Mediators vs. Gladiators in the Intellectual Property World
By: Joyce B. Klemmer (Retired)
With IP litigation becoming increasingly expensive, alternative dispute resolution is now a popular, cost-effective solution for many companies.
**The year was 1990. Lacking jurisdictional grounds to get into federal court, and unable to convince the clerk of the state court that this misappropriation of trade secrets case was inappropriate for the state court’s pilot mediation program, a young lawyer with the initials J.K. and her clients marched into the state courthouse with the goal of convincing the mediator to pressure the other side to settle. She had little experience in mediation or arbitration, thinking the former was a game of “let’s make a deal” and the latter was simply “rent-a-judge.”
JK held out little hope that the “thieves and liars” on the other side would settle. Scientific analysis had confirmed, with 90 percent probability, that her client’s secret formula for frozen yogurt was being used and private-labeled by the defendant, its own manufacturer, to the detriment of her client’s franchisees. Further complicating the situation, depositions of the manufacturer were scheduled to begin the next day, and she did not want to lose the element of surprise and disclose the product analysis evidence to the other side in a court-ordered mediation.
Counsel for the parties were offered the opportunity to make a “neutral” statement of the facts, but neither side respected that neutrality. This was war. In private caucus, the court-appointed mediator — a seasoned, respected trial lawyer — explained that anything disclosed to him would be held in confidence and that the only information relayed to the other side would be what each party authorized him to disclose.
At the conclusion, when requested to do so, the mediator told both parties, in general terms and without violating confidentiality, how some of the facts might be perceived by a jury. The case did not settle that day. The other side ceremoniously packed their trial bags and stormed out. But two weeks later, the case settled on terms that not only satisfied her client, but preserved the business relationship between the parties. Perhaps the mediator’s neutral assessment gave the other side a view of the case from both sides.
Nonetheless, the litigator continued to believe for years, as did many others, that patent, trademark, copyright and trade secret cases are simply not well suited to alternative dispute resolution (ADR). However, the high costs of these cases, multi-national parties and the desire to manage costs and risk are causing litigants and their lawyers to more seriously consider ADR as a means for resolving intellectual property disputes without litigation.**
Litigators are sometimes reluctant to discuss the option of ADR with their clients. And it is not just because we make our living by litigation. Litigators have other concerns — one of which is that our clients may think that we are not gladiatorial enough and that our suggestion of a non-litigation alternative is indicative that we will not vigorously prosecute or defend their rights.
However, sophisticated clients owning intellectual property (IP) are more sensitive than ever to the high cost of IP litigation, especially since the global economic downturn. Most will welcome the chance to resolve a patent, trademark, copyright or trade secret misappropriation case without spending in excess of $500,000 through the discovery phase and then an additional half-million dollars through trial — the average costs for cases in which less than one million dollars is in controversy. Those fees and costs double and triple in almost direct proportion to the amount of potential damages at stake.
A second concern is that neither the litigator nor the client is in possession of the facts needed to evaluate the case and that, by not engaging in discovery, the “smoking gun” may never be found. But there are other ways of getting the information needed to resolve a dispute, and most litigators can count on one hand the number of “smoking guns” that they have ever uncovered in discovery.
A third, more persuasive concern, particularly in patent litigation, is that there may be legal issues relating to validity requiring a judicial determination based upon the applicable law. But it has been reported that more than 97 percent of patent cases are settled before trial with no ruling on validity having been rendered by the court.
Not all IP disputes are appropriate for alternative dispute resolution. For example, if a patent owner has exclusivity as a result of the patent and is unwilling to license its rights and lose market share, the case is not a good candidate for ADR. Other examples include counterfeiting or the illegal downloading of content from the Internet. In those cases, the IP owner’s primary interest is in stopping the activity and warning other potential infringers.
Early proponents of applying ADR to intellectual property disputes favored arbitration. However, arbitration has many of the attributes and costs of litigation without the right to appeal the arbitrator’s decision. Today, most proponents of applying ADR techniques to IP cases recommend mediation, sometimes preceded by neutral evaluation. Mediation comprises some 70 percent of ADR in the U.S.
THE MEDIATION PROCESS
Over the years, many different “styles” of mediation have developed. But common to all of these styles is the goal that the parties reach a mutually acceptable resolution with the aid of a trained neutral whose sole purpose is to facilitate resolu20tion. In mediation, unlike litigation or arbitration, the goal is not to convince the mediator to rule in your favor. The mediator does not decide the outcome of the matter at all — that is the role of the parties.
Prior to the mediation, the parties agree on the logistics of the process: who will participate, where and when the mediation will take place, whether the mediator will meet individually with the parties in caucus at any time before or during the mediation, and whether the legal issues will be discussed or if the parties will focus solely on a business resolution.
