Using ADR to Resolve Intellectual Property Licensing Disputes

Frank L. Bernstein - Menlo Park, California office of Sughrue Mion, PLLC

I. Introduction

One of the phrases I have heard from time to time over the years is that all litigation is expensive, but patent litigation is "the sport of kings". The document-intensive, expert-intensive nature of patent infringement litigation contributes mightily to the expense. The technological complexity of most patent cases requires a lot of study by a large number of lawyers in order for them all to get up to speed. More lawyers, spending more time, means more expense.

As a patent lawsuit proceeds, there is always more to learn about the technology, about the patent, about the file history, about the accused products or methods (the client's and/or the other side's), about the client's (and/or maybe the other side's) accounting system; and so on. In litigation, all of this learning takes place in the context of discovery and trial preparation.

But, to get through discovery, and get a case ready for trial, how much more of the effort truly involves learning about the patent, the file history, the accused products or methods, and damages issues? At some point, from a substantive perspective, frequently relatively early in the process, the effort to deal with discovery issues, both offensive and defensive, and the effort to prepare for numerous depositions, as well as dispositive and nondispositive motions practice, can take on a life of their own, sometimes, often, bearing little relation, if any, to the merits of the case.

Sometimes patent disputes arise between competitors who would prefer to see each other out of business, or at least the particular business to which a patent or a group of patents relates. In such circumstances, both parties may consider it well and good to "go to the mat." Or, one of the parties getting sued may feel, as a matter of principle, that whipping out the checkbook and settling the case would be wrong.

However, in the context of a potential licensing situation (by which I mean a true licensing situation, rather than a "shakedown" by potential or actual "patent mafia," both big and small), there may be an opportunity for the parties to recognize that some sort of licensing needs to take place, with only the amount of money changing hands and perhaps the scope of the license (number of patents, extent of cross-license, or the like) being at issue. In that general environment, it might make a lot of sense to try to resolve the dispute in a setting that provides opportunity for advocacy, and in which there are even adversarial aspects, but in which both parties recognize the futility of endless discovery disputes, chasing down blind alleys for prior art, and generally the kind of "scorched earth" tactics that make patent infringement litigation so terribly expensive.

Licensing strategies may not be a critical source of revenue for all companies, but surely there may be a lot of money involved for some. IBM just announced that its revenues from intellectual property, while down $200 million from the previous year, still easily topped $1 billion.

II. Enter ADR

The ADR (i.e. Alternative Dispute Resolution) process we consider here is arbitration, rather than mediation, since in the present discussion we examine ADR as the endgame for resolving the dispute. Mediation might lead the parties in a given direction, but for this discussion we assume that the parties are willing to go a step further in order to put the matter behind them. In this circumstance, the parties might be willing to accept a result from a trier of fact other than a court. Whether the arbitration should be binding arbitration, with no recourse to district court litigation, is left to the parties. However, it is worthwhile to consider that, in order for this approach to achieve the desired cost savings, parties should consider limiting recourse to the district courts for enforcement of the arbitrator's (or the panel's) decision.

1. Who is the Arbitrator?
   
   Considerations going into choosing an arbitrator are multifold. My patent attorney bias may show a little here, but I would suggest choosing someone knowledgeable in patent law, and technically trained. Arbitration tends to be a more expedited process than district court litigation, so it is often worthwhile to have an arbitrator who can get up to speed quickly. By "getting up to speed" here, I mean able to understand not just the highlights of the dispute, but as many of the nuances as reasonably possible.
   
   This is not to say that lawyers without patent law expertise are unable to understand the case eventually. However, if the parties are proceeding on a relatively short timeline, it can take time and repeated exposure to the technology and the issues for someone who is not grounded in patent law and technology to achieve the same level of understanding as someone who has been there before. Besides, unlike trying a case before a judge, in an arbitration the parties pay for the arbitrator's time. The more efficiency that can be achieved by finding an arbitrator who can get up to speed relatively quickly and can understand the relevant technical and patent jargon, the better off the parties will be. Moreover, a "correct" result may be more likely to be arrived at if the arbitrator has the right intellectual tools, and follows the right path to get to the answer.
   
   
2. What is the Playing Field?
   
   Factors to consider with regard to the arbitration forum include the number and type of experts (in-house, outside, technical, financial); the amount of voluntary discovery (identification of one or more products, and production of manuals, schematics, source code, or other technical materials); the number of depositions, and of whom; and the number of document requests.
   
   Since the operating assumption here is that the parties are agreeing to some kind of procedure short of litigation to resolve their differences, there should be some willingness to compromise on the type and volume of discovery to be undertaken.
   
