Intellectual Property Roundtable: A Discussion of IP and ADR

INTELLECTUAL PROPERTY ROUNDTABLE: A Discussion of IP and ADR

November 10, 2004

Cleveland, Ohio

PARTICIPANTS

Michael H. Diamant

Teresan Gilbert

Anthony J. Haueisen

John Hornickel

Charles B. Lyon

John D. Moran

Richard H. Sayler

Michael Stovsky

James D. Troxell

George M. von Mehren

Vincent E. Young

Thomas F. Zych

Agnes Wilson

Sharon Obert

This is an edited transcript of a roundtable discussion organized by the American Arbitration Association to share ideas about the current and potential use of arbitration and other forms of alternative dispute resolution to resolve intellectual property disputes. This roundtable is part of an ongoing dialogue among the AAA, neutrals on the AAA panel, and users of ADR services, in order to assist the AAA in serving the IP community.

Introductions*

SHARON OBERT: Good afternoon, everyone. Thank you so much for coming. I know that you're all extremely busy so we appreciate your willingness to engage in this conversation with us about ADR and intellectual property disputes. As you all know, I am the AAA Assistant Vice President for the Cleveland region. Agnes Wilson, the AAA Eastern Divisional Vice President, is going to facilitate the conversation. Let's begin with introductions.

JOHN MORAN: I'm John Moran, general counsel with Corrpro Companies. We're a publicly traded corrosion engineering company located in Medina, Ohio.

CHARLES LYON: I'm Chuck Lyon with Calfee, Halter in Cleveland, Ohio. I am the cochair of the firm's intellectual property group.

RICHARD SAYLER: I'm Richard Sayler, formerly a partner and now of counsel at Jones Day in the Cleveland office. I'm in what's called the "issues and appeals" section, but I've also been a member of the intellectual property section in the past. I specialize in trials and appeals of IP matters.

MICHAEL STOVSKY: I'm Mike Stovsky, a partner at Ulmer & Berne in Cleveland. I am the chair of the intellectual property and technology group at the firm.

TERESAN GILBERT: I'm Teresan Gilbert. I'm with The Lubrizol Corporation, a specialty chemical company, which is located in the suburbs of Cleveland. My position is intellectual property counsel.

GEORGE VON MEHREN: I'm George von Mehren, a partner at Squire, Sanders, in the Cleveland office. I'm in charge of our international dispute resolution group, which basically involves international arbitration and litigation in courts outside the United States. We have 13 offices throughout Europe, Asia and South America.

THOMAS ZYCH: I'm Tom Zych, a partner at Thompson, Hine in Cleveland, Ohio. I'm a member of the firm's intellectual property group. I also chair our eBusiness and Emerging Technologies practice.

JAMES TROXELL: I'm Jim Troxell, a partner at Squire, Sanders & Dempsey. I'm responsible for intellectual property in the Cleveland area.

MICHAEL DIAMANT: My name is Michael Diamant, a partner at Kahn, Kleinman in Cleveland. I'm a member of the litigation group and I chair the technology practice.

ANTHONY HAUEISEN: Tony Haueisen. I'm general counsel at RJF International. We're a privately held corporation located in Fairlawn, Ohio, and our biggest product line is commercial wall covering, things you put in a room like this and other hospitality facilities.

JOHN HORNICKEL: John Hornickel, intellectual property counsel, PolyOne Corporation, Avon Lake, Ohio.

VINCENT YOUNG: I'm Vince Young, retired from BP and doing consulting in the areas ot dispute resolution and how to make successes out of your technology. I live in Ohio and consult internationally.

AGNES WILSON: I'm Agnes Wilson, AAA's Division Vice President based in the AAA's national office in New York City. I'm responsible for business development in the eastern half of the United States. Business development means being involved with users and potential users of AAA services, and encouraging a dialogue so that the AAA can do a better job. Intellectual property has been a favorite of mine since I've been with the AAA.

SHARON OBERT: We would like to have an informal discussion about your views on using ADR to resolve various types of intellectual property disputes. We also want your thoughts on AAA rules and procedures, and your approaches to drafting ADR clauses for IP transactions. We'd like to know what you're looking for in arbitration for an IP dispute, what type of arbitrator you prefer and why, and what you think would enhance the arbitration process.

Experience with ADR

THOMAS ZYCH: Some of these issues may have different flavors, depending on the type of IP we're talking about. Procedures and approaches that work for patent cases may not work, or work as well, for trademark or copyright cases, and vice ve-rsa. Also, processes that have worked in non-IP industries might work in the IP area, too, and can provide useful learning on how to make IP arbitration work. For example, the arbitration experience of the National Advertising Division [NADJ of the Better Business Bureau regarding advertising disputes largely has been positive. It works largely because the advertising community and consumer products businesses agreed that it was a good way to go. So there could be market segments that say, "For our industry, ADR works well," and that idea could be promoted to the IP market segment as a more focused approach to finding solutions to disputes.

RICHARD SAYLER: I've done about half a dozen IP arbitrations in which I was either a panel member or a sole arbitrator. Personally I have seen very few major patent disputes or infringement claims being arbitrated. The ones I do know of were arbitrated by specially hired panels.

TERESAN GILBERT: Lubrizol may put an arbitration clause in agreements that are entered into in the U.S., but we exclude intellectual property. So in our U.S. contracts, we may arbitrate all the commercial disputes, but we opt to litigate IP disputes in federal court. We use an arbitration clause in our IP licensing agreements with companies overseas because we don't feel as comfortable in foreign courts. For these arbitrations we generally use the ICC [International Chamber of Commerce].

