Resolving Intellectual Property Disputes Outside of Court: Using ADR to Take Control of Your Case

Dispute Resolution Journal, May-Jul 2006 by Kowalchyk, Alan W

Intellectual property cases, like most commercial disputes, start out in court but are usually resolved before trial. Given the high cost and protracted nature of IP battles, arbitration and mediation should be seriously considered as options to take control of a dispute when it arises. This article focuses on the key factors to evaluate when deciding whether to arbitrate or mediate an IP dispute.

The vast majority of intellectual property litigation, especially cases involving copyright, patent and trademark infringement claims,1 takes place in the federal courts. Like most cases that set out upon the litigation path, intellectual property cases are most often settled before trial; the number of cases actually tried in court is small. In 2002, for example, slightly more than 7,400 intellectual property disputes were disposed of by federal district courts.2 Less than two percent of these cases went through a trial to verdict.3

Regardless of when intellectual property lawsuits are settled, the cost of litigating is extremely high. A recent survey published by the American Intellectual Property Law Association reported that a party incurs about $2.6 million in legal fees and costs in an average patent infringement case, which usually involves claims for damages between $l-$25 million.4 More than half of this sum-about $1.49 million-is incurred up to the completion of discovery. Trademark, copyright and trade secret cases tend to cost somewhat less than patent cases because they are less technical. But even these cases can run into the high six figures or more when potential damages are large (i.e., exceeding $1 million), and there are complex legal issues and a lengthy trial is anticipated.5

Not only is litigation expensive, it is a liability on the balance sheet for as long as the lawsuit exists, which can be a decade or more in patent cases that are appealed and then retried.6 A more practical problem is that litigation continually drains a company's cash flow. And litigation is so very public.

So, when your client is faced with enforcing, or acquiescing to, an intellectual property right, the question is, "Should you advise the company to step into the ring?" The reason this question should be asked is because there are alternative, less public and less costly ways of resolving many intellectual property disputes. The most common are arbitration and mediation. These are distinctly different alternative dispute resolution (ADR) processes. This article discusses how they differ and when each should be considered.

Arbitration

Arbitration is an adjudicative process that, like a trial, has a third party decide the dispute. Thus, arbitration is a form of private judging. Because arbitration is a creature of contract, it has a major advantage over litigation: the parties can select a decision maker with expertise in the type of intellectual property dispute involved. Arbitration also has other advantages over litigation. It is potentially less costly and faster because

* it is less formal than litigation,

* it allows for less discovery,

* judicial rules of evidence typically do not apply,

* the arbitrator's award is final, binding and enforceable in court, and

* there are limited appeal rights.

The parties bear the costs of arbitration and the arbitrator's fees. The latter are generally billed at an hourly rate and can be quite high. However, because arbitration is usually a shorter process than litigation, overall costs are usually lower. You can see right away that arbitration costs less because it cuts down the scope of discovery and limits the right to appeal.

Commencing Arbitration

How do parties enter into arbitration? One way is to put an ADR clause providing for arbitration in the transaction documents, such as a patent royalty license. The ADR clause usually states that the parties agree to arbitrate "any and all disputes arising out of or related to this agreement."

If there is no ADR clause in the relevant documents, the parties can agree to arbitrate "post-dispute." However, by that time the parties are usually so at odds with each other that they are less likely to agree on anything.

So whenever possible, it is prudent to use a "pre-dispute" arbitration clause in the transaction documents. Having this clause can lower the temperature of the parties' heated reactions, which can distract them from objective decision making after a dispute arises. The cost of not having such a clause is that if litigation is commenced, the court might require the case to be arbitrated or mediated before a court-appointed neutral under a court-referred ADR program. This obviously takes the decision making about the process out of the parties' hands. It is much better for the parties to control the process of resolving their intellectual property dispute.

Private commercial arbitration allows the parties to have that control. Significantly, it allows them to decide on the rules and procedures that will apply to their arbitration. In most cases, parties agree to have their arbitration proceedings administered by a well-established, neutral arbitration provider, like the American Arbitration Association (AAA), which has well-tested arbitration rules, including specialized rules for patent disputes. But sometimes parties decide to use ad hoc arbitration in which the arbitrator administers the proceeding. A notable disadvantage of ad hoc arbitration is that the parties are involved in direct dealings with respect to arbitrator compensation. Administered arbitration does not have this disadvantage since the neutral arbitration provider acts as an intermediary with respect to compensation issues.