What’s a small or medium sized company to do. It has a patent or two. It knows that there are competitors in its industry who are using its patented technology without authorization and without paying it a license royalty. But when it shops for a law firm to assist it in enforcing its patent rights, it often collapses from the sticker shock.

The hard reality is that patent infringement litigation frequently costs each party $1 million dollars or more, from the initial pre-litigation investigation, to the jury foreman’s reading of the verdict. This amount frequently constitutes more than the annual gross profits of some small or medium sized companies.

For most of them, patent litigation on an hourly basis is financially out of reach. There is the option of retaining a firm on a contingency fee basis. However, it may be difficult to find a law firm with the inclination or the resources to take on a large, complex contingent patent litigation and bring it to trial. Even contingency fee attorneys can’t overcome case backlogs in federal courts which stretch for years, nor can they alleviate the built-in expenses of complex patent litigation, for which the client is responsible. Some high technology companies whose patented inventions may quickly become obsolete can’t wait that long.

Therefore, clients are urging their would-be patent litigation counsel to explore quicker and more financially rational means of enforcing their patent rights. Probably the cheapest way to enforce patent rights against a potential infringer is through licensing. However, licensing negotiations may drag on, or the potential infringer may refuse to purchase a license altogether. At that point, the only alternatives left for a patent owner are either to give up, or to mediate, arbitrate or litigate.

Alternative dispute resolution (ADR) has become an increasingly popular alternative to the expense and time commitment of patent litigation in the federal courts. Even if the decision is made to pursue ADR, there are as many types of ADR as there are types of patents (i.e. early neutral evaluation, mediation, special masters, arbitration, etc.). Each alternative has its own set of advantages and disadvantages and an ADR method which is appropriate for one client matter may not work for another. Similarly, some types of patent disputes are more amenable to ADR than others. However, there are some questions that are commonly asked by most clients.

IS ADR FASTER THAN LITIGATING IN FEDERAL COURT?

The reason most frequently cited by practitioners and clients alike for choosing ADR is that a resolution of the patent dispute is generally reached much faster than it would be resolved through traditional litigation. The need for an expeditious resolution of a dispute is often accentuated in the case of patent litigation. On the one hand, the patent owner often desires a rapid (and permanent) exclusion of an infringer from the marketplace, so that he can take advantage of peak demand for his patented device, process or design.

In addition, the patent owner naturally desires to obtain compensation for the infringement in a timely manner. On the other hand, the accused infringer would generally like to remove from his products the stigma of a charge of infringement, so that his customers don’t decide to buy from the patent owner or another competitor.

The federal court system has, however, been sensitive to these concerns. Certain federal jurisdictions, such as the Eastern District of Virginia, have established so-called “Rocket Dockets” which dispense rapid justice to both patent owners and infringers alike. On a rocket docket system, a complex patent case may go to trial in less than six months. This means that the parties often have to compress years worth of discovery and motion practice into a few months.

Discovery disputes and substantive motions are routinely briefed and disposed of in the span of a week or two. Although litigation on a Rocket Docket may be as fast as ADR, the parties have little control over this system. The expenses and fees generated by such a fast-paced litigation can put both parties on the ropes. ADR, by way of contrast, can be a privately-managed process where the parties are able to control the scope and pace of proceedings, so that they have adequate time to prepare and develop their cases.

In addition, as part of the Civil Justice Reform Act of 1992, most federal district courts have implemented a program of early neutral evaluation (ENE), which if successful, will lead to a much more rapid resolution of a patent dispute than traditional litigation. ENE is generally mandatory for the parties and requires litigants and their counsel to meet with an experienced, neutral private practitioner after the complaint and answer have been filed, but before extensive (and expensive) document and deposition discovery has been undertaken.

In the case of patent litigation, the evaluator, if properly selected, may have experience in patent litigation, as well as the technology involved. The parties make written submissions to the evaluator, who then meets in person with the litigants and their counsel. The evaluator then considers the written submissions and the outcome of the in-person meeting and renders a non-binding preliminary opinion about the strengths and weaknesses of the patent owner’s case and the defenses that have been asserted by the accused infringer(s).

