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Should We Believe in a Little Injustice? The Case for Patent-Integrated Arbitration Terms
By: John Moetteli1, Esq., managing attorney, Da Vinci PartnersLLC, Switzerland
At a recent IP conference in Switzerland, where the author spontaneously proposed an arbitration regime designed to reduce patent litigation costs, Chief Justice Randall Rader of the United States Court of Appeals for the Federal Circuit encouraged the author to write this article saying that he found that the concept was a good one which indeed has the potential of reducing such costs.2
For this reason, the author would like to start this article by quoting a phrase used by Judge Rader at this conference: "I believe in a little injustice". This he mentioned to set the backdrop for case management, reduced discovery and the swinging of costs as legitimate measures aimed at reducing the costs of patent litigation because many patentees, be they individual inventors or SMEs, simply cannot afford an arguably superior justice offered by the US courts. Indeed, it has been said that patent litigation, in the United States, as well as in many other jurisdictions globally, is the "Sport of Kings."3
Patent litigation has been tagged with this daunting phrase given the staggering costs involved, both legal fees and expenses, the human cost involved in organizing a suit, taking it through discovery (and if necessary through trial and appeal), the amount of time involved to get to a final judgment, to exhaust appeal, and indeed, for many individual inventors, the shear "blood, sweat and tears" involved in monetizing inspiration involved in a patent estate. Indeed, we are certainly talking about, at a minimum, hundreds of thousands of US dollars or Euros, and at least one to four years of time through trial.
So the question arises: should we promote a patent enforcement system other than the courts that occasionally yields an injustice, provided that by and large it renders justice overall at a much more reasonable cost? Patents are involved in 40 percent of arbitration and mediation cases, and a disproportionate percentage of the costs involved in IP litigation, given the complexity.4
Consequently, it's an important issue to address. This is what motivated the author to explore the concept of innovator-elected, where necessary, legislated arbitration in patent proceedings, and how such a system may serve as a framework to render justice overall at a reasonable cost. To evaluate this option, after discussing patent arbitration in general terms, we will explore considerations applying to legislated mandatory patent arbitration, including advantages and disadvantages thereof, public policy considerations including constitutionality of such a system in the US, the Portuguese example of legislatively mandated patent arbitration, as well as a proposed legal framework for a suitable system promoting arbitration of patent disputes.5
General Discussion Regarding Patent Arbitration
Patent arbitration is a form of alternative dispute resolution (ADR). In this article, we will use the abbreviation PADR to refer to Patent ADR. PADR is a technique for the resolution of patent disputes outside the National courts, although the technique typically uses the National courts to enforce an arbitration judgment or award. In a typical patent arbitration, the parties to a patent related dispute, e.g. a patent license, refer it to one or more persons (the "arbitrator(s)") by whose decision (the "arbitration decision") they agree to be bound. PADR is a technique in which an independent third party (generally, with technical/legal training and experience) reviews the evidence in the dispute and imposes a decision that is legally binding on both sides and enforceable in a National court. As mentioned previously, patent arbitration is often used for the resolution of commercial disputes, e.g. patent license agreements, and is particularly useful in the context of international licensing transactions.
According to the recently conducted survey WIPO International Survey on Dispute Resolution in Technology Transactions, , "parties to technology related agreements are worried about the high costs and lengthy timelines of disputes, especially in an international context".6
"The most commonly negotiated stand-alone dispute resolution clause provides for court litigation (32 percent), followed by (expedited) arbitration (30 percent) and mediation (12 percent)".7
"The estimated duration of court litigation in a home jurisdiction was on average 3 years and costs around U.S. $475,000. Litigation in another jurisdiction takes around 3.5 years with legal fees of just over U.S. $850,000. In contrast, "mediation takes on average 8 months, and in the majority of cases costs less than U.S. $100,000. Arbitration takes an average just over a year and typically costs around U.S. $400,000."8
The costs and time investment associated with a dispute involving WIPO Arbitration and Mediation Center are significantly lower than the average, amounting to about $48,000 in costs and 7 months' time.9
Consequently, the frequency of use and resulting cost and time savings associated with arbitration can be very significant indeed.