GEORGE VON MEHREN: What's the rationale behind that?

TERESAN GILBERT: Well, we've done really well in the courts with "Exxon" litigation issues. [Editors Note: Ms. Gilbert is referring to a 15-year patent infringement litigation involving Exxon.] Furthermore, we have a general counsel who comes from a litigation background and we have our own in-house litigators. So we feel comfortable litigating the law on IP matters in the U.S.

THOMAS ZYCH: Has access to the U.S. Court of Appeals for the Federal Circuit helped? This Circuit has earned a reputation for flyspecking district court judgments in patent cases, giving the losing party a real second bite at the apple. Has that fact encouraged a resort to arbitration?

TERESAN GILBERT: Yes.

RICHARD SAYLER: That's curious because the Federal Circuit reverses the district courts more frequently than any other federal appeals court. At one point the reversal rate was hovering around 50%. The district courts, in my view, seem to be of lower and lower quality. Maybe it's the price differential. In addition, many district judges seem totally uninterested in resolving discovery disputes fairly and squarely, and discovery is at the heart of these cases; they just can't be bothered. So I wonder why you wouldn't want to write a clause that would allow you to select qualified decision makers to resolve the discovery issues and everything else in the case. When you have the right of selection you can pick people with a background tailor-made to the subject-matter area.

MICHAEL DIAMANT: I served as a sole arbitrator in an IP case involving a license for some pretty sophisticated software between two sophisticated companies. The claimant alleged a violation of the license and, based on such violation, that the respondent had infringed its software. The respondent asserted that the arbitrator lacked authority to decide the copyright infringement issue, and only had authority to decide the breach of license issue. This argument was not accepted. The license and copyright issues were inextricably bound together. I did not see how they could be split up. This was not a unique situation.

TERESAN GILBERT: Most of the time we exclude patent issues from arbitration in the U.S. The reason is that we are a chemical company, so our issues are in the patent area. In our industry, there are five or six companies very close to each other.

MICHAEL DIAMANT: You're not troubled by having the patent issue decided by a judge or a jury?

TERESAN GILBERT: We haven't been troubled.

MICHAEL DIAMANT: You would think that jurors who don't have the background to understand the underlying IP or technology, let alone the intricacies of the patent or copyright law, would have a more difficult time making the correct decision.

TERESAN GILBERT: We do a lot of work before we ever get to a lawsuit. Right now we are talking with a company with which we have patent issues and hopefully we'll resolve them before we need to file a lawsuit. But our process is still evolving, and maybe you'll give me new ideas and we'll come back and think about using a panel of arbitrators. I like the idea that in arbitration, three decision makers are going to be neutral and informed.

GEORGE VON MEHREN: Does the time that it takes to litigate cause your business problems?

TERESAN GILBERT: Yes. Also the cost of litigation.

VINCENT YOUNG: It seems to me that the big obstacle in selling lawyers on arbitration is the inability to appeal the outcome. With the Federal Circuit, you have at least a 50% chance of obtaining a reversal of a district court order. I can see why, depending on how strong you think your case is, you'd rather roll the dice than arbitrate.

GEORGE VON MEHREN: But the other side gets to appeal when you've won.

TERESAN GILBERT: Right.

MICHAEL DIAMANT: It works both ways.

VINCENT YOUNG: Of course. In fact, recently a federal district court judge spoke at the local CIPW meeting. [Editor's Note: Mr. Young is referring to the Cleveland Intellectual Patent Lawyers Association.] She was asked whether federal judges make decisions knowing that the federal circuit courts will have the opportunity to get it right later. She said she didn't do that but speculated that some judges probably do, which makes arbitration look attractive.

THOMAS ZYCH: The Lubrizol experience is instructive. There, two competitors go toe to toe repeatedly over the years on patent claims, and those patents are perceived as critical to competitive success. It seems to me that the resolution of the patent disputes one way or another clarifies where the parties stand. Litigation yields decisions that are more precedential than arbitration awards.

I previously suggested that today companies rely on the Federal Circuit as a place for a second trial. They have confidence that if the district court messes up, there's another place to go. So, if I'm hearing correctly, it's not just winning or losing cases that is important, it is having a certain amount of predictability.

TERESAN GILBERT: And cost. Economics are very important, more so than when I began working 20 years ago for an oil company.

JOHN HORNICKEL: I have two comments. The first is that the relationship with the adversary has to be taken into account because arbitration is more likely to be agreeable to parties who start out from a transactional basis. About 10 years ago, John [Moran] and I once negotiated a license agreement, which, as I recall, included an arbitration clause. In my view, this agreement was based on our mutual respect for each other's intellectual property positions. Later on, reasonable people could always have a difference of opinion about that agreement.

So if an IP dispute arises out of a transaction in which the parties negotiated an arbitration clause, arbitration is far more likely to be acceptable to both sides because that clause was there at the beginning when the parties entered into what they considered to be a desirable working relationship. After all, they willingly sat at the negotiating table together. Contentious lawsuits often arise because the parties don't like each other, have never liked each other, and never will like each other, and they want to make sure that they preserve all of their options to appeal.

The second comment is that in patent litigation today, there's a lot of preliminary jousting leading up to a summary judgment decision at the district court level, following the so-called "Markman hearing" for a decision on "patent claim construction." These decisions have been reversed and remanded by the Federal Circuit if the "patent claim construction" is found to be erroneous. That's a big expense for a client to pay, and even then it might end up with a "patent claim construction" decision that may seem inconsistent with rulings by appellate panels. To counter potential inconsistencies, the Federal Circuit has been helping to bring more predictability by making en bane decisions. With that predictability, I know at least three people in private practice in this room who would be good arbitrators because each of them is well versed in the practicalities of the patent law. It might be a controversial position, using arbitration in a litigation-originating environment, but I do think too much time, effort, and money is being spent in federal court on "patent claim construction" issues under the current Markinan procedures.