Although it is easy to say that one or the other of the parties to an ENE proceeding will reject the evaluator’s recommendation out of hand, this process may cause the litigants to become more realistic about the strength of their claims and defenses, as well as their respective prospects for ultimate success. The realism that is instilled may prompt the parties to explore settlement. If ENE accomplishes this goal, it will also be faster than litigation through trial.

Mediation is another option for the parties to a patent infringement controversy short of full-scale litigation. If successful, mediation will also generally be faster than litigation in federal court. Mediations are voluntary efforts undertaken by the parties with their mutual consent and use a neutral third party to help them broker a settlement. Like the evaluator, the mediator can be an experienced patent litigator, with knowledge of the particular technology in question.

Mediation can be undertaken at any stage of the litigation before trial (or even during pre-litigation licensing negotiations), unlike ENE’s, which are usually undertaken at the outset of suit. Mediations proceed in the same, relatively informal manner as an early neutral evaluation. Mediations usually involve more detailed, elaborate presentations by the parties, including a discussion of the technologies involved, as well the parties’ respective theories of infringement and validity of the patents in question. The mediator generally undertakes a more active effort to engage in “shuttle diplomacy” between the parties in order to find a realistic and acceptable compromise.

Of course, for the mediation process to succeed, the parties must be willing to compromise. Frequently, however, both the realization by a party that its property rights are being purloined, and the indignation on the part of the accused infringer at having his good name tarnished, provoke emotional reactions that work against compromise.

Therefore, the willingness to form a middle ground often does not materialize until a substantial amount of resources are expended by the parties in litigation for document discovery, depositions of fact and expert witnesses and the filing of procedural and substantive motions. At that point, if the mediation results in a settlement, then at least the time, expense and uncertainty of trial will have been avoided.

Arbitrations, on the other hand, do not necessarily reach a resolution more quickly than traditional federal court litigations. This is particularly true in light of the fact that a growing number of federal courts have instituted “Rocket Docket” systems of dispensing justice, which can force a case to go to trial in six months after the complaint is filed, sometimes faster. Given the fact that the parties have more control over the arbitration process, it is certainly possible that a case can be arbitrated this rapidly, but such is not the norm.

Indeed, the California Supreme Court recently noted that the private arbitration of an alleged breach of a technology transfer agreement covering state of the art computer hardware took 4 and ½ years and 365 trial days to complete. Of course, the length of the arbitration proceeding will, vary with the nature and complexity of the patented technology, the legal issues presented and the willingness of the parties to cooperate in moving things along.

The first skirmish in the arbitration battle is the selection of the arbitrator or panel of arbitrators. The usual size for a panel of arbitrators is three. The arbitrators, like the evaluators and mediators discussed above, are private parties experienced with analyzing the validity and infringement of patents in a litigation context, and who are also (preferably) schooled in the particular technology at issue. The parties generally exchange lists of proposed arbitrators, conflicts of interest are scrutinized and a substantial amount of time is spent by the parties negotiating over an arbitration panel that is acceptable to them.

Moreover, if an arbitrator is sufficiently prominent in the patent or technological community to warrant consideration, he is usually a busy attorney or business person as well. Therefore, scheduling conferences between the parties and the arbitrators can become an art unto itself. A somewhat less controversial issue involves that choice of the rules to be applied to the arbitration proceeding. The rules most commonly used in arbitrations are those promulgated by the American Arbitration Association (AAA).

Arbitrators, like the attorneys representing the parties, are generally compensated for their services on an hourly basis. If the parties are sufficiently combative and the patented technology involved complex, the cost of arbitration may rapidly mount. At least in federal court, the litigants do not generally have to pay for the judge’s time, or the jury’s, unless of course they are sanctioned for misconduct.

IS ALTERNATIVE PATENT DISPUTE RESOLUTION CHEAPER?