PADR can be either voluntary, e.g. through a patent licensing agreement agreed to by both parties,10 or mandatory, e.g. as in the example involving Portuguese legislation discussed below.11
PADR can be either binding on the parties or non-binding on the parties. In non-binding patent arbitration, the decision cannot be imposed on the parties, and is typically used in a patent litigation settlement process. The "non-binding" arbitrator(s) remains removed from the patent litigation settlement process, but may provide an indication of liability, and where appropriate, an indication of the amount of damages that may be payable by the accused infringer. This form of non-binding patent arbitration is more of a hybrid between mediation and more typical binding patent arbitration. In other words, non-binding patent arbitration is free of the ability to bind the parties and therefore will not be discussed further in this article.12
By way of contrast, binding patent arbitration is a proceeding in which a patent dispute is resolved by one or more arbitrator(s) that are tasked with rendering their decision with impartiality. The decision is one the parties to the patent dispute have agreed, or patent legislation has decreed, will be final and binding on the parties. Limited rights of review and appeal of arbitration awards exist in the American context by statute.13
Binding arbitration in the patent context has several advantages and commensurate disadvantages. The parties to a patent dispute generally perceive advantages over judicial proceedings, particularly in the patent licensing context. These same advantages/considerations equally apply to situations where arbitration would be mandated by new patent legislation:
1) Where the subject matter of the patent dispute is very technical, arbitrator(s) with technical subject matter expertise could be appointed, eliminating the "gap" in technical expertise one may find in the general ranks of most, but not all, judiciaries around the world;
2) Binding arbitration is more often faster than litigation in a National court, than even in the most efficient "rocket dockets" in the United States and National courts of first instance, such as in Germany;
3) Arbitration is in most situations less costly and more flexible for businesses, than participation in full blown patent litigation, albeit, the caveat exists that in most significant arbitrations, the parties still retain qualified legal counsel (including patent litigation counsel), thus incurring legal fees (these are generally, however, orders of magnitude lower than in full blown US patent litigation as the patent arbitration proceeding is much shorter, and much more compact);
4) Arbitration proceedings and the resulting award/decision are generally non-public, and can, by agreement of the parties or by legislation, be made confidential (as contrasted with US patent litigation where a great portion of the proceedings are publicly accessible through the Court record, unless covered by Protective Order);
5) In patent arbitration proceedings, the language of the patent arbitration may be selected by agreement of the parties, whereas in National judicial proceedings, the official language of the country of the Court of competent jurisdiction is automatically used;
6) Due to the provisions of the New York Convention 195814, patent arbitration awards are more readily enforced in other Nations than National court judgments; and,
7) In most National legal frameworks, very limited avenues for appeal of a patent arbitration award exist. The advantage of this feature of these legal frameworks is that it greatly reduces the duration of the dispute, e.g. cuts out the Appellate review period, and any additional liability that may be associated therewith.
8) Inter partes or erga omnes effect: while the US recognizes that disputes in relation to US patents can be arbitrated, albeit only with inter partes effect, some European countries, such as Belgium and Switzerland, go much further and recognize that patent arbitration can have erga omnes effect and therefore invalidate a patent or patent claim vis-à-vis parties that did not participate in the arbitration.
By way of contrast, there are various disadvantages to binding patent arbitration, both voluntary and legislatively mandated:
1) Patent arbitration may be subject to pressures from powerful corporations and/or patent law firms representing the stronger and/or more affluent corporation, e.g. the arbitrator(s) may be influenced by potential "future" or "repeat" business which the firms/corporations may channel their direction.
2) Legislatively mandated binding arbitration requires the parties to waive their rights to access the National courts and to their rights to have a judge and/or jury decide all or portions of the case (which may subject the legislation to attacks on National Constitutional grounds in certain jurisdictions, particularly the US).
3) The parties are required to pay for the patent arbitrator(s). As these individuals are very highly trained professionals (in the technology and the law), this adds to the costs
4) In some legislatively mandated arbitration frameworks, attorneys' fees are not recoverable, while on the other hand, many arbitration codes provide for the parties to benefit from the same relief that could be granted in a National court of competent jurisdiction.15
5) As there are very limited venues for an appeal of an arbitration award, an erroneous decision, either on the technical facts of a case or the requisite application of patent law, cannot be easily overturned, and can be particularly damaging in jurisdictions where erga omnes effect is recognized.
6) Patent arbitration proceedings involving a single arbitrator are usually much faster than patent litigation proceedings. However, when there are multiple arbitrators on an arbitration panel, costs are multiplied and scheduling hearing dates in practice is problematic, thereby leading to delays.
