With the constant rise of litigation costs, particularly in patent disputes, alternative dispute resolution (ADR) is becoming an increasingly attractive alternative to fully litigating patent cases.
Patent litigation is almost always complex, highly technical and time-consuming. It has been called the sport of kings – complex, uncertain and sometimes ruinously expensive. Over one hundred years ago, Lord Esher commented that, “Why that a man had better have his patent infringed, or have anything happen to him in this world, short of losing all his family by influenza, than have a dispute about a patent. His patent is swallowed up, and he is ruined. Whose fault is it? It is really not the fault of the law; it is the fault of the mode of conducting the law in a patent case. That is what causes all the mischief.”
Litigating patent disputes leads companies to quickly understand that the value of their intellectual property is only as strong as the balance sheet behind it. Successful patent litigation teams are aware that litigation is a business issue, not just a legal issue. Firms have to understand clients’ business priorities and focus on resolving legal disputes with the best business result. ADR, in its many forms, can lead to less expense, less stress and early resolution of these complex technical matters which trumps the limitations of full litigation.
According to survey data from the American Intellectual Property Law Association (AIPLA) in 2009, the average cost of patent litigation in the United States was approximately $2 million. For cases where the plaintiff was seeking less than $25 million in damages, the cost of litigation ranged from $350,000 to $1.5 million when the cases settled before going to trial, and $650,000 to $2.5 million for cases going through trial and appeal. If more than $25 million was at stake, the cost nearly tripled, resulting in pretrial litigation costs of $3 million and $5.5 million for cases going through trial and appeal. This is not inclusive of costs which the court may order the losing party to pay – the winning party’s attorney fees or treble damages for wilful patent infringement. While this happens in limited circumstances, the thought of paying nearly $6 million in litigation expenses makes many companies ask what the alternatives are to full litigation.
Even assuming costs on the lower end of the spectrum, $1 million is often larger than the total profits of many small and medium-sized companies. These companies are therefore forced to consider if litigation is even worth the expense, despite the merits of the potential patent infringement claims. Many law firms have developed alternative fee arrangements to minimise the risk associated with litigating patent disputes, taking cases on a contingency and partial contingency basis. But the nature of firms in these economic times often prevents patent litigation practitioners from taking on contingencies, given the risk associated with patent validity and infringement determinations. The associated risk of appeals then drives the sticker price in litigation even higher.
Patent litigation has proven to be a high-stakes game for corporate survival. Before filing, companies should consider potential effects on third-party relationships as some customers may choose another supplier if one is involved in litigation. Investors and external financing may be limited by the risk and expense of litigation. Additionally, through litigation, there are lost opportunities and internal costs that can far exceed any rewards that may result. Even winning a patent dispute can result in exceeding legal budgets, shareholder complaints where the ultimate recovery does not offset the costs of litigation, and further forced litigation costs through appeal. Being on the losing side is even worse. Paying patent damages can often mean cutting expenses, leading to layoffs, research cuts and even bankruptcy for some small companies.
The game changes even more when there are international patents, parties and disputes across borders. There are various multi-jurisdictional concerns when parties are from different countries. In order to litigate patent disputes, there must be some form of personal jurisdiction over the parties to move forward. Even after litigation, parties are faced with the hurdles of enforcement required in each jurisdiction where infringement occurs – and litigating in multiple jurisdictions increases costs. As a result, at the onset of litigation, many parties need to know the potential benefits and limitations of alternative measures to resolve these disputes.
There are many forms of ADR, each of which has its own advantages and disadvantages when it comes to patent disputes. It is imperative to know that what works for one may not work for all. Many factors will influence the best method of resolution, including, but not limited to, the size of companies in dispute, the complexity of technology at issue, the age of the patents and the locale of the infringement and parties. However, ADR can really evolve into anything the parties want it to be. Unlike trials, there is an ability to customise the parameters in determining the dispute, which maximises the chance of success. In some instances, parties have exclusive control over testimony, discovery, timing and restricting the remedies available, all of which can lead to more efficient and cost-effective resolution of patent disputes.
Probably the simplest form of ADR is negotiating patent licensing. This is most often the cheapest way to avoid litigation. Parties, either on their own or through counsel, determine the value of the intellectual property at issue and come to a reasonable financial compromise for use of the patented technology. This often happens before litigation complaints are even filed. Upon notice of potential litigation, the parties can determine, irrespective of the merits of infringement and invalidity, whether the cost of litigation outweighs the benefit of paying a licence. Licensing is limited when negotiations carry on for extended periods of time, or when the potential infringer simply refuses to purchase a licence.
