Arbitration: A Cost-Effective Alternative for Litigating Patent Disputes

Litigation Alternatives: Mediation and Arbitration

Although most companies resolve their patent disputes through litigation in federal district court, there are alternative, less costly, means of dispute resolution that merit consideration: mediation and arbitration.

Mediation is a procedure whereby the parties meet with a neutral third party to craft a mutually agreeable solution. ¹⁰ A mediator does not decide substantive issues, such as patent infringement or validity. Rather, he or she helps the parties find business solutions. Because mediation does not result in a winner and a loser, it enables the parties to preserve their relationships. However, it is not always successful. Nevertheless, even when the parties are unable to reach agreement, mediation can sometimes still be useful. For example, it may help to determine where the dispute truly lies and, perhaps, reduce the number of issues for litigation—and therefore, the litigation's cost.

Several federal district courts, as well as the Court of Appeals for the Federal Circuit and the International Trade Commission (ITC), have implemented pre-trial mediation programs to help alleviate judicial caseload. The Federal Circuit's mediation program, for example, is mandatory for cases selected for participation. ¹¹ The mediation proceedings are highly confidential, so if no agreement is reached, the suit simply remains on the court's docket and proceeds as usual. ¹²

Arbitration, on the other hand, is similar to a trial in that it is an adversarial proceeding decided by one or more neutrals. They can be used to resolve a variety of intellectual property issues, including license agreements, inventorship, infringement, and validity. A hearing is usually held, but an arbitration hearing is more informal than a trial, and the rules of evidence are often less strictly followed. Arbitrations conclude with a final decision, known as an award. Therefore, arbitration, because of its similarities to a federal district court litigation in that disputed issues are actually determined by a neutral third party, can offer a true alternative to more costly federal district court litigation.

The Advantages of Arbitration

There are several important advantages to using arbitration to resolve patent and other intellectual property disputes. First, arbitrations are designed to reduce cost by streamlining the litigation procedure and limiting discovery. Arbitrator(s) can tailor the procedure to meet the specific circumstances of each case and work with the parties' counsel, in a more informal setting, to establish a schedule and determine how much discovery is necessary. Because there are no prescribed rules that govern discovery, arbitrator(s) can prevent abuse by overzealous parties and restrict it to the information they believe is needed to make a decision. However, the converse can also occur: that is, because arbitrators are not under the same time pressure as many federal court judges (who face overcrowded civil and criminal dockets), they can easily allow too much discovery. Hearsay, for example, is not precluded; it is simply weighed accordingly. Thus, selecting an arbitrator who is skilled in docket management is critical to ensuring an economical and efficient proceeding.

Second, arbitration providers recognize that cost savings is a major reason most litigants turn to arbitration. Therefore, they have endeavored to keep costs to a minimum by bringing each case to a swift conclusion. For example, the American Arbitration Association (AAA) strives to complete all claims within 1 year of filing. To help achieve this goal, the AAA sets forth a roadmap with recommended time frames for each stage of the proceeding and requests its arbitrators to clear their calendars so they can complete an arbitration in an expeditious manner. District court judges, in contrast, have busy trial schedules and usually are juggling several cases at the same time. Consequently, most patent infringement litigations take approximately 3 years from start to finish, and obtaining final judgments can add as much as 7 years more.

Third, cost savings are realized because arbitration decisions have greater finality. Although both arbitrations and civil trials are all-or-none propositions, resulting in a winner and a loser, a district court decision can be appealed to an appellate court and, on rare occasion, to the Supreme Court. In contrast, arbitration decisions are binding on the parties and, by statute, can be appealed only in cases of malfeasance on the part of the arbitrators. ¹³

Under the Federal Arbitration Act (Arbitration Act), 9 USC §1 et seq., an arbitration decision can be overturned only: “(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone a hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of the party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” ¹⁴ Although not expressly authorized by the statute, courts also have permitted an arbitration award to be set aside on the basis of an arbitrator's “manifest disregard of the law.” ¹⁵ In other words, under either the Arbitration Act or the case law decided under it, a would-be arbitration appellant has a much more difficult standard to meet to appeal a decision.