7) In many National legal systems, patent arbitration awards have fewer enforcement routes than National court judgments; however, in the United States, patent arbitration awards are enforced the same as court judgments and have, in essence, the same practical effect.
8) The choice and application of the applicable patent law(s) is not necessarily binding on the arbitrator(s), although they technically cannot disregard the applicable patent law.
9) Discovery is extremely limited in patent arbitration proceedings, or, worse yet, may be entirely nonexistent, making it very difficult for the parties to mount defenses to patent(s), e.g. those acquired by inequitable conduct, thus eviscerating entire defenses available in patent litigation in the United States, in particular.
10) In juxtaposition to court judgments, patent arbitration awards in and of themselves are not directly enforceable. Consequently, a party seeking to enforce a patent arbitration award must resort to a judicial remedy at the end of the day to finally obtain its remedy.
11) Although the grounds for attacking an arbitration award in a National court may indeed be limited, the winning party's efforts to confirm an award in a National Court can be fiercely fought, thus requiring large legal expenditures that ultimately negate the expected economic/time reduction incentive to arbitrate the patent dispute in the first instance.
12) The risk of predictability of case law would be lost. Case law is generated by the National courts in common law jurisdictions and would be lost, as there would be no stare decisis effect of arbitration judgments.
Public Policy Considerations: Do All Constitutionally Granted Patent Rights Lend Themselves to Binding Arbitration?
By virtue of their very nature, it is arguable that at least some of the subject matter of typical patent disputes may not lend itself to legislatively mandated binding arbitration. By way of example, typical patent litigations involve charges of infringement against the infringer brought by the patentee, and defenses of invalidity and/or unenforceability brought by the accused infringer against the patentee.16
In the US scenario, patent infringement can be adjudicated by an arbitrator(s), but the validity of a patent cannot, under existing law. Since patents are subject to a system of public grant under the US Constitution, and the 7th amendment guarantees right to trial by jury, a private arbitrator(s) has no power to order the relevant public body to rectify a public document such as a patent. However, one avenue to enable a private arbitrator to effectively decide the validity of a patent, or portion thereof, would be for the arbitration terms to require that the patentee (if a party) file an assignment to the public of any claims the arbitrator deems invalid.
The patentee, if a party, could also agree to withdraw the patent if determined by the arbitrator to be invalid, which would then make it of no legal effect. Consequently, it is the 7th amendment of the US Constitution that would effectively prevent the innovator or applicant-elected arbitration terms in a US patent to apply to a third party not privy to the quasi-contract created between the patent applicant and the granting authority.
The opportunity for and the specter of corruption of the arbitrator(s) (e.g. by bribery, undue influence or National prejudice) in such a non-public, often confidential or closed system with respect to unpopular, but valid and enforceable patents could be significant. This potentially raises several interesting public policy questions: How would the arbitrator(s) be penalized for malfeasance against either party to the arbitration? How would United States required "inequitable conduct" issues be decided if there was limited or no discovery involved in a patent arbitration proceeding? How would an arbitrator(s) sanction a party that fails to honestly comply with discovery requests (assuming that limited discovery is permitted)?
The Portuguese Experiment with Legislatively Mandated Patent Arbitration with Respect to Medicines
On December 12, 2011, Portuguese Law 62/2011 ("PL 62/2011") created a system for the settlement of disputes related to patent rights where "reference medicines," e.g. patented medicines, and generic medicines are at issue. PL 62/2011 provides that for "reference medicines" and "generic medicines", conflicts arising from patent disputes and remedies related thereto, including interim injunctions, are subject to compulsory arbitration. As a result, the traditional National Commercial Court ("Tribunal de Comércio") has been denied jurisdiction over disputes over patent rights related to such medicines and the parties are obliged to settle any disputes through a patent arbitration proceeding. Unfortunately given its recent implementation, it is still too early to know whether the Portuguese system has provided the perceived benefits listed above in this specific technological subject matter area.17
Following Portugal's lead, one can imagine that through national legislation, binding arbitration could at least be encouraged as the preferred way to resolve such case. If the prospective infringer would like to avoid binding arbitration and instead choose patent litigation in the courts, he or she would have to present good arguments, and reach a threshold in order to move the proceeding from the arbitration scenario to a litigation scenario.
Proposed Legal Framework for an Innovator-Elected, Legislatively Mandated Hybrid Patent Enforcement System
Due to the disadvantages of the current system of patent enforcement mentioned at the outset of this article, in particular for individual inventors and SMEs, the author suggests that an innovator-elected, legislatively enabled patent enforcement system be proposed in new National legislation, and potentially, by treaty at the international level.