Resolution of a patent controversy through early neutral evaluation or mediation, instead of litigating in federal court, will generally prove to be less expensive, if successful. These options are also generally less expensive than arbitration. This is so, of course, because the settlement garnered through ENE or mediation will obviate the need to develop evidence through costly discovery, as well as the presentation of this evidence in court or before an arbitration panel. However, arbitration of a patent dispute will not necessarily be less expensive than a civil trial in federal court.

On the one hand, federal litigation requires the compilation of admissible evidence through discovery. In addition, since most federal judges are not familiar with the intricacies of the patent law, much less the patented technologies at issue, the parties will generally be compelled to retain the services of several expert witnesses, who will educate and aid the judge and the jury in reaching their respective decisions. The parties may retain a technical expert proficient in the patented technology and a damages expert who is competent to apply the law of patent damages to the particular technology or industry.

Finally, the parties may name a patent law expert, who is an experienced patent attorney, former federal judge or a former commissioner of the United States Patent and Trademark Office. The patent law expert provides testimony on Patent Office procedures, the patent application process, as well as an analysis of the patent law as applied to the factual issues presented in the case. However, many federal judges do not allow patent law experts to testify at trial, or they sharply limit this expert’s testimony. This is so, because it is the judge’s role to instruct the jury as to the proper legal standards to be applied. It is then the jury’s responsibility to apply the law to the evidence presented at trial. It is often felt that the patent law expert usurps these functions by offering authoritative opinions on the ultimate issues in the case.

Individual litigants, and even small to mid-sized companies can’t afford to pay their attorneys, let alone experts. In arbitration, paying the arbitrators can also be a significant burden. However, in a complicated patent infringement case, there are often substantial amounts of money or a potentially devastating injunction at stake. Therefore, the cost of paying an arbitrator may be modest compared with the time, expense and uncertainties of a lawsuit. In addition, the primary source of cost savings is the limitation or rationalization of discovery.

The Federal Arbitration Act authorizes arbitrators to issue subpoenas compelling witnesses to appear before the arbitration panel, and to bring books and records with them when they do. Several states, including California, have similar provisions. The Federal Rules also authorize discovery before the actual arbitration hearing commences. Other state statutes, including California’s, are not clear on the issue of pre-hearing discovery.

Regardless of any limitations inherent in these rules, the parties can, of course, agree to conduct some limited discovery prior to the arbitration. Although the parties must be willing and minimally cooperative, in most instances some discovery will occur by necessity, although it will usually be far less extensive (and expensive) than discovery undertaken as part of federal court litigation.

ARE ALTERNATIVE METHODS OF PATENT DISPUTE RESOLUTION BETTER?

The primary advantage of alternative dispute resolution is that the parties have the ability to select the person or group of people who will mediate or decide the dispute. This ability gives the parties the opportunity to select individuals who already possess knowledge in the patent law and litigation. It also allows the parties to choose individuals skilled in the particular technology in question.

Since the ultimate mediator, fact-finder or decision-maker is knowledgeable of the patent law and the technology, the parties will generally not need to retain the technical, damage and patent law experts required for a federal court litigation. This also means that the parties will spend less time (and money) educating the ultimate fact- finder on the basics of the factual and legal issues pertinent to the case.

Attorneys and clients involved in high technology patent litigation will be justified in having greater confidence in the decision-maker, since he (or they) will have experience in the relevant field, unlike a jury chosen at random from the general population, or a federal judge, also chosen at random, who may not have a strong background in patent law or the technology in question (or the time and inclination to develop one).

Another advantage of mediation or arbitration that has appeal in a patent controversy is that it private and confidential. Patent litigation frequently involves high technology matters and information which is trade secret. Although there are methods (such as strict protective orders) designed to shield this information from disclosure in a federal court litigation, the litigants must at least divulge this business sensitive information to the other party’s attorneys. Compliance with protective orders is often dubious and hard to police.

Federal judges, in turn, are frequently unwilling to seal their courtrooms during trial in order to accommodate the concerns of a party over the confidentiality of the evidence being discussed. Given the pace at which technology changes and the role that such technology plays in a party’s competitive advantage, the exposure of this information to the public, or to an opposing party, can spell disaster.

