement. If one manufactures uses or sells an infringing product with knowledge of the infringement, they can be liable for willful infringement under the patent laws. A party is liable for willful infringement if the patent owner demonstrates that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. If willful infringement is found, the patent laws provide that the infringer can be liable for up to treble damages and the patentee’s attorney’s fees.

The Pros:
If one or more issued patents are located that would cover the design of the product under development, it may be possible to redesign the product in a manner so as to avoid the infringement. Avoidance of a potential lawsuit for patent infringement is certainly desirable provided that a redesigned product can be manufactured and sold at a competitive price and that a redesigned product can provide the features desired in the marketplace.

If no issued patents are located as a result of a freedom to operate study that disclose or suggest the design of the new product, such may be informative of opportunities to obtain patent protection on the new design and offer guidance as to the scope of protection that may be available should a patent application be filed.

The Cons:

Not all freedom to operate studies have happy endings. What if a patent is located that contains claims that apply to the product under development and a viable product cannot be produced without violating the claims of the patent. If the non-infringing product cannot be designed that provides the desired features, or cannot be produced in a way that is commercially viable for reasons of cost, the company has several options. One option would be to inquire of the patent owner whether a license is available and on what terms. If a license in not available or is not available on reasonable terms, proceeding with a product introduction poses a heightened risk that a suit for infringement will be initiated by the patent owner. A second option would be to abandon the product introduction. This decision may involve substantial losses of investment in the product development, depending on how far along the product development has progressed. A third option would be to proceed with the product introduction and assume the risk that the patent owner may take notice and initiate a suit for patent infringement. If a court determines that a product infringes a patent, that the infringer had knowledge of the patent, and that the infringer’s conduct was “objectively reckless” the court may hold the infringer liable for willful infringement. In such a case, the patent owner could be awarded up to treble damages and its attorney’s fees associated with the pursuit of the litigation.

If a product is introduced and a suit for patent infringement follows, the infringement could be held to be willful as noted above if the conduct of the infringer is determined to be objectively reckless. Although it is not required that an opinion of counsel be obtained to counter a charge of willful infringement, a competent opinion of patent counsel concluding that a product does not infringe or, that any relevant patent claims are invalid, will generally serve as a defense to a charge of willful infringement. When such an opinion is obtained, the continued sale of the accused product during litigation is seldom considered to be objectively reckless. The preparation of a competent opinion of counsel requires study of the patent and its prosecution history and the preparation of such an opinion can involve substantial legal costs.

If a party chooses to sell a product with knowledge of a patent and chooses not to obtain an opinion of counsel, a court will determine whether the sale of the product was objectively reasonable or objectively reckless based on the specific facts in the case. It should be noted that an opinion of counsel does not serve as a defense to a charge of infringement, only a defense to a charge that the infringement was willful.

If a freedom to operate search results in the identification of a published patent application with claims that, if issued, would cover the product under development another issue is raised. The application that was identified in the search may never issue as a patent and, if it does issue, the claims may not resemble those that existed in the published application or in the public records of the U.S. Patent and Trademark Office. Thus, a company developing a product must decide how to proceed in a period of uncertainty regarding claim coverage that may ultimately be obtained.

In such a circumstance does one shut down the development of the product, defer the project or continue the development with the recognition that the product would infringe if the patent issues with existing claims? While one can study the progress of a given patent prosecution if the prosecution is available in the public records of the U.S. Patent and Trademark Office, it would require a crystal ball to determine the scope of protection that would ultimately be granted. Unfortunately, the correct decision to many of the questions raised can only be determined in hindsight and must be based on an educated guess as to what patent coverage may ultimately be achieved.

If a freedom to operate search had not been performed and there was no knowledge of the patent in advance of the introduction of the product to the marketplace and the filing of suit by a patent owner, it is more difficult to sustain a claim for willful infringement. Of course, it this path is followed, following the filing of a suit for patent infringement, the company is faced with a decision of whether to discontinue the product, attempt to settle the dispute or contest the assertion in a litigation.