The author proposes that such a new system would incorporate the advantages of patent arbitration for infringement determinations, while maintaining some of the features of established traditional National patent enforcement proceedings minimizing the risks associated with improperly grounded determinations related to validity and enforceability, and thus retaining the incentives for inventors to provide an early and full disclosure of their inventions.
Further, as with the Portuguese model described above, a pilot program may first be limited to "reference medicines," e.g. patented drugs and generic drugs, and then the system may be phased in to include other technological subject matter areas thereafter.
Features of such a system could (through rule making authority and/or new legislation), allow a patent applicant to (via an opt-in feature at the time of filing or prior to issuance of a patent, where the applicant might receive fast track patent prosecution treatment and lower patent filing/issue fees as consideration) bind himself to arbitration where these limitations run with the patent, much as in a "standards setting" situation, with the goal of promoting an alternative to expensive US or other national patent litigation.18
Similarly, by treaty, other signatory countries could provide similar options using the established arbitration rules of the WIPO, as a way to enable the creator of the right to choose an enforcement means that would reduce litigation costs as well. In this case, an issued patent would have a further bit of biographical info, which might include, by way of example, "Submitted to Arbitration terms 12345," and that designation would unlock the terms that the Applicant agreed to, such as arbitration according to specific rules, locations, and other terms, e.g. with one or more arbitrators, etc.
Such election may have a time window for being accepted by the prospective infringer, say, after thirty (30) or sixty (60) days after formal notice of infringement is sent to the prospective infringer. Should the Applicant be an individual inventor or an SME, they might have the option of electing to institute a patent arbitration proceeding for certain issues, such as infringement, while other portions of the proceeding such as invalidity and/or enforceability in a hybrid patent enforcement proceeding. In this case, arbitration would simply be one of many options that a would-be litigant might have to attack a patent.
Another possible scenario would involve binding arbitration running with the patent on both sides, e.g. offensively and defensively. This means, if the innovator or patent applicant has elected mandatory arbitration and he asserts a patent, or if someone challenges it, they are both bound to use arbitration. This type of mandated binding arbitration would require supporting legislation. There are also constitutional questions regarding due process, among other issues, that would need to be addressed but are not the subject of the current article. Certainly, in the US, one would expect constitutional challenges based on the Seventh Amendment right to trial by jury.
Issues related to validity and/or enforceability could, optionally, be handled by arbitration within the framework of the hybrid patent enforcement proceedings or standard National Court proceedings prior to the binding infringement/damages determination.
In this scenario, the party not electing the hybrid arbitration process(es), and forcing the other party into the National Court proceedings on the issues related to validity, enforceability and/or damages would be forced to pay attorney's fees to the prevailing party who elected to proceed via arbitration. In this framework, there is a strong incentive on both sides not to move forward with frivolous and/or tenuous positions related to these issues via the lengthy National court proceeding route.
Certainly, there is still some down side for the "David" style patentee in this scenario when up against a well-funded "Goliath" infringer, given that the "Goliath" infringer can move forward with any defenses they desire and still afford to absorb the patentee's attorney's fees, even should the "Goliath" lose the proceeding.
Nevertheless, it makes sense to the author to allow the creator of the intellectual property right to select the terms by which he is she is willing to disclose his invention to the public. This may involve the promotion or the determination of a more cost effective dispute resolution regime over the traditional, extremely costly means. In this way, he or she can promote or even determine the way that his or her rights will be weighed and balanced, even if this selection may result in a little injustice now and then. This selection, tailored to the creator's needs, can help make the playing field a bit more level.
1 John Moetteli, a Swiss and US Patent Attorney with over 20 years' experience, earned his Doctor of Jurisprudence magna cum laude from the University of Houston Law Center. He holds a Master's in International Business Management and a Bachelor of Science in Mechanical Engineering from the University of Texas System. He has taught for the Swiss Patent Office, IMD in Lausanne, and various universities in the central European region. His firm, Da Vinci Partners LLC, serves global clients, both small and large, in securing and enforcing their intellectual property worldwide. He may be contacted via email at firstname.lastname@example.org.