Notably, even though intellectual property disputes fall under the exclusive jurisdiction of the federal courts, these courts have embraced and upheld arbitration decisions, and at least one appeal involving an arbitration panel's claim construction in a patent dispute was affirmed by the Federal Circuit. ¹⁶ In that case, the district court had held that even though the arbitrator's claim construction was not as thorough as a court decision, it was nevertheless sufficiently reasoned. ¹⁷ Moreover, the arbitrator's decision was not in “manifest disregard” of the law or the product of gross misconduct. ¹⁸ The Federal Circuit agreed. The Federal Circuit noted that claim construction and patent rights are federal law issues; however, under the Arbitration Act, arbitration decisions receive great deference. ¹⁹

Thus, given that professional arbitrators are trained in how to maintain their neutrality and write well-reasoned awards, it appears that companies can reasonably rely on arbitration to bring finality to their patent disputes.

Another benefit to arbitration is that, in contrast to a district court litigation in which a judge and jury decide the case, the parties are able to select the former and dispense with the latter. It goes without saying that most district court judges are neither technical experts nor experts in patent law. ²⁰ The same is true of jurors. Few jurors hold advanced degrees in biotechnology or have any other technical background. Rather, they come from diverse educational backgrounds, with equally diverse experiences. It requires time and money to bring a judge and a lay jury up to speed on the technology as well as patent law. Arbitration avoids these problems by allowing the parties to choose one or more neutral decision-makers who are experts in intellectual property law, the involved technical area, or both.

In this regard, the use of an arbitration provider, such as the American Arbitration Association (AAA), Judicial Arbitration & Mediation Services (JAMS), or Collaborative Decision Resources Associates (CDR), among others, can be helpful in selecting an arbitrator. The AAA, for example, has a panel of more than 7,000 arbitrators worldwide who are selected for their “industry-specific” knowledge and expertise. To be included in the AAA intellectual property roster, an arbitrator must “have either (1) twenty years of litigation or litigation management experience plus 10 years full time equivalent experience in patent litigation; or (2) ten years full time equivalent experience in patent prosecution, licensing and opinion writing plus registration with the U.S. Patent [and Trademark] Office.” ²¹ Thus, it is not surprising that an AAA survey of in-house counsel found that only 2% thought their arbitrators were not qualified. ²²

Finally, a practical benefit to arbitrations is that they can be kept confidential. The parties can agree not only that the arbitrators' decision be kept secret, but also that the very fact that they are in arbitration be withheld from the public. For a patent owner, confidentiality may be especially advantageous. First, it will prevent other competitors from knowing that their patent is being challenged, or that there may be issues concerning the patent. In contrast, the public announcement of a dispute that occurs when a district court litigation is filed can embolden others to also challenge the patent. Second, confidentiality is important when a patent is found to be invalid. Arbitration awards are binding only on the involved parties. Thus, if there is a negative outcome, the patent nonetheless remains fully enforceable against other infringers. A Federal Circuit invalidity decision, in contrast, generally results in the permanent loss of all patent rights. ²³

Role of Arbitration in Intellectual Property Disputes

Despite the many benefits of ADR, and in particular, arbitration, to resolve intellectual property disputes, the number of companies doing so appears to be relatively low. However, these statistics may be misleading. Because most arbitrations are confidential, there is no way of knowing how many actually take place. In addition, at least with respect to the AAA, intellectual property arbitrations were, for many years, categorized as commercial disputes and not tracked separately. ²⁴ In 2009, AAA changed its recordkeeping procedures, and, as a result, reported the filing of 83 new intellectual property cases. In 2010, the number of intellectual property-related demands increased to 122. ²⁵ The majority of these cases were pharma/biotechnology contract disputes involving licensing agreements, joint development agreements, purchase agreements, and the like. Even though the majority of demands were not directed to the patent itself, it is encouraging that the number of biotechnology companies engaging in ADR is increasing.

What other factors contribute to low ADR numbers? Probably the number one reason is that there is no contractual relationship between the parties in a typical patent infringement litigation. Absent a contract provision requiring the parties to resolve their differences by arbitration, the process necessarily is voluntary. Consequently, many parties reject arbitration because they believe that they will be disadvantaged and deprived of their due process. They want to have their “day in court,” where they feel their voice will be better heard.

Attorneys are equally reluctant to elect ADR voluntarily to resolve their disputes. As discussed above, arbitration awards are binding and will, except in rare circumstances, be enforced by the courts. Recognizing the high likelihood of being unable to appeal an award, and facing the possibility of limited discovery, few litigators recommend arbitration to their clients. Most want to be able to tell their story without restriction and with the assurance that they can appeal any adverse judgment. Yet, in some circumstances, this reticence to consider ADR is detrimental to, and costly for, the client.