Early Neutral Evaluation (ENE) is also another resolution measure used in the very early stages of litigation by some jurisdictions. ENE was formed as part of the Civil Justice Reform Act of 1992 and requires the parties to meet with a third-party neutral evaluator to determine the potential merits of the case. The meeting occurs after the complaint and answer have been filed, but before the parties proceed with any form of discovery. In meeting with the third-party evaluator, the parties get a non-binding preliminary finding on the merits of the patent claims. The parties then have the option to either accept the finding or reject it and move forward with litigation. ENE is not always a successful option because of the complexity of patent litigation matters. Issues of patent validity often require going through the files of the patent attorney, patent prosecution histories, information considered by the patent office, prior art and prior publications. At the outset of litigation, this is information that parties simply do not have fully available without discovery. This often leads to parties rejecting ENE findings and moving forward with litigation in any event.
Mediation is a voluntary, non-binding process that grants control of resolution to the disputing parties. This form of ADR requires a compromise between parties and can occur at any time during litigation. In complex patent disputes, parties often seek appointment of special masters or magistrate judges to handle certain aspects of the litigation, including mediation. Special masters are appointed by the court, in accordance with Rule 53 of the Federal Rules of Civil Procedure, as experts to advise the courts in patent cases. Magistrate judges are often used to conduct early case management and settlement conferences. Use of these entities as mediators early in the litigation process can lessen the need to go forward with litigation. Apart from the mediator’s potential suggestions and proposal for resolution, the ultimate success of any mediation rests solely with the parties. However, the major limitation with mediation is that although flexible, it may not always result in complete resolution and final settlement. Many parties often view this as a waste of time because there is still a need for further litigation. However, partial resolution can lead to the elimination of certain claims, simplifying the litigation.
Arbitration is probably the best method of ADR in patent disputes. Parties have the power and control to select the arbitrator (or often a panel of three arbitrators). The reality is that most judges and even lawyers have no idea of the intricacies of the patent system, nor the willingness or desire to learn. Private parties with patent expertise are usually the best selected arbitrators. Many patent lawyers serve as arbitrators, and their experience gives them the ability to evaluate the dispute with precision. Arbitration tends to be better than litigation because if the proper arbitration panel is selected, parties avoid the cost of trying to educate the judge/jury through technical experts who can explain the patented technology, and of using patent law experts to discuss the intricacies of the patent prosecution process.
While costs can mount because arbitration presentations are usually much more involved and detailed in patent disputes, there are several benefits to selecting arbitration as an ADR method. Arbitrations are generally less expensive than litigation. They are also private and confidential. This allows disputing parties to maintain confidential business information such as product development, manufacturing, marketing strategies, sales and customer lists. Arbitration also allows the parties to agree on the scope of discovery, the method of claim construction and the type of damages that can be awarded, and the parties can restrict the remedies afforded in the decision. For example, parties have the ability to request a decision of infringement or non-infringement; a claim-by-claim analysis; and can even limit decisions on validity to read as “unenforceable” rather than “invalid.”
Unlike mediation, decisions in arbitration are final and very rarely appealable. Arbitration decisions are usually only set aside if procured by fraud. Absent a manifest disregard of the law, arbitration awards are final but apply solely to the parties of the dispute. Unlike litigation, there is no res judicata or collateral estoppel effect on third parties. Arbitrations are unique to the parties involved and any future dispute will be decided irrespective of the arbitration award. Thus, if the patents are ever litigated again, parties can rest assured that the previous litigation will not prevent them from prevailing against other parties.
As stated, there are various multi-jurisdictional concerns when parties are from different countries. Very often there are public policy implications to any patent dispute, which are unique to each country involved. Patent litigation is often limited by hurdles of enforcement required in the jurisdiction where infringement occurs. Collecting on an award or judgment is extremely difficult unless the assets of the losing party are located in the country where the judgment was entered. Enforcing a judgment in a foreign jurisdiction requires a treaty on recognition of court judgments between the country where the judgment is rendered and the country where the winning party seeks to collect. This often presents obstacles to prevailing parties’ ability to collect an award.
International arbitration lends some benefits in this regard. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, more commonly known as the New York Convention, was adopted by the United Nations in 1959. This international treaty makes foreign arbitral awards enforceable around the world. There are 142 of the 192 United Nations Member States, the Cook Islands and the Holy See which adopted the New York Convention. Only 50 UN Member States and Taiwan have not yet adopted the New York Convention. Under the terms of the treaty, challenges to an arbitration award are only allowed when no due process was afforded. Thus parties are often attracted to international arbitration when patent disputes are multinational.
Regardless of the method a party chooses to resolve patent disputes, the ultimate success of the litigation will turn on proper management of client expectations. While litigation has its own risk and rewards, even ADR can be a failure if realistic expectations are not set at the outset for each party. In order to effectively resolve a matter, there truly has to be a willingness and ability to resolve a patent dispute. If the future of a company is on the line and a settlement will nevertheless bankrupt the company, clients need to have a vast understanding of the implications of any dispute resolution. Proper management of expectations can lead to successful resolution of patent disputes despite the sticker price associated with the litigation. Each situation has to be examined to determine what the best course of action is, taking into account the risk, rewards and costs.