2 January 15, 2014 conference entitled "Honorable Randall R. Rader, Chief Judge, U.S. Court of Appeals for the Federal Circuit speaks about the U.S. patent system, "patent trolls" and effects on Switzerland, organized by the Competence Center Intellectual Property Management of the Institute of Technology Management at the University of St.Gallen, Switzerland, Dr. Martin Bader, Dr. oec. HSG, Dipl.-Ing., Manager.
3 Kline, Douglas J., Patent Litigation: The Sport of Kings, MIT Technology Review, April 28, 2004 (http://www.technologyreview.es/printer_friendly_article.aspx?id=13562).
4 Survey Results Confirm Growing Trend in Favor of ADR" , Les Nouvelles, Journal of the Licensing Executives Society International, Volume XLIX No. 1, March 2014, p.11 col. 2.
5 Other topics which merit further investigation include the question of consideration in this quasi-contract situation, in particular, the question of whether an Applicant who is willing to disclose his invention in a patent application, in part, because he can elect a reasonable, cost efficient alternative enforcement mechanism, can validly bind third parties to his elected mechanism. The constitutionality of such Patent-Integrated, mandatory arbitration terms could be more thoroughly investigated in the US, and also addressed in key jurisdictions such as Germany, France, the UK and China.
The option and constitutionality of legislation swinging the costs to the party that elects a suit in common law as opposed to an applicant selected arbitration option should be investigated further. In addition, we could more thoroughly investigate how the cost of justice in resolving disputes may be served by allowing the patent applicant to elect optional arbitration terms that bind him and successors in interest should a third party elect to exercise the arbitration option proposed by him during the prosecution of the application.
6 Survey Results Confirm Growing Trend in Favor of ADR", Supra, p.8, col. 2.
7 Id. p. 9, col. 2
8 Id. p. 12. Col. 1.
10 35 USC § 284 - Voluntary Arbitration
11 Rocha Duraes, Manuel, Recent Developments in Portuguese Pharma Litigation, September, 2012 (http://www.genericsweb.com/index.php?object_id=1118).
12 Hybrid patent enforcement proceedings could be legislatively created in which certain issues, e.g. patent infringement, would be resolved via proceedings involving binding/non-binding arbitration processes first. Similarly, a "non-binding" arbitration process directed to the extent of potential damages may be used following the infringement/non-infringement determination as is currently used in other contexts.
This would posture the proceeding for settlement potentially at this stage, while eliminating discovery/expert/damages witness costs and expenses related to infringement, and legal fees associated with claim construction issues, and the like. Certainly, this would be a boon to "David" individual inventors and SMEs who may be taking on "Goliath" corporate infringers, and provide, not for a perfect playing field, but certainly one that is more level.
13 DeRosier, Judicial Review of Arbitration Awards Under Federal and Michigan Law, Michican Bar Journal, p. 34-37 (February, 2013)
14 McLaughlin, Enforcement of Arbitral Awards under the New York Convention - Practice in U.S. Courts, Vol. 3 Berkeley Journal of International Law (1986).
15 Mason et al., An Arbitration Panel's Authority to Award Attorney's Fees, Interest and Punitive Damages, Vol. 6, No. 2, Rutgers Conflict Resolution Law Journal, (2009).
16 "While the main objectives of claimant parties in patent disputes were to obtain damages/royalties (78 percent), a declaration of patent infringement (74 percent), and/or injunctions (53 percent), respondent aimed at declaration of patent invalidity (74 percent), a negative declaratory judgment (33 percent), and/or a declaration of patent infringement (33 percent)." Survey Results Confirm Growing Trend in Favor of ADR" , Les Nouvelles, Journal of the Licensing Executives Society International, Volume XLIX No. 1, March 2014, p.11, col. 1.
17 Rocha Duraes, Manuel, Recent Developments in Portuguese Pharma Litigation, September, 2012 (http://www.genericsweb.com/index.php?object_id=1118).
18 In the view of at least one industry patent chief in Europe, the incentives of reduced filing/issue fees and/or faster patent prosecution should entice SMEs or individual inventors to elect arbitration.
The author would like to thank CAFC Chief Judge Randall Rader for his inspiring words and initial encouragement to write this article. Further thanks belong to Matt Rainey, J.D., Director, Innovation Division of WIPO, as well as Thomas Dubuisson, LLM, J.D., LL.B, for their contributions. Additional thanks go to Dr. Wolfgang Fischler, Head of Strategic Cooperations & IP at MEDEL, and to Guillaume Tattevin, Avocat à la Cour (Paris), of Vecchio Avocats in Geneva for their comments and review.