Taking Advantage of the Arbitration Alternative

There are some situations where arbitration is likely the most effective means to resolve a dispute. In the international arena, for example, arbitration offers many advantages over transnational litigation. The benefits include flexibility of procedure, the ability to select experienced arbitrators, the enforceability of awards (see discussion below), elimination of hometown advantage, hearings that are not in a foreign language, and not having to subject the dispute to the laws of a foreign country. International arbitration is used by major corporations to settle numerous disputes concerning commercial transactions (38%), construction (14%), shipping (11%), joint venture agreements (9%), intellectual property (6%), and insurance (5%). ²⁶

In addition, international arbitration can result in considerable cost savings above and beyond the possibility of an expedited procedure and limited discovery. Approximately 75% of international ADR disputes are settled before the hearing on the merits. ²⁷ The main reasons for settlement are: (1) the desire to preserve the business relationship (27%); (2) to avoid high costs (23%); (3) recognition that one has a weak case (21%); and (4) to avoid excessive delay (17%). ²⁸

Most importantly, it is easier to enforce an arbitration award in a foreign country than a civil judgment awarded by a U.S. court. The U.S. is not a party to any bilateral treaty or multilateral international convention for reciprocal recognition and enforcement of judgments. ²⁹ Thus, depending on the nature of the dispute, an aggrieved party may be forced to litigate in multiple jurisdictions. However, as a consequence of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a prevailing party in an arbitration has an excellent chance of enforcing an award in many countries around the world. ³⁰

Finally, compliance with an award rendered in international arbitration proceedings is high. Studies indicate that the non-prevailing party voluntarily honored the award, in full, in more than 76% of the cases. ³¹ Noncompliance usually was a consequence of financial difficulties on the part of the losing party. ³² In such cases, there would have been no chance of payment regardless of how the dispute was settled, but at least by using ADR, some of the high litigation costs were avoided.

Are there other situations where arbitration might be more advantageous in a patent dispute? After the Federal Circuit's affirmation of the arbitration panel's decision in Flex-Foot, one commentator suggested that “Markman hearings” could be settled more efficiently by arbitration. ³³ Markman hearings frequently arise in patent infringement cases that involve a dispute over the meaning of the terms in a patent's claims. ³⁴ A Markman ruling is supposed to define the invention and help the parties to focus their case on a particular target. However, because the Supreme Court held that claim construction is a matter of law, a trial judge's decision can be appealed and reviewed de novo by the Federal Circuit. If the Federal Circuit finds an error, the case can be remanded for a new trial. Indeed, this is often the case. The Federal Circuit's reversal rate for claim construction rulings is approximately 34%. ³⁵

Having a second trial because of the reversal of a Markman decision adds considerable time and expense for litigants. ³⁶ Submitting claim construction to binding arbitration would bring finality to at least one phase of the litigation and, perhaps, speed up resolution of the case. That is, the claim construction result might discourage one party from going forward and make it more amenable to settlement. Even if the litigation proceeds, because the Federal Arbitration Act limits the conditions under which an arbitration decision can be appealed, at least the meaning of the claims would be locked in. Thus, arbitration of the claim construction issue would greatly reduce the chances of reversal by the Federal Circuit and a new trial.

Enticing as the use of “Markman arbitrations” may sound, it would contravene the law for a court to order such a proceeding absent a contractual arrangement between the parties. After all, in Markman, the Supreme Court held that claim construction was an issue for the judge, not the jury. Thus, a judge would be remiss in his or her duties if he or she sua sponte delegated decision-making authority with respect to claim construction to arbitration.

Conclusion

The number of litigants using ADR to resolve their intellectual property disputes is steadily increasing. More and more companies, including those in the pharma/biotechnology industry, are recognizing that ADR, and arbitration in particular, can be less costly and more efficient than federal district court litigation. In patent cases, arbitration can be a particularly advantageous in resolving international disputes or in settling Markman issues. It can be hoped that greater understanding of the benefits of these proceedings and knowledge that they can provide a full and fair opportunity for the parties to present their case will encourage more companies to choose ADR—and particularly, arbitration—over district court litigation to resolve their intellectual property disputes.