MICHAEL DIAMANT: I think you can sell arbitration to parties with IP disputes if you can offer them a panel of arbitrators they can relate to and have confidence in. That way they will not teel that the decision in arbitration is a lottery or "a roll of the dice." Otherwise the parties will feel that arbitration is just as much a lottery as going to court, but without appeal rights. The greatest fear clients have about arbitration is that they don't know who the arbitrators are going to be so if they lose it's over, finished. So it you are going to make this work, you need to push the quality of the panel. That should be the focus of your promotion to the industry.

CHARLES LYON: I would agree that it is the quality of the neutral that is the most important thing. Parties need a neutral with knowledge of the issues and the courts, and with an ability to focus the issues and interact with counsel as theprocess unfolds. I've been a neutral in an ADR process on 10 or 15 cases. When I serve, I'm always looking to enter into an early dialogue with counsel. I learn the issues in the case, make sure I receive the documents I need, and possibly receive briefs on critical issues. So by the time of the hearing on the merits, I have a good sense of the case and what's important. The parties want to have confidence in the person who will be deciding the issues when they have their day in court, whatever that day may be.

It is very important that the neutral arbitrator have the patience to hear the parties out, whether in an evidentiary proceeding or a non-binding discussion with the principals. I also think that knowledge of the issues is extremely important.

THOMAS ZYCH: Another issue is the relief an IP holder can get in arbitration from another contracting party and from those who might be in privity, or acting in concert, with that party. The parties to the contract can agree to arbitrate; they also can agree to recognize the powers of the arbitrators to enter orders. But in choosing the right option on the menu, it is important to analyze the relief available against those acting in concert. The IP holder has to have confidence that it has a basis for obtaining relief from other entities acting in concert and the like with the infringer-parties that may not be subject to arbitration for one reason or another. Relief is an important part of the decision as to whether arbitration is attractive or not.

JOHN MORAN: One comment from the in-house side of this. A benefit of arbitration, particularly for a transactional dispute, is the flexibility of the timing of the proceeding and the privacy it offers. It ensures that documents and briefs will not be publicly filed. That's critical when you're on the inside looking out. The nature of the proceeding can affect your ability to get your management people to the table, accommodate their schedules, and narrow the focus of the issues to be resolved. Another important factor is the application of rules of evidence and other procedural rules. Devoting time and expense to litigating discovery and other non-substantive disputes is an unproductive use of resources.

GEORGE VON MEHREN: Picking up on that point, it would be a terrific selling point for the AAA to develop a good reputation for having the award prepared within a particular length of time. We talked about legal fees. The fundamental rule of legal fees is that the longer a case takes, the more you will pay outside counsel, the more cost you will incur internally, and the more disruptive the dispute will be to your business. So important business objectives are served when the dispute can be resolved quickly. Because of "party autonomy," arbitration does have the unique ability to get things done rather quickly. We know from experience that judges act when they act.

JIM TROXELL: My concern is with litigation of trade secrets because you never know what will come out during the discovery process. But arbitration may present a problem of finding an acceptable arbitrator because of their prior affiliations. For example let's say Chuck Lyon is proposed as a neutral. If Chuck has represented a competitor, you probably wouldn't accept him as a neutral. Another consideration is whether the proposed neutral has stock in one of the parties. Counsel to companies with lots of trade secrets will be vitally concerned about how to protect those secrets from disclosure to an arbitrator. You usually don't have the same level of concern with a judge because the civil procedure laws provide for in camera review and protective orders. This is a concern in any IP matter where the evidence might contain trade secrets.

GEORGE VON MEHREN: The International Bar Association has some important new rules on presenting evidence in international arbitration.

MICHAEL DIAMANT: Following up on this, the AAA ethics rules should also be read. They not only have guidelines for arbitrator behavior, they have disclosure requirements that are quite extensive and delve deeply into the individual arbitrator's potential conflicts, such as the stock situation you mentioned, or relationships with industry companies.

RICHARD SAYLER: The other thing the rules do, at least as I understand them, is reverse the presumption that party-appointed arbitrators are expected to be partial. It provides that they are neutral unless the parties otherwise agree. Now, most arbitrators I know, even if they're appointed by a party, insist on acting in a neutral capacity. I think that's better for the parties anyway. But the new ethics rules make neutrality the operative presumption.

So you don't have these collateral issues. You know the role of the party-appointed arbitrator and whether they can talk to the appointing party about internal discussions and other matters. So that's a step forward, but how many potential users of the process are aware of that?

Likewise, how many people are aware of the AAA's effort to cull its panel of active arbitrators to its present, much-reduced size? When I talk to my partners at the firm, especially those who do a lot of contract negotiation and drafting, they still think of arbitrators as a bunch of stodgy, retired folks who always "split the baby" and won't decide a difficult issue. I say to them that there are clear winners and losers in the cases that I've been appointed to. So I think the AAA needs to publicize the work it has done to upgrade its panels and try to compete more directly with private ADR providers. They are out there, floating resumes and issuing press releases when they sign up a retired judge who may be no better than most of the AAA panelists-or may be worse, given the fact that he's dodged any work connected with discovery issues for 40 years.

THOMAS ZYCH: Dick has clearly had a bad experience.

