Patent Cases Need Early Resolution. Here's How. (NYLJ Online)
August 31, 201106-09-2011
New York Law Journal Online
Manny W. Schecter and Kathleen A. Bryan
Mediation seems to be a great idea to resolve patent disputes…for others.
Many attorneys SAY mediation can be a useful tool in resolving patent disputes. Yet, when faced with an infringement case, not a dispute over patent terms in a contract (such as the extent of a license), lawyers usually refuse to even consider mediation until a court requires it or considerable litigation expense has been incurred. Why is there a default to litigation?
It is a challenge to resolve complex commercial cases early, but even so, 98 percent or more settle before trial. In contrast, patent infringement cases more often go to trial, and more often are appealed.1 Moreover, early resolution tools, especially mediation, are not used as frequently as they are in other complex cases.
An early resolution avoids cost and drain on management time and resources. While lawyers generally would agree, their usual refrain is that early resolution cannot be achieved because it is too complex, positions are already entrenched, more information is needed through discovery, the opposing party
has all the information needed to analyze settlement, there is a slam-dunk motion to dismiss or summary judgment motion that should be filed first, and so on. They are all good reasons. The conservative approach appears to be to let the litigation process play out before considering dialogue with adversaries.
But pursuing cases through litigation doesn't necessarily resolve them effectively. There is a better way: pursuing faster, more economical resolutions that let business plans proceed and predominate over litigation strategies.
Patents' Unique Challenges
There are a number of important factors that make patent cases particularly difficult to resolve at an early stage of the proceedings.
There are entrenched views: Parties to a patent dispute often resign themselves to their disagreement, and refuse to allow themselves to be persuaded by the other side. They may be certain about liability or damages. Their engineers insist that they will prevail because it is "just a matter of physics." Even though the judge or jury likely won't have scientific credentials, parties believe that their view of the science or technology ultimately will be upheld.
There are high reversal rates: At the U.S. Court of Appeals for the Federal Circuit, the reversal rate is much higher than in other appellate courts. The latest statistics show that only 50 percent of the patent infringement cases are fully affirmed on appeal. Both parties could perceive that they would have a "second bite at the apple" relatively more frequently than in complex commercial cases, where grounds for reversal are significantly narrower.
Greater uncertainty results in less pressure to settle.
There are competitive pressures: The U.S. economy typically grows about 2 percent to 3 percent annually, but since 1991, the compound average growth rate of patent infringement actions exceeds 5 percent—considerably higher than the growth rate of newly granted patents in most years. These trends suggest companies realize comparably high value from patents, and attempt to leverage them for competitive advantage.
In these intensely competitive markets, emotions run high. The parties may feel they need the publicity and finality of a lawsuit, not settlement, for tactical and strategic reasons. In-house or outside lawyers who suggest considering early resolution options can be viewed as weak, or worse, as disloyal.
Closing ranks and disparaging the opposition can occur in any commercial dispute. But the additional layer of animosity created between competitors greatly inhibits collaborative problem-solving.2
They want rulings: Parties who need patents declared invalid by a court for strategic or tactical reasons generally are unwilling to discuss compromise unless they have come to the conclusion that they may lose the invalidation argument at trial. In those cases, full-blown discovery, motion practice and
Markman hearings are likely before meaningful discussion can take place.
A Markman ruling adds a measure of certainty and may be needed before acceptance of a position's weaknesses. (Similarly, in jurisdictions where infringement damages need not be specifically pleaded by the patentee until after an infringement finding, the certainty of an initial liability decision might
encourage settlement.) Court-ordered pre-Markman mediation often fails for this reason.
The need for immediate injunctive relief to maintain exclusivity also compels parties to remain locked in courtroom proceedings for longer periods. But the Supreme Court ruling in eBay v. MercExchange, 547 U.S. 388 (2006), has reduced the likelihood that an injunction will be awarded to a successful patentee.
The timing of the so-called Markman ruling is critical. In cases where the ruling—which is made in an infringement matter after a judge examines evidence on the meaning of relevant key words used in a patent—comes at the end of the pretrial phase and right before trial, it means that many of these cases
will not settle until the parties reach the courthouse steps (or "eve of trial").
Judges who issue their Markman rulings earlier in the case, however, give the parties additional time to assess their positions and explore settlement at earlier stages.
But it can also have the opposite effect. The Markman proceedings and ruling can make an early resolution more difficult, because they involve producing and vetting evidence. The hearing may thus harden positions by increasing the parties' investment in the litigation.
