PATENT ARBITRATION IN THE AGE OF RAPIDLY CHANGING TECHNOLOGY

By: Jeffrey A. Schwab, Esq.
September 2018

It may be time to give greater consideration to Alternative Dispute Resolution (ADR) for patent disputes. The rapid changes brought about by the technological revolution have, in many instances, shortened the economic life cycle of patented technology. The right to exclude competition is often no longer as valuable as it once was because of industry disrupting or category killing innovation.

As a consequence, sophisticated businesses are reevaluating patent enforcement philosophies that were previously predicated upon the assumption that the high cost and long pendency of patent litigation worked in their favor. With time and money on their side, and with long-term prospects for maintaining product exclusivity for many years, the initiation of what was likely to be a protracted litigation was not only logical – it was a prudent business strategy.

No technology can today be safely considered safe from obsolescence. The heralded “Fourth Industrial Revolution” is underway. Every industry is facing disruptive competition. Robotics and 3-D printing were only the tip of the iceberg. Artificial intelligence has arrived and is likely to see exponential growth.

It is not only the changing technological landscape that is responsible for a fresh look at ADR. Recent Supreme Court rulings also suggest that a strategy reevaluation may be in order. Today’s accused infringers have a greater likelihood that if they successfully defend, there may be a fee shifting award granted in their favor. An unsuccessful patent owner is no longer assured that without regard to ultimate outcome, the accused infringer will be required to spend significant unreimbursable legal fees. In the past, patent owners generally could take comfort that the American Rule respecting attorney’s fees would govern, even in the event of an adverse ruling. Under the rule, each party was responsible for its own legal fees – which in a fully-contested proceeding often can be in the millions of dollars. The American Rule was only subject to an exception which permitted to fee shifting in “exceptional” circumstances. For decades “exceptional” was narrowly construed and it was rare that attorney’s fees were awarded to successful accused infringers. However, the Supreme Court has made it clear that district court judges have much broader discretion in evaluating whether a case is “exceptional” than heretofore thought to be the case. As a result, applications for reimbursement of attorney’s fees in patent matters have now become common practice – and the granting more likely. Thus, another factor favoring deep pocket patent owners has been eroded.

With the scales slowly tipping against them, alternative strategies, including ADR are being given greater consideration. In some ways the litigants have little choice. It is now more a question of “when” not “if” there will be ADR. Pragmatically, in all likelihood, once litigation is initiated, some form of ADR is inevitable. Courts are urging – (if not outright requiring) the parties to mediate. Admittedly, this often takes place after the parties have been worn down by six figure discovery expenses and the deposition of high level executives. It is not uncommon for the parties to suggest to the court that mediation be deferred until at least some discovery has taken place, arguing that it is only then that the parties will be ready to sit down with a neutral to see if there is a common-sense solution that can be facilitated by a mediator who is more likely to understand the legal principles, lingo and technological issues than a judge, magistrate or lay jury. However, deferral may no longer be as attractive as it once was and many are now considering strategies which permit the parties to control the ADR narrative.

Agreeing to mediation even before litigation is filed is now part of the conversation – and if it is not, it should be. Indeed, there is a growing discussion supporting the view that not just mediation, but voluntarily submitting the matter to pre-litigation binding arbitration, even with its potential uncertainties, could be a better choice than litigation with its guaranteed uncertainties.

The absence of a contract with ADR provisions or a prior relationship between the parties need not be an impediment for the parties to explore ADR. Changes in the law requiring more definitive pleadings in patent litigation have resulted in a greater exchange of information prior to the filing of litigation. This in turn often results in a narrowing of the issues separating the parties. In such circumstances, an earlier non-judicial resolution may be attractive to both parties.

In the past, often the first communication between parties was the delivery of the Summons and Complaint. It was not uncommon for a cease and desist letter to be sent, but often this was sent after litigation was filed to avoid the recipient from filing a preemptive declaratory judgment action seeking a friendlier forum. However, forum shopping has been seriously restricted by the Supreme Court decision limiting the reach of the patent venue statute. Although a cease and desist letter still carries the risk of a declaratory judgment action being initiated, the forum selection advantages are no longer as meaningful as they once were. As well, there is no longer a tactical advantage in filing an “I own a patent – you infringe it” Complaint, with no detail. The Complaint will be dismissed for failure to meet proper pleadings notice requirements. It is becoming common practice for the parties to exchange meaningful positions about infringement and potential validity attacks in pre-litigation exchanges. As a result, each party is now more likely to have significant information about the positions of the opponent. They may also have a sense whether, until each sides position is tested, settlement is likely.

If settlement seems likely, but the parties cannot themselves bridge the gap, private mediation might well be the solution. If a rapid testing of positions makes sense, then arbitration might be the appropriate option.

With time no longer favoring the patent owner to the extent it once did and with the shifting legal landscape, counsel and the parties are coming to the realization that they should consider the pros and cons of ADR before litigation is filed. In the absence of a contractual ADR right, both parties must agree, however, given inter alia the speed, confidentiality, the expertise of the facilitator or arbitrator, and the lesser cost in both legal fees and lost management opportunity time, both may see the wisdom in the approach.

ADR may not always be the preferred solution and may well be rejected for good reasons. Not to accept ADR is often understandable. However, not to consider carefully as an option could very well be a lost opportunity.

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Jeffrey A. Schwab, Esq., is a member of NAM’s (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate intellectual property cases throughout the United States. He is one of the nation’s leading registered patent attorneys specializing in all aspects of intellectual property, licensing and advertising law. He has dedicated his practice to protecting clients’ interests worldwide defending and enforcing intellectual property rights both in the courts and by effectively negotiating the settlements of such disputes.

For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at jsilvey@namadr.com or direct dial telephone at 516-941-3228.