RICHARD SAYLER: I had a bad experience. Many judges think that they are above having to get their hands dirty with discovery disputes, and if you have a certain type of lawyer as an opponent, that's a license to steal. I regret having to say this, but people are stealing in terms of abusing the discovery process today. If they think the judge will not call them on it, people are not complying with their discovery obligations in my judgment.

CHARLES LYON: I'd like to go back to the point about expenses. Sometimes it seems that arbitration may not be less expensive than litigation. That's when there are three arbitrators, all busy people, and the hearings cannot be held continuously because the arbitrators do not have a large enough block of time, so the hearings have to be scheduled here and there with long breaks in between. That process can be very slow. In this situation we've felt that arbitration has not been as economical as we would like.

I know a number of people who have used mediation very successfully. Once you get the principals in the same room with an experienced mediator who has the technical, political and litigation skills you need, along with a sense of fairness, you can get a case done pretty quickly. I personally like mediation, using a business-savvy mediator who can talk to the parties and knows the issues.

THOMAS ZYCH: That brings me to another question close to the agenda: How does one get into arbitration in the non-transactional setting, which, in my experience, is the setting for the majority of disputes? You don't put in your letter, "You better cease and desist or I'll see you in arbitration." What is the process to get there, assuming that is where you want to go?

GEORGE VON MEHREN: If you don't have an agreement to arbitrate, you can't arbitrate.

MICHAEL DIAMANT: You've got to get one.

GEORGE VON MEHREN: There either has to be an arbitration agreement in the transaction documents, so that once the dispute arises the parties have a contractual obligation to arbitrate, or, and this is a rare case, the parties have to agree to arbitrate after a dispute arises because they have no pre-existing contractual arbitration obligation.

JAMES TROXELL: It seems a lot easier to have an arbitration agreement than wait until a patent infringement suit has been filed against your client to bring up the subject of arbitration. When the client says to you, "What do you think we ought to do?" Do you say, "Well, we ought to talk to the other side about arbitration"? How many times have you done that?

GEORGE VON MEHREN: It's not so difficult talking to your client. It's difficult talking to the other side, particularly when you have a domestic dispute. It may be easier when you have an international dispute.

RICHARD SAYLER: It's astonishing that these conversations don't happen more often. It doesn't happen because lawyers discourage it. You can draw your own conclusions as to why that is.

I was taking the deposition of the chief technology officer of a semiconductor manufacturer out on the West Coast. Our client filed four separate lawsuits against the company on multiple patents. VVe were about a month away from trial in one of the cases and at one point I said, "Well, we could always agree to arbitrate this case." He said, "That's a good idea, I'm in favor of that." So I took the idea back to my client and one of my partners who was running the show. Nothing happened. But at least we had the conversation.

JAMES TROXELL: What are the negatives of going to arbitration? You lose the ability to appeal except on very limited grounds. You don't have the protections of the Federal Rules of Civil Procedure, which don't apply unless both parties agree to it, and in that case, arbitration becomes quite similar to litigation. If there is no professional responsibility to discuss ADR with the client, that may be why the conversation doesn't happen as often.

RICHARD SAYLER: Who's to say you can't build an appeal into an arbitration clause if that's what you're so concerned about? You can write a clause that provides for review of the award.

MICHAEL DIAMANT: You mean an appeal to another arbitration panel?

RICHARD SAYLER: Yes.

MICHAEL DIAMANT: I've done what you just suggested and it actually worked. There was an issue of jurisdiction. We said this is silly, we're fighting about jurisdiction. Why don't we just pick some neutral place, like Chicago, and pick an arbitration panel with an agreeable level of skill. Both sides agreed, and we arbitrated the case. It was a good panel. My adversary ultimately lost the case.

RICHARD SAYLER: The great advantage of arbitration has always been that you can pick the decision makers and you can pick the rules and procedures. You can even pick the place.

MICHAEL STOVSKY: Getting back to the panel, the composition of the arbitration panel is obviously of fundamental importance. T think my middle-market clients would be more inclined to agree to an arbitration clause if they knew that there would be at least one transactional lawyer on the panel, rather than three litigators. I don't know if that's the case with larger clients, but it is something to consider.

VINCENT YOUNG: Switching the subject a little bit, I'd like to talk about mock arbitration. I received a call recently asking me to serve as an arbitrator in a mock arbitration for a company. It reminded me that several years ago, we did a mock arbitration at BP. Management was undecided about whether to settle. The typical management reaction is to sue. Then management always wants to know what's the chance of winning. So I suggested an in-house arbitration. Management agreed. So we hired outside counsel to represent our adversary and one of our internal lawyers represented our side. We put this show on for the president of the company so he had the opportunity to see how the key witness was going to perform under pressure. Two hours later he said, "Let's settle this." Until that point I think he was prepared to litigate. But the mock arbitration gave him a flavor for the case right away. Perhaps the AAA ought to provide this kind of service.

AGNES WILSON: You mean a non-binding, internal process to test your case?

VINCENT YOUNG: Yes.

GEORGE VON MEHREN: That is the kind of thing consultants do.

RICHARD SAYLER: Jury consultants sell that service.

VINCENT YOUNG: Well, I'd say the AAA can do the same thing.

GEORGE VON MEHREN: You certainly can provide real arbitrators to "decide" the case on an advisory basis for internal purposes only. I'd like to get back to what to do when you have lawsuits and you don't have an arbitration clause. What we usually do is to try to mediate the case. Mediation is different from arbitration because the end of the process is either agreement from the parties or a return to litigation. The AAA and other institutions have mediation services. I think mediation is a very important process now and for the future.