   In litigation, ideally, all possibly infringing products should be identified and as much information as practicable about all those products should be obtained in order to maximize the proofs available, as well as the potential damages base. The corresponding financial information would be just as voluminous, and the analysis just as arcane.
   
   However, in a licensing situation, in which the parties are looking to come to some sort of agreement, the parties should recognize that they do not have to look under every rock, and do not have to drive their opponents to distraction in discovery. Accordingly, it should be possible to agree, for example, on a representative product or products; on the kind of reasonably available internal documentation that will be necessary to learn what needs to be learned about the product or products; on limitations on dissemination of sensitive materials; perhaps even on an additional (or even a threshold) amount of licensing fee to be paid in the event of a showing of infringement (or alternatively, on a methodology for arriving at a licensing figure, leading to an identification of the type of financial documentation that can be sought).
   
   It might be possible to agree on a licensing floor, and then on one or more additional amounts which would be paid (or subtracted) in the event of different outcomes.

III. When Might ADR Work?

Here is one possible checklist of issues to consider in deciding whether to try for some sort of ADR-based approach to a licensing problem.

For the patent owner and the prospective licensee:

1. Are the parties competitors? If so, ADR may not work. However, just being competitors is not the end of the inquiry. Even if the parties are competitors, it is appropriate to go further, and ask:
   
   
2. Are the patents at issue in the core areas of the parties' business? If so, ADR may not work, unless both parties are willing to treat the situation at hand as a true licensing situation, rather than an opportunity to edge a competitor out of one's line of business. If the patents are peripheral to the areas in which the parties compete, or if the parties are not competitors, ADR might turn out to be worthwhile.
   
   
3. Have the parties been through licensing exercises with each other before? If so, there may be a useful history that could provide some context for an ADR type approach to resolving differences. Even if this is the parties first time negotiating against each other, ADR might be a useful endgame toward which either party might work.
   
   
4. Are large numbers of patents involved? If so, can the parties agree on a representative number of patents for presentation to an arbitrator? Note that strategic considerations abound in selecting these patents; some of these will be discussed below.
   
   
5. Can the parties agree that a certain (threshold) amount of money should change hands? Can the parties agree on a formula for the additional money that should change hands depending on the outcome of the arbitration? If the parties cannot agree on the threshold amount, can they agree on the formula?
   
   
6. Is it relatively easy to identify potentially affected products? Affected product lines? Affected markets? Are there representative products that might usefully represent the issues to be litigated, and that even might span multiple product lines, making the additional (or even the threshold) licensing amounts at stake relatively easy to agree on?

IV. Choosing the Arbitrator

It may not be possible to find the perfect arbitrator. In any event, the issue of the identity of the arbitrator can be another opportunity for the parties to disagree. It is important to keep in mind that implicit in following the ADR approach outlined above is that the parties basically are agreeing to resolve their dispute without pulling out all the stops. Obviously the parties do have a disagreement; otherwise there would be no need to find a vehicle for resolving the dispute. However, resolving a licensing dispute without litigation must entail a spirit of compromise. The parties will the opportunity to fight all they want about the merits once they have agreed on the shape of the conference table.

It can be easy to get bogged down in rules and requirements regarding discovery scope, evidence scope, and the like, and it can be equally easy to get into disagreements over who the arbitrator should be. If the shape of the conference table is going to be that big of an issue, then ADR is probably not going to work.

Some would say that the choice of the arbitrator is much more important than "conference table shape" issues. This is generally true. But if it is possible to identify someone or maybe a combination of people, who is unobjectionable (leaving aside the kind of "peremptory strikes" that can doom the ADR process before it even begins), then the parties should try to do it.

There may be times when finding a patent lawyer, with the requisite technical background, and a lack of perceptible bias relative to both parties, just does not exist. Maybe, in those circumstances, an arbitrator chosen from an organization such as JAMS, together with a technical expert, would be a better compromise. The combination may well be more expensive, but the potential can gain in return is the removal of a roadblock.

V. Choosing the Playing Field

Here is where perhaps the biggest part of the strategy comes into play. Knowing one's own patent portfolio, and the opponent's patent portfolio; and knowing one's own product line and the opponent's product line, can be keys to setting the playing field in a way that is to one's best advantage. My purpose here is to provoke some thought about various approaches to the process.