There are many advantages to mediation over litigation. Mediation can level the playing field when one party has more resources to devote to litigation than the other. Unlike a negotiation without the aid of a mediator, where each party tries to convince the other party of the rightness of its position, a mediator helps the parties to see the case from the other party’s perspective, thus increasing the likelihood of settlement. Mediation gives the parties and their lawyers control over what information they are willing to share, as opposed to being forced to disclose information in discovery.
Because the process is voluntary, the parties cannot be compelled to reach an agreement and either can walk away when they think it is no longer worthwhile to proceed. Generally, anything said in mediation is confidential as a matter of statutory law and, in any event, a good mediator will have the parties sign a confidentiality agreement. Perhaps the biggest advantage to mediation is the availability of alternative outcomes that are not within the power of the judicial system, but are available to the parties if a resolution is reached. For example, licensing and cross-licensing is not an outcome that can be ordered by the court, but can be agreed to by the parties.
At the conclusion of the mediation, if the parties have reached a resolution, the mediator will have the parties sign an agreement memorializing the settlement reached. The parties or their lawyers draft the agreement, which is legally enforceable by a court. Because the terms were negotiated voluntarily, the parties will likely abide by the agreement they reached. If litigation is pending, and the parties agree, the agreement can be presented to the court for incorporation into an order made part of the public record, or it can be deemed by the parties to be confidential, with both parties agreeing not to disclose the terms of the agreement.
IP cases, particularly patent infringement cases, usually involve issues of willful infringement, validity, injunctive relief and unenforceability due to, for example, inequitable conduct. Neither party will wish to engage in mediation unless they feel confident that they have sufficient facts to enable them to evaluate the strengths and weaknesses of their position. For that reason, designing a process that satisfies the informational needs of both parties is of paramount importance prior to proceeding with mediation.
Some clients are concerned that proposing mediation or settlement discussions at an early stage in litigation will be perceived as a sign of weakness by the other party. However, there are many reasons that can be given for avoiding litigation: legal fees; the cost of experts and depositions; the drain on management’s time; bad publicity; the uncertainty of the outcome if a judge or jury decides the issue and the business risk of an adverse outcome. Another concern is that if mediation is proposed, the other party might make a preemptive strike and file a declaratory judgment action out of concern that litigation is imminent. While not an ideal solution, one way to handle this would be to file a lawsuit prior to suggesting mediation of the dispute. In the federal court system, where the vast majority of intellectual property cases are filed, the plaintiff has 120 days within which to serve the defendant, but the filing of the lawsuit without service of the complaint minimizes the risk of becoming a defendant instead of being the plaintiff, or having to litigate in an inconvenient forum.
THE ROLE OF IP COUNSEL
An experienced intellectual property litigator knows the substantive law that will apply in the event a matter is litigated, can quickly grasp the salient facts, can assess the strength and weaknesses of each side’s position, and, most importantly, knows how to persuasively present facts. The counsel will usually have a working knowledge of its client’s business and know the questions to ask to understand the client’s business concerns.
Since we are experienced negotiators, intellectual property litigators are especially effective in orchestrating productive negotiations. With the aid of the client, we can discover information that will be important to both sides. Our resources for information include public investor information and information available in government filings in the Patent and Trademark Office. Company internal inquiries will reveal information that employees in R&D, marketing and finance possess. Third parties may be willing to share information and independent consultants can be retained to address issues that will likely arise.
However, there will always be some information that is solely in the possession of the other party and we can help identify what information 22is needed and how to ask for it. Because virtually every intellectual property case is litigated under the protection of a confidentiality agreement, we can negotiate safeguards so that information can be disclosed to the other party without compromising confidentiality or competitive advantage.
SELECTING A MEDIATOR
In IP cases, the parties generally want a mediator with a good working knowledge of the laws at issue. Although it is not the mediator’s role to decide legal issues, both parties will most likely be more comfortable with a mediator who has an understanding of the substantive law governing the dispute, the potential damages that could be awarded, the scope of injunctive relief available if infringement is found, and the confidentiality issues that are always present in an IP case.
MEDIATION GROUND RULES
In designing the mediation process, the parties and the mediator agree on the format of the mediation in advance. Will each party make an opening statement? Will the parties themselves discuss the issues or will all communications be through the mediator? Who will attend the mediation? Will it be just the decision makers or will additional people, such as technical experts, be needed? Where will the mediation take place and how long should the parties reserve for the mediation? These are all decisions made well in advance of the mediation. But the beauty of the process, as opposed to litigation, is that the parties get to decide these issues.
In an intellectual property dispute, a “win” can take many forms. If a negotiated settlement manages your risk, saves legal fees and costs, meets your business objectives and financial goals, and avoids putting the fate of your business in the hands of a judge or jury, is that a win? If so, a mediated negotiation may achieve those goals.