THOMAS ZYCH: I found mediation to be successful where you have an emotional overlay to the case, where one party's business judgment is overly flavored by its love affair with its creation. You probably are more likely to get that in inventor-patent cases, trademark cases, and cases involving artistic properties. Early neutral evaluation also can work. It often comes about when one side suggests to the judge that the case may be pushed toward settlement in mediation or ENE. I have pushed for these processes in some circumstances.

AGNES WILSON: On the issue of mediation, are you finding that your adversary will go to the mediation table without encouragement from a judge or does there have to be a judicial order?

THOMAS ZYCH: Some will mediate willingly, some need a push from the court. I think it depends on counsel's sense of whether ADR will be worthwhile. We've done enough negotiations to know when it's time for opposing counsel to beat on his client, and when it's my turn to beat on my client. If both counsel sense that the case is solvable, they are more likely to come to the table. The litigator has to have a feel for that.

AGNES WILSON: I've been in some jurisdictions where part of the bar really understands and appreciates mediation and another part says that if I can't negotiate this case, it can't be settled, so mediation is a waste of time. So absent the strong arm of the court, mediation doesn't happen as often as it could in intellectual property cases.

THOMAS ZYCH: You can always suggest it to the judge.

AGNES WILSON: Are your finding that judges are receptive to the suggestion and understanding the mediation process?

GEORGE VON MEHREN: Yes, mediation reduces their workload. So they have come to appreciate it.

MICHAEL STOVSKY: In the transactional area, we are seeing more and more, a willingness on the part of both vendors and licensees to consider the inclusion of mediation provisions in their license agreements. Though some entities are still reluctant to include arbitration clauses for a variety of reasons, the willingness to refer cases to mediation is becoming more common.

MICHAEL DIAMANT: Sometimes you know that a case can be settled but the other lawyer doesn't. He either doesn't understand the law or he has some other reason to keep the case going. That is a real problem.

We're practicing law in an interesting time. In federal court in Cleveland, everything goes to court-sponsored mediation. Court-referred mediation settles a lot of cases. In the state system in Cuyahoga County, you can request ADR, but that's not true everywhere.

I've had cases in another state where nothing happened until the day before trial when you first get assigned a judge and all of a sudden the parties start talking to each other. So I think the AAA ought to be selling a skilled arbitration panel. I think it could also sell the services of skilled mediators because mediation doesn't involve the same kind of commitment of time and dollars as arbitration.

RICHARD SAYLER: If nothing else, mediation gives you a very good idea of how an intelligent third party is reacting to your case.

AGNES WILSON: So what I'm hearing is that in an infringement action where there is no contractual relationship between the parties, mediation clearly has a role to play. Is there a role for arbitration, and if you had to sell it to your client, what would you say, apart from the quality of the panel?

THOMAS ZYCH: There are jurisdictions where I look at the bench and say, "They're not going to understand the case." And I'm not necessarily talking about a patent case. So when the court gets it wrong, you appeal to a regional circuit, which will get you a panel of judges who may or may not have much experience with IP issues. If we arbitrate and get a Chuck Lyon, say, or anyone else here at the table, instead of a judge or a panel of judges who really don't know IP, I'm more likely to get a decision down the middle from the arbitrator.

RICHARD SAYLER: If my client is a defendant, I'm generally going to recommend arbitration as a great process, and urge against a jury trial. However, if my client is a plaintiff, I'm less likely to do that. But I've seen juries reach zero damages verdicts too. But the more technical the claims and defenses-and I can't imagine anything that's more technical than a patent infringement case-the more critical it is, in my view, to have some say in determining who the decision makers are going to be.

Thirty-five years ago, the American Bar Association was telling the Supreme Court that patent cases are so complicated that you shouldn't apply the ordinary rules of collateral estoppel. Now, the Supreme Court didn't buy that, but that was an argument that was seriously put forth. You may remember the argument that there are certain kinds of cases that are so complicated you can't get a fair trial from a jury. So I don't despair of arguing, even to a plaintiff who's had a track record of doing well with juries, that you may get a nasty surprise some day; why not give serious thought to having some qualified arbitrators decide the dispute instead of a jury?

If you're agreeing to arbitrate post-dispute, you can address the issue of costs and the procedures to incorporate in the agreement. Maybe one party has fewer resources than another, and that may tempt that party to enter into a post-litigation arbitration agreement. Those are the things I would emphasize.

GEORGE VON MEHREN: I think that confidentiality is a big issue.

RICHARD SAYLER: It's very important. At least one large, high-tech company with a substantial patent portfolio has an arbitration clause with a secrecy clause in every one of its licenses, and they have dozens of them. Their arbitration clause is, in my view, a potential Lear v. Adkins problem, because not only do they require arbitration, they also prohibit the arbitrators from explaining the reasons for their conclusions as to validity, infringement, etc. The only type of decision permitted is one that says which party gets how much money. Thus, no reasoned explanations are given about the legal and factual issues relating to the strength of the licensor's patent portfolio explanations that would presumably be discoverable in later proceedings on the same patents. In any event, that is one example of the widespread use of arbitration clauses in a highly organized licensing program.

AGNES WILSON: The importance of confidentiality, secrecy, privacy, whatever the label, is one of the messages that I consistently hear from inside counsel. Obviously you lose certain rights if you don't litigate, but if you litigate, you allow your competitors to have access to potentially confidential information about your technology, whether it's biotechnology or nanotechnology. Sometimes the cost of that disclosure is greater than the cost of losing the right to appeal.

GEORGE VON MEHREN: Judges are very reluctant to close the courthouse. That's just not part of our tradition.

THOMAS ZYCH: We had a trade secret case in the late 1980s where the judge had to seal the courtroom for the entire six-week trial. We had a marshal sitting there keeping spectators and reporters out of the courtroom. That's rare.