Conclusion 

There are perfectly good and valid reasons for performing freedom to operate studies. If a study is to be conducted, it is generally advisable that it be undertaken before substantial sums have been invested in product development.

It should be recognized however, that is often unknowable whether a patent owner will become aware of a product that enters the marketplace, whether the patent owner would view the product as constituting an infringement should it become aware of the product, whether the patent would ever be asserted by the patent owner even after becoming aware of the product or, if a license would be available upon reasonable terms. Of course, it is considerably more likely that the introduction of a product will become known to a competitor. The ultimate decision whether to commission a freedom to operate study and what to do if such a study is performed, relates to ones tolerance for risk and an understanding of the ramifications that flow from such a course of action. Before a company engages patent counsel to perform a freedom to operate study, it is therefore worthwhile to discuss with counsel what the company plans to do with the search results since, once the search has been performed, if relevant issued patents are located as a result of the search, the specter of willful infringement is out of the bag.

The Layered Look: Copyrights and Visual Arts

People are generally aware that a painting, photograph, sculpture or other works of art are subject to copyright protection but many are less aware that copyright has many layers of possible protection which can present legal traps for the unwary.

An original work of art which may be a painting, photograph or sculpture, is subject to copyright from the time of creation of the work.  The copyright is owned by the artist or creator unless the work was produced as a work for hire where the creator is an employee acting within the scope of his or her employment duties, or by written agreement between the creator and a party who commissioned or ordered the work.

The exclusive rights of copyright for a visual work include:

• The right to make copies;
• The right to make derivatives;
• The right to distribute copies;
• The right to publicly display the work; and
• The right to reproduce the work on any article or item.

Here are a few examples to ponder in relation to these rights.

A photograph may itself be a separately copyrightable work apart from an original work being photographed.  For example, an old master painting may not itself be the subject of a copyright by reason of its age but a photograph of that master painting can be a copyrightable work of the photographer, or other owner if a work for hire.  The copyright owner of the photograph is entitled to control its copying and public display.

What if you wish to photograph a painting that is copyrighted?  Without permission of the copyright holder such a photograph will be a violation of copyright.

The risks of infringing a copyrighted work are heightened by today's ease of electronic transmission by use of the Internet, social media, cell phones, etc. What if you photograph a copyrighted painting or sculpture and post it on your Facebook page?  That posting can be considered copying and also considered a public display, both of which are violations of the owner's copyright, if done without permission.

Another right of copyright is the right to publicly display a copyrighted work or copies of that work.  Say you purchased an Ansel Adams photograph of a Yosemite landscape, you may display that photograph for your own enjoyment or within you usual social circle but you have no right to publicly display that photograph unless you were granted that right of public display by the copyright owner.

What if you take a copyrighted photograph and Photoshop it into an altered image?  As one of the rights of copyright is to make derivative works, your Photoshopped image would be a non-authorized derivative and also an unauthorized copy of the original work.

Can you put a commercial photo of your favorite band on a tee shirt?  You cannot (absent permission) since the copyright owner has the right to reproduce the photo on any item.

Liability for copyright infringement can be significant.  An owner of a registered copyright can claim damages based on actual provable economic loss or more often statutory damages which can be in the range of $750.00 to $30,000 for each infringement, as a Court may determine.  In cases of willful infringement, a Court can award costs and attorney's fees.  A court may also issue an injunction against ongoing infringement.

In a case of willful infringement under certain circumstances generally relating to commercial piracy of copyrighted works, there can be criminal liability for copyright infringement with penalties including fines and/or imprisonment.  
A defense to an assertion of copyright infringement is the right of fair use of the copyrighted work, which generally allows non-commercial use or copying for purposes of criticism, comment, news, teaching, scholarship and the like.

It would be safe to assume that copyright attaches to most paintings, photographs, sculptures and other visual arts and you should seek permission for any intended commercial activity. Permission may be sought directly from the copyright owner or most conveniently from various licensing organizations which exist for the purpose of providing such permissions.  Usually the permission is for a fee in an amount which depends upon the extent of intended use of the work. Well known licensing organizations for the visual arts include Corbis, Getty Images, Artists Rights Society (ARS), and stock photo companies, among others.