It's never too late to arbitrate a patent case

Effective in-house counsel draw upon all dispute resolution mechanisms available to achieve optimal results for their companies.

Advocates of alternative dispute resolution point to the costs of litigation and the courts’ inability to decide matters effectively. At the same time, horror stories regarding arbitrated cases cause companies to retreat from using arbitration clauses in licenses. The reality is that there is no one best way to resolve every dispute.

Negotiation, mediation, arbitration, and, yes, litigation are all available to counsel to handle matters successfully. Taking one path does not foreclose changing course as the dispute progresses.

Companies can face disputes that would be decided more effectively in private, outside the courthouse. Even though a court action has begun, a third party can still be empowered by agreement to decide all or some portion of the case.

As litigation of a patent infringement case progresses, consider the possibility of negotiating an agreement to arbitrate that includes provisions that can result in a partial victory before the arbitration even begins.

Retaining separate counsel for purposes of negotiating the arbitration agreement, keeping the litigators from being distracted, can work well under the right circumstances.

Determine the goals

It is critical that a company and its in-house counsel work together to determine the company’s goals before negotiating an arbitration agreement. It is easy to say the goal is to win, but it’s harder to analyze what winning means.

Winning can include favorable decisions, advantageous resolutions, and avoiding the risk of loss or severe damage. A proper analysis must consider the likelihood of different outcomes, their benefits and consequences, and weigh success against the cost in dollars and lost productivity.

After assessing goals, the company can seek an arbitration agreement that maximizes available advantages while minimizing risks. Unlike when arbitration clauses for licenses are drafted, once litigation has begun the parties know the substance of the dispute and the players involved.

Counsel can then assess whether it would be advantageous to submit portions of the dispute to arbitration while neutralizing the risk on aspects that are less polarized. An arbitrator can decide key issues and leave the remaining concerns to be resolved by the parties. To minimize future disputes, it is better to agree in advance of the arbitrator’s decision on the results that flow from the arbitrator’s ruling.

In negotiating a tailored agreement, certain points need to be considered. A patentee risks the court finding the patents sued upon are invalid or unenforceable. Third parties would then be free to practice the invention.

Similarly, the court could find a valid and enforceable patent not infringed, paving the way for others to compete with a device cleared of infringement.

A pyrrhic victory can also result when a patentee proves infringement if an injunction is not binding on a company that is part of the infringing enterprise. This occurs when all of the entities engaging in the infringing activity are not identified when the lawsuit is filed.

A patentee also wants to recover damages for past infringement, and there are risks and costs for such recovery. In a patent case, the damages to be awarded are no less than a reasonable royalty, but can be measured by lost profits if appropriate.

Even if a high award is obtained, however, the award may be uncollectible if the infringer has no money. Finally, a patentee faces costs for legal services and lost productivity during the litigation that could cripple the company.

An accused infringer faces great risks that can put the company out of business. Being sued subjects a company to unplanned expenses and extreme disruption. Customer fears can result in lost sales and a court injunction could stop production of a lucrative product.

There is also the risk of payment of the patentees’ lost profits, attorneys’ fees, and multiple damages if infringement is found. Litigation could even put an accused infringer out of business before there is a determination on the merits.

Minimizing risks

Minimizing the risks each party faces should be the goals of both parties in negotiating an arbitration agreement.

A number of examples illustrate ways parties can negotiate an advantageous arbitration agreement that maximizes benefits and reduces risks, particularly the most significant risk.

The patentee would like to assure the patent’s validity. The accused infringer would like an agreement that there is no willful infringement, eliminating the risk of treble damages. In an arbitration agreement, the parties could consent that the patent is valid and that there is to be no finding of willful infringement.

The accused infringer would be agreeing not to present invalidity claims in exchange for avoiding treble damages. The accused infringer could further be required to have all related entities involved in the enterprise be party to the agreement, with all of those entities receiving benefits under the agreement.

It can be valuable to an accused infringer to reach an agreement on a royalty if infringement is found, along with a license into the future and assurances there will not be an injunction. The patentee wants to recover lost profit damages. The parties could agree to a heightened royalty for past conduct if the arbitrator finds infringement, in exchange for a license into the future at a reasonable royalty.

When a court action is lost, the accused infringer can only obtain a license into the future in settlement negotiations. Negotiating an arbitration agreement provides an opportunity to guarantee this result.

In submitting to arbitration, the parties can use a particular organization, or conduct the arbitration on their own. The agreement can specify minimum qualifications for the arbitrator, the number of witnesses, a schedule for briefing, and the location of any hearing.

The agreement can also address whether there is to be a reasoned decision, or simply an identification of the winner. The parties can decide whether the various issues are appealable and, if so, to what court.

In-house counsel must review the goals of their companies regularly during the course of litigation. Arbitration can be one means for achieving those goals.

There is danger in removing any arrow from trial counsel’s quiver, but an agreement to arbitrate that is structured to reduce risks and focus the decisionmaker on material issues may be worth giving up some of the artillery.

Susan G. L. Glovsky is a principal intellectual property litigator with Hamilton, Brook, Smith & Reynolds, P.C. She is a member of the American Arbitration Association’s National Roster of Neutrals and is a former president of the Boston Patent Law Association. She can be reached at [email protected].