AGNES WILSON: When you have a closed courtroom are all the filings off limits?

RICHARD SAYLER: You can file under seal in court. But unfortunately, I have seen those systems break down. Whether that is more or less likely to happen in these days of electronic filing, I don't know. What hackers can do scares me, though.

JOHN HORNICKEL: Bridgestone/Firestone went to the 11th Circuit to protect trade secrets that it produced during discovery in a product liability case in a document production subject to a protective order. Despite this order, the press tried to unseal the documents. Concerned that its trade secrets would be made public, Bridgestone/Firestone sought a stay from the district court. Resolution of the issue turned on an interpretation of the protective order and whether or not the items in question were produced as part of a court document or solely for discovery between the parties. At that time, there wasn't a lot of law on the side of protecting the documents from disclosure.

What I took away from that case was the lesson that protective orders are very scary documents. They have lots of holes in them. So you have to be very careful with protective orders.

GEORGE VON MEHREN: Whether you can protect something that is in court files depends on the judge. Some judges are very reluctant to issue protective orders.

In the international context, it's hard to get a U.S. court judgment enforced in some parts ot the world. But there is an international treaty that many countries have ratified that makes it much easier to enforce arbitral awards. That is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. That's a major advantage of arbitration, given the international realities of IP and patents and commerce today.

AGNES WILSON: Given your experiences in court and arbitration, where do you think you're better off vis--vis confidentiality and privacy for your clients?

GEORGE VON MEHREN: For confidentiality I think you're better off in arbitration.

MICHAEL DIAMANT: I agree because at least you know who has access to it. When you are in court, you think it's just a judge and two law clerks who are going to be there for a year. But there's a back office to the place and a file room. There is a tendency in the law not to protect the parties' privacy.

CHARLES LYON: That tendency also shows up when the judge refuses a request to close the courtroom for witness testimony because it's inconvenient and takes too much time, and the judge says the proceeding ought to be open to the public. Anybody can be sitting in the courtroom, watching and listening, including competitors that have nothing to do with the case.

THOMAS ZYCH: We've talked about this interest of in-house counsel in maintaining the confidentiality of information. But there are IP litigants for whom confidentiality is the last thing they want. I don't think Jerome Lemelson was interested in confidentiality in the "bar code" cases. He's an extreme example. Another is Mag Instruments. Part of its business strategy is to be very public in its litigation.

GEORGE VON MEHREN: No dispute resolution mechanism is perfect.

JOHN HORNICKEL: Lawyers in corporate law practice are in a fulcrum position. We are the client vis--vis outside counsel and we are counsel to our business people. Sometimes the business people involved are truly savvy and have experience going to court and with the appeal process. Then they know the economic and time capital needed to litigate. They know that litigation is a very unpredictable activity and will take much longer and cost a lot. If the business people have not been through this process before, both in-house and outside counsel have a huge amount of educating to do. IP litigations take on a long life of their own. So when the business people embark on this path, they must understand how drastic and irreversible a step it is.

Going with arbitration or mediation has many advantages. One is having an answer in one or two years, even if it's not the answer you want. That's better than litigating for five or more years to get the answer you do want, because the world will move faster than you think it will. So I hope that the people who spent the money on the Festo litigation-going back and forth between the Federal Circuit and the Supreme Court on the issue of "prosecution history estoppel"-got their money's worth because a lot of effort went into it. [Editor's Note: Mr. Hornickel is referring to the litigation between Festo Corp and Shoketsu Kinzoku Kogyo Kabushiki. Festo VIII is reported at 344 F.3d 1359 (Fed. Cir. 2003) (en banc), on remand from the Supreme Court, 535 U.S. 722 (2002).]

If we had the chance to let "esteemed patent attorneys" act as arbitrators, wouldn't they already appreciate the kinds of situations that can arise out of "right to practice" and "product clearance" opinions? We haven't talked at all about wilful infringement or enhanced damages. That's what gives me the most gray hair. There is the KiioiT-Bremse en bane decision out of the Federal Circuit in September 2004 that, in my view, sort of "split the baby." [Editor's Note: The reference is to Knorr-Bremse Systeme Flier Nutzfahrzeuge GmbH v. Dana Corp., 2004 U.S. App. LEXIS 19185 (Fed. Cir. 2004).]

While the court said there remains an affirmative duty of care to avoid the patent rights of others, one need not produce the opinion as evidence in litigation to rebut willful infringement. So I'd rather be in front of a panel of arbitrators in a case involving enhanced damages and wilful infringement if those arbitrators have had the experience in the trenches and know what it takes to write a product clearance opinion.

I have another point to make. Outside counsel should discuss disputes with attorneys representing the other side before lawsuits are filed. I used to work in a corporation where it was standard operating procedure not to inform counsel for the other side of disputes before lawsuits were filed. The first notice of a dispute was receipt of a summons. There was no prior discussion between opposing in-house counsel who often knew each other from prior negotiations or bar association activities. If I were on the receiving end of that summons, I would be very unhappy. The fact is that reasonable people can differ, but they can also reach agreement on how to resolve their differences. Sometimes it takes a reasonable arbitrator (I'm not going to say a reasonable jury because I'm not sure I've ever seen one) to come up with a decision that will tell your client how the next dispute should be resolved.