The playing field here includes not only the selection of patents for arbitration, but also the timing. If you are way ahead of your opponent in preparation, you may be able to force the issue to arbitration more quickly, at a relatively early stage of the negotiations, and thus get patents that you are think are more likely to be winners included in the mix. If the parties have been at it for a while, both sides may have some knowledge of the clear "winner" and "loser" patents. There may be patents which are winners, but not as obviously. These patents ultimately may turn out to be the best ones to throw into the arbitration, before your opponent can find out what all of the pitfalls are.

The current general manager of the Oakland A's baseball team, Billy Beane, is considered by many baseball cognoscenti to be the most capable and brilliant general manager in baseball today. With awe and respect, his fellow GMs admit that, when you negotiate with Mr. Beane, not only does he know his organization better than you do; he knows your organization, including your farm system, better than you do. Like a chess grandmaster, Mr. Beane sees not only the board as it exists now, but also the board as it might exist after any number of gambits and endgames. He is the acknowledged current master of the three-team trade.

Why have I just given this example? Well, besides my being a big baseball fan (and a fan of the A's), the service that the patent department and/or the licensing department in your organization can perform is immense. If your company is looking to get a lot of revenue out of your company's patent portfolio, it would behoove you to know your patent portfolio intimately, as well as your opponent's patent portfolio.

Thinking about your company's portfolio this way has far-reaching implications, not only with respect to approaches to potential licensees, but also with respect to the development of a patent portfolio. Here is a checklist of questions to ask in shaping the playing field for an ADR resolution to a licensing dispute.

1. How do you select the right patents for ADR?
   
   
2. How do you get your opponent to agree on the patents?
   
   
3. How early are you able to identify good candidate patents?
   
   
4. Are there some patents for which infringement is obvious? Those patents might have been the reason why your counterpart has agreed to pay something in the first place, so those patents probably would not be ones which your counterpart will agree to contest in an ADR proceeding.
   
   
5. Are there patents for which infringement is relatively clear, but only once the appropriate explanation is provided? These may be patents which your opponent may not identify as readily as being problematic. These are important ones to try to identify early. They might be held back in the negotiation, and introduced at a slightly later stage, perhaps just before, or at the time, that the parties first consider ADR. If you have patents for which infringement is clear, such that your counterpart is going to have to acknowledge some need for a license, and others which hold out some hope of limiting the amount of the license fee, you have some important components in getting your counterpart to agree to ADR.
   
   
6. Do both parties have patents which you could put in play? Maybe resolving issues with respect to each other's patents can determine the amount of offset in a cross-licensing situation.
   
   
7. Where are you in the negotiation? Are you far along? Not so far along? Are you first considering ADR relatively late in the negotiation? If so, finding a good ADR candidate patent may be difficult, as both sides will be more likely to know which are the "winner" and "loser" patents. Did you think about ADR sooner, but decide not to raise the possibility until relatively late in the negotiation? One might put forth significant effort early in the process to identify patents that are good candidates for ADR with a view to raising the ADR possibility later in the negotiation process. Thus, if there are a large number of patents potentially in play, one should consider preparing for raising the ADR process as a possible endgame if the opponent does not agree to resolve the dispute.
   
   
8. What is a good ADR candidate patent? I am of the view that the good candidate patent is not the easy or the "slam dunk" winner. The opponent is unlikely to want to enter an arbitration with both hands tied. More likely, a good ADR candidate patent is a patent for which infringement is not easy to discern. Extensive familiarity with your own portfolio is therefore important in this regard.
   
   
9. Can the parties put aside validity issues? Resolution of patent validity may entail claim construction issues that require an analysis of the prior art or careful resort to the patent specification as a dictionary. However, those kinds of issues do not necessarily amount to a validity contest and, for purposes of ADR, they do not have to.

VI. Conclusion

In considering the use of ADR to resolve patent licensing disputes lots of layers can be peeled back. A company may have a patent portfolio which it intends only for defensive purposes, for example, to cross-license if threatened. Alternatively, the strategy may be to extract licensing revenue from the patent portfolio. Perhaps the purpose of the company's licensing effort is to pick off low-hanging fruit, with litigation being an acceptable alternative. If licensing is an important part of the reason for having the portfolio, it would be worth considering how that portfolio might be shaped to take the best advantage of the licensing tools available. ADR is one such tool, but as has been demonstrated in this discussion, ADR need not be merely the step that is just short of full-blown litigation.

______________________________
Mr. Frank L. Bernstein is the managing partner of the Menlo Park, California office of Sughrue Mion, PLLC. This paper is adapted from a paper presented at the Richard C. Sughrue Symposium on Intellectual Property Law and Policy at the University of Akron School of Law, Akron, Ohio, on March 11, 2002.