Early Resolution's Advantages
The reasons for resolving early are numerous and often obvious.
- Cost savings: Patent infringement case expenses are typically $1 million to $5 million per patent depending upon the amount in dispute.3 Early resolution not only avoids most of these expenses, but mediation costs are a small fraction of those for litigation. For example, World Intellectual Property Organization mediation costs range from just $6,000 to $60,000.
- Timing: Patent infringement litigation takes too long—about two-thirds of cases take three years to reach trial.4 Final judgments typically require more than seven years.5 Mediated cases can be resolved in less than a year.6 When interest-based analysis is explored early in a dispute, more funds are available to spend on resolving the dispute, and the relationship between the parties has not yet been damaged. In addition, the cost of uncertainty to both patentees and accused infringers is mitigated by accelerating resolution of the dispute.
- Subject-matter expertise: Mediation offers the opportunity for parties to select a neutral third party who understands the subject matter more effectively than judges or juries. Judges and juries generally are not trained in patent disputes' technical areas.
- Nonbinding: Arbitrators and judges render binding decisions. Parties might disagree with the substance and structure of a decision. For example, an arbitrator might award damages but require a continuing, invasive quarterly review of the business results of the parties to decide the appropriate damages. Mediation is voluntary and nonbinding, and the mediator does not render a merits decision. Settlements are reflected in an enforceable contract accepted by the parties. Parties can explore workable solutions according to their business needs, and preserve their business relationship.
- Confidentiality: Mediation provides a safe harbor from litigation. If mediation is unsuccessful, the parties still have the right to take court action, and the mediation results may not be used against either party. If mediation is successful, the settlement terms need not be disclosed.
Based on patent cases' unique challenges, it would be easy to conclude that only a small percentage would be ripe for early resolution. We disagree. We suggest that early resolution should be analyzed in all patent infringement cases. Many more would be resolved earlier, more effectively, and most
significantly, at much lower cost.
1. Put a system in place. In-house litigation lawyers who manage large case portfolios recognize the importance of developing a systemic approach, rather than considering early resolution on a case-by-case basis. A system requiring all cases to be analyzed for early resolution options, including a discussion with opposing parties, eliminates the impression that the discussion arises from a weak position. It's simply policy.
CPR, the International Institute for Conflict Prevention and Resolution, convened a group of in-house lawyers to share their early case assessment processes. The resulting "ECA Guidelines" collects essential information, provides an understanding of the legal positions' basic strengths and
weaknesses, and uses that information for an early cost/benefit analysis. The assessment redefines the essential information needed to value the case quickly and effectively. The tool compels lawyers and management to evaluate the dispute for settlement at the earliest possible point. A systematic process
requires the attorneys and management to take a structured look at the matter to determine whether there are early resolution opportunities that otherwise could be missed in a rough-and-tumble litigation.7
2. Review within 30 to 90 days. The key benefit of a systematic review is to quickly assemble relevant information and focus the team on issues that may be most relevant to settlement before astronomical discovery and motion practice costs begin piling up. Depending on the case's complexity, lawyers using these methods believe that the review should be completed within the first 30-90 days.
3. Interests, not just positions. A good early case assessment process is different from conventional litigation practices because it considers the interests of both parties. In her book "The New Lawyer: How Settlement Is Transforming the Practice of Law," Julie Macfarlane demonstrates that the parties' interests are typically explored later in the process, not at the beginning. She notes, "The settlements appear as if by magic once the parties have exhausted (and perhaps bankrupted) themselves with the legal process."
Ms. Macfarlane found that interest-based questions that typically produced common ground were not asked or considered until actual settlement discussions began.
Put another way, lawyers using the usual adversarial practices fail to uncover elements of the dispute that might be relevant to settlement but may be unrelated to the legal claims in front of them.
4. The cost/benefit analysis. In a perfect world, we would focus on resolving our disputes without regard to the time, management resources or costs involved in litigating. In the real world, however, litigation is a set of trade-offs, balancing the benefit of success in the case against the time and cost to achieve it. Using a structured cost/benefit analysis at the outset puts the case in a more practical perspective.
Most cases start with a view of the merits and an idea of the costs. Most lawyers will agree, however, that the initial picture usually looks more optimistic than it does part way through the discovery process, or, even more starkly, at the courthouse steps.