Settlements in Arbitration

ANTHONY HAUEISEN: My company has very little litigation. In the last seven years, we have had five matters that went to arbitration. However, in no case was there an award. The parties ended up settling. So it seems that arbitration, at least for us, fulfilled the objectives that earlier discussion and mediation would have had. Yet I think that everybody's expectations of arbitral efficiency were not met. At the last arbitration, when asked by the arbitrator how many days to set aside for the hearing, opposing counsel said, "I think we can do it in five days. I'm going to put my case on in two days, and I think the other side will do the same, and then we'll have one day for closing arguments." Well, it was the 20th hearing day and we had just started our presentation, so opposing counsel's estimate of his own case was clearly wrong. That frustration drove us to find a back channel to our adversary's outside IP counsel who helped engineer a settlement at our suggestion. I'm curious to know whether other people in this room have settled IP arbitrations prior to issuance of an award.

JAMES TROXELL: In my experience, larger clients, public companies with over three or four billion in sales, tend to avoid arbitration clauses in transactions where they're the buyer. Generally, they will agree to a mediation. Is everybody finding that?

MICHAEL STOVSKY: I find it depends on the company. Sometimes when your client wants arbitration, you can't get an arbitration clause into the contract because the other side objects. I've rarely had clients say "no" to a mediation clause. Businesses are often willing to agree to mediate.

AGNES WILSON: We did an analysis of AAA awards in licensing cases last year. We found that 40% went to a hearing and resulted in an award and the remaining 60% settled, sometimes in mediation and sometimes simply because the parties saw the light during the arbitration. So the AAA settlement rate in arbitration is lower than the settlement rate for cases litigated in court. The average time frame from filing to issuance of the award was 332 days. About 11 months. So even in the worst-case scenario, the licensing dispute was over in less than a year.

RICHARD SAYLER: I find that cases do settle before the award is issued. In a business valuation case I heard a year or so ago, I was in the midst of writing a reasoned award when the case settled. I have also run across situations where information developed in the course of a hearing was a genuine surprise to both sides. What I typically do if I'm the arbitrator is to ask, "Do you agree that this is a tact that neither of you was aware of when this proceeding began?" If they both agree, I tell them that I'm willing to suspend the hearing it they want to talk about this for a while and see whether it changes their attitude toward going forward. I do that because things often will look different once you actually get to the stage of presenting evidence. One of the good things about having an arbitration panel is they tend to pay attention and can sense those things. A jury has no opportunity to do that, and a judge may be paying scant attention if the jury will be deciding a large part of the dispute. So that's another way that arbitration can precipitate a resolution "off the books."

Mediation

MICHAEL DIAMANT: We are now addressing the advantages of mediation. My experience as a litigant's representative and a mediator is that the process works very well. What could the AAA do to encourage mediation, not just when a case is first filed for arbitration, but throughout the proceeding? I sat on a panel in an arbitration last year in which it was very clear to me and the other arbitrators that the case should settle because there were some really good business solutions from which both parties could have benefited. There was no dollar award that could be as beneficial as a business solution, given the current situations of both parties. Although the panel was excellent, any award would hurt somebody very badly and cost a lot of money, but not necessarily compensate the other party fully. We kept saying, "Guys, here's what is going to happen. We're either going to do A or we're going to do B. Nobody can get the kind of dollars that you're looking for on the law." Eventually the parties caught on. When we called a hiatus for a couple of months because of scheduling issues, the parties settled. I wonder if we should push the parties in the direction of settlement more often in these kinds of cases.

AGNES WILSON: [Addressing Michael Diamant] Have you ever sought out an AAA case manager on a case and said "I know you have suggested mediation, to these parties already, but this might be a good time for you to suggest mediation again"?

MICHAEL DIAMANT: We did that. The manager, to his credit, said, "We've been suggesting it." There are certain cases where you can see how the case should be resolved through mediation, so to continue to arbitrate or litigate would be counterproductive for everybody.

TERESAN GILBERT: While we have not done any arbitrations that I am aware of, we do have settlement discussions. We've had situations where the businesspeople sit down with the attorneys and look at the facts and then work out a business solution. Since I've been at Lubrizol, we've been doing this with every major IP matter that I have been involved in

VINCENT YOUNG: In one mediation case [not involving BP] the mediator held a preliminary hearing on the telephone with the parties' attorneys for the sole purpose of scheduling the first mediation session. The attorneys started fighting with each other and it got so heated that they said they wanted to scrap the mediation. So the parties paying the bills never had a say. I was stunned because this case clearly could have been settled. If the parties had participated in the conference, this probably wouldn't have happened. So my advice is, don't have a preliminary hearing over the phone with counsel.

Emergency Relief

AGNES WILSON: Moving to the topic of emergency relief, would the panel comment on the availability of temporary restraining orders (TROs) and preliminary injunctions in arbitration. The AAA has supplemental procedures that deal with this. Are these procedures valuable in the arbitration context to any of you?

THOMAS ZYCH: When I'm drafting an arbitration clause, I will carve out the right to seek emergency relief in court because the cases are split on the issue. In other words, where the arbitration clause is silent on the right to go to court to get a TRO or preliminary injunction pending arbitration, some courts recognize the right to do so and some don't. I try to remove that doubt.

MICHAEL DIAMANT: There's nothing the AAA can do to solve the problem because it takes too long to get an arbitrator appointed. So when I need a TRO, I draft it for the judge and head to court.

AGNES WILSON: I raised the issue because there is a lack of knowledge about arbitration and what you can and cannot do. I frequently hear people say that one reason they don't use arbitration is that they can't get interim relief. That is obviously wrong. There are erroneous perceptions out there that arbitration has no remedies available in certain arenas.

THOMAS ZYCH: But it's true that arbitrators can't put people in jail.

MICHAEL DIAMANT: Or send out the marshals. I had an infringement action in which the marshals raided the place and took all the property and locked it up. The AAA will never be able to do that.