Mediation and arbitration proceedings, and their outcomes, are closed to the public. Therefore, when preserving the confidentiality of business sensitive information is of primary concern, these alternative dispute resolution mechanisms may be the way to go. However, the attributes of ADR which give it its advantages also make it less desirable in the patent infringement context. For example, in order to establish the infringement of a patent, every element of the patent’s claims must be present in the accused infringing device or process either literally or by substantial equivalents. Access to the structure and functions of the accused infringing device or process can generally be obtained only through extensive document and deposition discovery.

In addition, establishing the invalidity of a patent necessitates an archeological expedition through the files of the patent owner, the inventors and the attorney who prosecuted the patent application. This discovery may also entail taking the depositions of these potential witnesses. This is necessary in order to determine such issues as who invented what part of the patented subjected matter, whether pertinent prior art was knowingly and intentionally withheld from the patent examiner, and whether the patented technology was on sale or in public use a year prior to the patent application, so as to set up a statutory bar to patentability.

The need for such discovery in a patent case may mean that early neutral evaluation or mediation undertaken at the outset will not succeed, since the patent holder is relying on incomplete public information to establish his case for patent infringement and the accused infringer can only obtain such public information as prior art patents and publications, as well as the patent’s prosecution history, which would bear on the issue of patent invalidity.

However, if the parties agree to, or the arbitrator’s order that discovery be undertaken under the Federal Rules of Civil Procedure, then one of the cost advantages of these alternative dispute resolution mechanisms will have been undermined.

THE FINALITY OF THE DECISION

Of course, if early neutral evaluation or mediation succeed, they result in a settlement of the controversy between the parties, which is by definition final. Additionally, arbitral decisions, on the other hand, are rarely, if ever reviewed by an appellate court. Although the lack of appellate review makes the process quicker and less expensive, the arbitrators have wide discretion to base their decision and fashion a remedy “upon broad principles of justice and equity.” This gives the arbitrators wide latitude in resolving a dispute. Generally, the arbitrator’s award cannot be reviewed for errors of fact or law, even if the award causes one or both of the parties substantial injustice.

Furthermore, in the context of patent litigation, the arbitral decision has no res judicata or collateral estoppel effect. Essentially, this means that the decision of the arbitrators is not binding upon the parties, and does not constitute persuasive authority, in subsequent proceedings involving third parties who were not a part of the arbitration. Of course, the same is true for ENE and mediation.

If the goal of the patent owner is to have a federal court hold his patent valid and enforceable (and if the Federal Circuit affirms), then the patent owner should not choose ADR. The patent owner who relies upon ADR thus loses a potent weapon in his arsenal with which to extract favorable license terms from other potential infringers and prospective users of his technology.

THE BOTTOM LINE

When asked by his client whether he should litigate, an honest lawyer will answer “it depends.” Although some intellectual property cases, such as trademark and copyright infringement matters, may be amenable to ADR, patent cases may not be. Serious attempts should be made to engage in ENE or to mediate a dispute when the parties to a patent dispute have evidenced a cooperative stance, but arbitration may not be preferable to federal court litigation.

The parties to a patent dispute generally need more discovery and appellate recourse than is afforded by most mainstream arbitration systems. In fact, most if not all, arbitration decisions involving patents cannot be appealed to the Federal Circuit.

Moreover, no matter how you slice it, patent infringement cases are scientifically and legally difficult, not to mention expensive and time-consuming. The expense and time needed, of course, vary with the complexity of the technology involved, such that simple mechanical patents may be more conducive to arbitration than, for example, cases in the area of semiconductors or biotechnology.

When complex issues of patent validity and enforceability are thrown in, however, even simple mechanical cases may become unwieldy. Therefore, before choosing to pursue any form of alternative dispute resolution mechanism, the costs and delays inherent in federal court litigation must be weighed by the parties against what the parties will be giving up in terms of the rights and protections afforded by the Federal Rules of Civil Procedure and Evidence, as well as an appeal to the Federal Circuit.

For more information, contact:

Tony Lupo
202.857.6353
lupo.anthony@arentfox.com