It's safe to declare that litigation costs drive early case assessment and mediation. But mediation techniques—such as the ECA's application and expert mediator practices—may reveal other, far more important factors in a particular matter that can lead a party to conclude that it will benefit from early
settlement. If, after this discussion, the conclusion is the case should be litigated fully, then all parties will do that—with the full picture and the trade-offs in cost and time in mind.
5. Determine settlement value. This is perhaps the most difficult aspect of an early case assessment. At the outset of a case, damages are often uncertain. Discovery is needed to understand the scope and value of the claim—which initially may be hugely inflated by the patentee.
The key to early settlement-value evaluation is to assemble the relevant and accessible information, and to make judgments about what is reasonable, and about what each side is willing to accept.
Clearly, this is rough justice. But if early focus is placed on the concept of "best alternative to negotiated settlement" or BATNA, the exercise of developing a settlement value can help achieve an early settlement.
BATNA was developed in "Getting to Yes," and has been a staple of negotiation analysis ever since.
The BATNA, "of all of your possible alternatives…is the one that best serves your interests—that you will most likely take if no deal is reached," write Robert H. Mnookin, Scott R. Peppet, and Andrew S. Tulumello, in "Beyond Winning: Negotiation to Create Value in Deals and Disputes,"19 (Belknap Press
of Harvard University Press 2000). It is predicated on a strong and thorough assessment of the stakes.
Patent litigation needs to be brought back to a rational process of dispute resolution. Despite the challenges, it is possible to resolve some of these cases more quickly, less expensively, and with superior results, using a disciplined "time out" through an early case assessment analysis soon after the case commences.
* * * * *Manny W. Schecter is chief patent counsel at International Business Machines Corp. in Armonk.
Kathleen A. Bryan is the CEO and president of CPR-International Institute for Conflict Prevention and Resolution, which is discussed in this article, and previously was head of litigation at Motorola Inc.
1. Current settlement rates before the U.S. Court of Appeals for the Federal Circuit (CAFC) hover around 50 percent. Mediations through the World Intellectual Property Organization are 71 percent. According to database information compiled by (then) Professor Kimberly A. Moore of George Mason
University, from 1996 to 2000, 63 percent of patent cases settled, with only 34 percent of the settlements occurring prior to any court action. Ms. Moore is now a judge on the CAFC.
2. There is venue pressure: The forum for patent disputes matters. The quality of the judges, the potential jury pool, and the local rules are important tactical factors in every case. Some courts, such as the Eastern Districts of Virginia and Texas, are thought to be more favorable venues for patentees. The
first to file in patent cases has a significant advantage in retaining favorable venue regardless of transfer motions. Because of increased fear of exposure to declaratory judgment actions after MedImmune Inc. v. Genentech Inc., 549 U.S. 118 (2007), and because of recent cases ordering a venue change in disputes with a small number of parties, patentees are increasingly bringing
multidefendant actions to eliminate strong ties to another, less favorable, venue.
3. AIPLA Report of the Economic Survey (2009).
4. PricewaterhouseCoopers: 2009 Patent Litigation Study.
5. Marion M. Lim, "ADR of Patent Disputes: A Customized Prescription, Not an Over-the-Counter Remedy," 6 Cardozo J. Conflict Resol. 155, 169 (2004).
6. In WIPO mediation, 73 percent of cases settle within one to seven months (WIPO Arbitration and Mediation Center).
7. The CPR Institute's International Commission on Patent Disputes' 2004 book, "Patent Mediation: Better Solutions for Business," lays out a five-step early case assessment road map geared to mediation use, that helps businesses install and systematize their ADR processes. The first step in the process is getting to mediation. It considers whether mediation is appropriate given the parties' relationship, competitive positions, leverage and resources. It examines the routes to mediation: In the absence of a contract in the patent area, will the parties agree to terms voluntarily? Have they signed the CPR Corporate Policy Statement on Alternatives to Litigation, agreeing to negotiate before court proceedings, or otherwise exhibited a policy favoring negotiation, mediation or early resolution?
The initial stage also involves considering whether to use an ADR provider or conduct a self-administered mediation, and timing decisions. The book's second patent mediation step focuses on mediator selection.
The third step is pre-mediation planning, which focuses on case strategy, including the selection of a mediation team and a review of process issues.
The fourth and fifth patent mediation road map steps involve, respectively, the mediation sessions themselves, and the settlement agreement, outcome, and enforcement.
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