Arbitrating Patent Disputes — A Strategic Choice

Most practitioners are aware of mediation as a potential tool for resolving patent disputes. Mediation affords the parties and their counsel many well-known advantages: privacy, informality, an opportunity for a frank evaluation of the merits, and control, including the ability to manage the costs and the risks of litigation as well as the outcome. Many, however, do not consider whether arbitration might make a better strategic choice over litigation for resolving a patent dispute when an adversarial process is called for.

Litigating patent disputes is known to be both time consuming and costly. Patent cases take an average of 2.5 years to resolve according to the PWC 2016 Patent Litigation Study, although only 1.7 percent actually reach trial. The typical cost for litigating a dispute with $10-25 million at risk through the end of discovery is $2.6 million with total costs amounting to $4.5 million. When over $25 million is at risk, these numbers jump to $3.8 million through discovery and $6.2 million respectively. In addition, the disruption to business-as-usual cannot be over estimated with employees engaged in extensive document production, and executives and engineers providing testimony in depositions.

Patent litigation is also not known for its finality. Even after

Teva Pharm. USA, Inc. v. Sandoz, Inc.

, 135 S. Ct. 831, (2015), claim construction still remains a fertile ground for reversal and remand to the district court for further proceedings. According to the PWC Study, appeals were lodged in 80 percent of cases analyzed with 53 percent of appealed cases modified in some regard.

For Certain Matters, Arbitration May be a Better Choice for Patent Disputes

Arbitration’s perceived benefits are readily transferable to patent disputes. In fact, given the characteristics of patent cases, arbitration may well provide a preferred adversarial process depending on the parties’ business goals. Arbitration affords the parties autonomy over many aspects of how their dispute is resolved. First, parties are able to determine the characteristics they want in a decision maker and then choose an arbitrator who meets their needs including, for example, expertise in patent law, a relevant technical background, sufficient time to devote to the matter, and excellent case management skills. Moreover, parties can decide whether they want a sole arbitrator or whether the size and complexity of the matter calls for a panel of three. The parties’ ability to achieve many of the benefits associated with arbitration often depends on the skills of the arbitrator or the panel chosen and their commitment to the process.

The parties also control the timing of their evidentiary hearing and the events leading up to it. At the preliminary hearing, the parties and the arbitrator agree on a schedule which is then set forth in a pre-hearing order. The parties can set as aggressive a timetable as they choose which helps avoid the application of Parkinson’s law - that work expands to fill the time available. And as arbitrations, like trials, tend to settle, an aggressive schedule can lead to an earlier settlement which saves time and money.

The parties are also able to choose to conduct the arbitration under the auspices of a service provider, such as the American Arbitration Association and its attendant rules. The AAA, for example, has supplemental patent rules that include actions relevant to patent disputes such as the content of initial infringement and invalidity disclosures, and the exchange of proposed claim construction terms. And the AAA, like most service providers has rules governing interim relief, and emergency measures of protection. In the event that the parties prefer to conduct their arbitration on an ad hoc basis, without the use of a service provider, they are able to do so.

Discovery, which is frequently credited for the expense of patent litigation, is also subject to the parties’ agreement. Generally, discovery is much more limited in arbitrations than in litigation. And in patent disputes, the parties often need little discovery for claim construction other than the patents, the prosecution file histories, and prior art.

When important intellectual property rights are at stake, keeping the proceedings private can be important. Unlike litigation in state and federal courts, arbitrations are not open to the public. Moreover, the parties can agree that they will not divulge what happens during the course of the arbitration to enhance confidentiality.

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2017 Ⓒ Boston Patent Law Association

Arbitration affords the parties finality. As noted above, many of the claim construction rulings are appealed to the Federal Circuit and more than half are modified and/or remanded in some fashion. By contrast, pursuant to Section 10 of the Federal Arbitration Act (the”FAA”), the grounds for appealing an arbitration award are limited, as will be discussed below.

Parties’ Goals May Render Arbitration of Patent Disputes Undesirable

A party may have several business goals that render arbitration a less suitable process than litigation. First, if it is important to a party to establish a legal precedent in an area involving patent rights, then the party must turn to the courts as only the courts can establish legal precedent. Second, a party may want to publicly send a message to its competitors that it will fight long and hard to protect its intellectual property. Similarly, if a company’s goal is to drive a competitor out of business, then a lengthy and expensive litigation will prove a better alternative than arbitration.

A party may also believe that extensive discovery is important to establishing its case. As noted above, discovery in arbitrations tend to be far more limited than that in federal court. And, if a party’s business goal is to drive a competitor out of business, extensive discovery might provide a useful tool. Further, if a litigant is dissatisfied with at the outcome of a case pending in district court, an appeal to the Federal Circuit is available. In arbitration, appeals are limited to the grounds set forth in the FAA.

The Patent Statute Expressly Provides for the Arbitration of Patent Disputes

The United States Patent Act was amended in 1982 to expressly provide that parties may arbitrate issues of patent validity and infringement. 35 U.S.C. §294. Pursuant to Sec. 294, a contract involving a patent or any right under a patent may contain a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract. Sec.294(a). Typically, agreements to arbitrate are found in license agreements and technology and intellectual property development agreements. However, in the absence of such a contract, the statute provides that parties to an existing patent invalidity or infringement dispute may agree in writing to settle their dispute by arbitration

Unlike patent litigation, an arbitral award is final and binding between the parties but “shall have no force or effect on any other person.” Sec 294(c). Depending upon a party’s business goals, the limited

inter partes

effect of an award may be a consideration when deciding upon the optimal dispute resolution process.

While the arbitration process is generally confidential, Sec 294(d) provides that notice of an award must be provided to the PTO in writing. The notice, along with the award, is then entered into the prosecution record for the patent in issue. A separate notice must be filed for each patent in dispute. The award rendered is unenforceable until the notice under Sec 294(d) has been received by the Director Sec. 294(e).

Finally, Sec 294(b) provides that awards are subject to confirmation under the FAA. Under Sec 9 of the FAA, a party may apply to a court for an order confirming an award. The court must grant the order unless the award is vacated, modified or corrected. Sec 10 of the FAA provides the limited grounds available for vacating an award:

(1) where the award was secured by fraud, corruption or undue influence;
(2) where there was evident partiality on the part of the arbitrators;
(3) where the arbitrators were guilty of misconduct, including refusing to postpone a hearing on good cause shown, refusing to hear evidence, or other misbehavior by which the rights of a party may have been prejudiced; or
(4) where the arbitrators exceeded their powers.

By far the ground most often asserted by parties seeking to vacate an award is the claim that the arbitrators exceeded their powers. The arbitrators’ powers are governed by the parties’ agreement to arbitrate. Arbitration clauses must, therefore, be drafted with care.

Conclusion

Parties entering into a license or joint development agreement may want to consider whether the arbitration of any underlying issues of patent infringement or invalidity will more readily achieve their business goals. Even if not already contractually obligated to arbitrate a patent dispute, parties involved in such a dispute may consider whether a portion of the dispute, such as claim construction, if not all of the dispute, is better decided by an experienced arbitral tribunal.

Merriann Panerella

, Independent Arbitrator, Mediator, Consultant

¹ See Table C-4. U.S. District Court Cases—Civil Cases Terminated, by Nature of Suit and Action Taken, During the 12-Month Period Ending March 31, 2015. ² See AIPLA 2015 Report of the Economic Survey, I-111, assuming the firm has 60 or more lawyers. ³ See id at I-112, assuming the firm has 60 or more lawyers.

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