AGNES WILSON: True.

RICHARD SAYLER: I once represented a client in a case in Delaware Chancery Court in which my client sought a stay of a merger in aid of an arbitration proceeding. I wanted the defendant's property to be held in escrow until the arbitration was over. The defendant argued that the court should dismiss the lawsuit because the only equitable causes of action permissible under the Delaware State Constitution were those that existed under Delaware law or English common law at the time that Delaware joined the Union back in the late 1700s. So I called an English legal historian who told me that one could obtain equitable relief in support of arbitration a long way back in merry old England. He gave me an affidavit to that effect, and the Vice Chancellor denied the motion to dismiss so I was able to go ahead with my lawsuit seeking stay of the merger.

As an arbitrator, I've granted preliminary injunctions in arbitration. The problem with granting such an injunction is that the recalcitrant party may stop paying its share of the costs of the arbitration and then the arbitration ends. That's the "dirty little secret" of arbitration. So unless the panel has the guts to hold that party in contempt for breach of the duty to arbitrate in good faith, the proceeding is over. That happened to me in two cases in which I sat on the panel. Now when I serve as counsel drafting arbitration clauses, I put language in the agreement making nonpayment of arbitration fees and/or expenses a sanctionable default.

MICHAEL DIAMANT: The AAA seems to be aggressive in getting fees paid in advance so there is less of a risk of that.

RICHARD SAYLER: I agree that the AAA seems to be doing a better job.

THOMAS ZYCH: Do you see any trend toward accepting arbitration of IP disputes in the way that the advertising community adopted arbitration through the NAD?

AGNES WILSON: That's a good question. I don't see any trends yet, but if you consider the IP community's willingness to discuss ADR alternatives today versus 10 years ago, there's a phenomenal difference. For example, I recently met with patent counsel for a medical devices company in the Midwest. He had just settled a patent infringement case after a trial produced an $80 million decision on liability. His company was happy with the settlement but it took four years and $6 million. He acknowledged the waste of resources and capital and said the company must find another way. Companies can see in their own checkbook how much infringement litigation is costing them. So he asked the AAA to work with him to develop model ADR clauses for a protocol that companies in his industry could use in infringement cases. It was clear to him that litigation was not productive and he said he hoped that his competitors felt the same way. So this gives me hope.

I also met with the general counsel of a technology company in the Northeast, who said, "You've got to help me. I want to negotiate an arbitration clause into our licensing agreements, but my adversaries-or partners, if you will-don't know anything about arbitration or they remember their last bad experience in a California employment arbitration and they think that all arbitrations are like that."

The AAA is frequently asked to educate people to help them better understand what ADR processes are all about. These kinds of experiences tell me that people in the IP field are open to discussing alternatives that can be less costly and more productive than litigation. But while they are open to discussion, they have yet to fully embrace arbitration and mediation. That is one reason we are having this roundtable-because we are wondering whether the time is now right to go forward with an educational program in the IP area.

RICHARD SAYLER: The fact that the Federal Circuit is loath to take interlocutory appeals on pretrial rulings by the district judges who are construing the meaning of the technical language in patent claims after holding so-called "Markman hearings" is also a selling point for arbitration. Because claim construction shapes the whole case, it is not uncommon for there to be a full trial on liability and damages based on the judge's initial claim construction, followed by an appeal where the Federal Circuit disapproves ot that initial claim construction and remands for a new trial based on the Federal Circuit's construction. If the case is significant, that second trial will likely be followed by a second appeal. The cost of getting to final resolution in such cases can be enormous.

AGNES WILSON: Exactly. But Teresan Gilbert's comment indicated that going to court and getting your case reversed was not a cost concern.

TERESAN GILBERT: Let me clarify. Litigation and outside counsel fees are a cost concern so we negotiate attorney's fees and provide incentives based on how well the attorneys do.

JOHN HORNICKEL: I have two comments. First, WIPO's Arbitration and Mediation Center may be superior to the ICC because the WIPO Center has arbitrators knowledgeable about IP. [Editor's Note: The reference is to the World Intellectual Property Organization.]

Second, arbitration might be very helpful in a joint arrangement to develop new intellectual property where both companies have inventors and they put a clause in their contract about determining ownership based on "inventorship." It you provide for arbitration, then you can refer questions about ownership to an arbitrator for a good-faith, final decision. Then the attorneys working on the patent application don't have to fight it out since they are both going to benefit from having ownership determined based on inventorship. That could be very helpful, even if new legislation passes on how joint development agreements operate under sections 102(g) and 103. [Editor's Note: Mr. Hornickel is referring to 102(g) and 103 of the Patent Law in Title 35 of the U.S.Code. The new legislation he refers to is the Cooperative Research and Technology Enhancement {CREATE) Act of 2004, which was signed into law on Dec. 10, 2004, shortly after this IP roundtable.] So that's one area where arbitration is not controversial and could be of great help to the two companies.]

MICHAEL DIAMANT: For the past five years or so, I've been making presentations on ADR and IP at the the ALI/ABA seminar on Litigating Trademarks, Trade Dress and Unfair Competition cases. The IP community is looking at ADR of all types.

AGNES WILSON: The Intellectual Property Owners Organization had a meeting earlier this week at which one full day was devoted to ADR. This kind of event indicates that corporate counsel and the corporate community are becoming increasingly interested in alternatives to litigation. So there's a movement afoot, but it has not yet crystallized.

SHARON OBERT: I want to thank you all for your participation.

AGNES WILSON: I also want to thank you very much. It's been a pleasure meeting all of you.