Mediating IP Disputes - Starting with Patents
I recently had the pleasure of contributing a chapter to Mediating Legal Disputes: Effective Techniques to Resolve Cases. Dwight Golann is the main author and editor. I highly recommend this comprehensive guide to mediation of all sorts of disputes. It’s available online at the ABA bookstore.
My chapter addresses mediating IP disputes. For a full treatment of that topic, I recommend the book. But there are some things worth discussing here until you have a chance to pick up the book.
Let’s start with mediating patent disputes. Today we’ll begin with a Patents 101 discussion and describe the kinds of patent disputes likely to end up in mediation. We’ll then see how this might affect who you want to mediate your dispute.
In later articles we’ll look at some unique aspects of patent mediations and how best to address them.
Patents 101
The basics
We’ll concentrate on United States utility patents here. You may run into design patents, plant patents, and foreign patents, but we’ll leave those to another day.
A patent is a grant from the federal government providing the inventor an exclusive right to use a novel invention for a limited period of time. That period is now 20 years from the time the inventor applies for a patent.
A patent owner has the right to file a suit in federal court for damages and injunctive relief if the patent is infringed. A patent is infringed if an accused infringer practices all elements of one claim of a patent without permission. The claims are numbered paragraphs at the end of the patent. They are like a legal description of land, but they define intellectual property instead of real property.
An inventor obtains a patent by applying to the United States Patent and Trademark Office, which then examines the application to determine whether the claimed invention is novel and meets other requirements for getting a patent. Patents can be sold – usually called assigned. They can also be licensed, which is like being rented. The licensee is allowed to make, use, or sell the patented invention and usually pays a royalty, that is, a percentage of sales. Licenses can be exclusive or non-exclusive and may be restricted or limited in a variety of ways, depending on the parties’ agreement.
Infringement claims
Patent disputes take many forms. The most common arises when a patent owner believes a person or entity – usually an entity – is infringing the patent. The patent owner can sue for patent infringement, claiming damages for infringement, and often seeks an injunction against further infringement.
Damages can be in the form of lost profits on lost sales or other monetary losses, for a reasonable royalty, or some combination of the two.
Damages for lost profits are available if the patent owner can show that but for the infringement it would have made the sales or otherwise have enjoyed a higher sales price or the like on sales of its patented products or processes. This often presents a difficult proof problem, particularly if there are non-infringing substitute products or methods available in the market.
If the patent owner proves infringement, if is entitled to at least a reasonable royalty. A reasonable royalty is based on a hypothetical negotiation of a royalty a reasonable entity would pay to license the patent, based on analysis of 15 factors, known as the Georgia Pacific factors. The factors are named after the case that first set them out.
The court can multiply the actual damages up to three times if infringement is willful. Infringement is willful if the infringer knowingly infringes on a patent owner’s exclusive rights showing a disregard for the law. To try to avoid liability for willful infringement, accused infringers often obtain the opinion of qualified patent counsel that they either don’t infringe any asserted claims of the patent or that the patent is invalid.
In exceptional cases, the court can award attorneys’ fees against a party. An example of an exceptional case would be where the patent holder obtained the patent through misleading the patent office, as discussed below. Another example would be particularly vexatious litigation conduct by a party.
At one time injunctions against further infringement were almost automatic if infringement was found. But now a party seeking an injunction must show that: (1) it has suffered an irreparable injury, (2) money damages are inadequate to compensate for that injury, (3) considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted, and (4) the public interest would not be disserved by a permanent injunction.
Of course, an injunction can be fatal to some businesses or product lines. In many cases, though, an infringer can “design around” the patent. That is, they can redesign their product or service to avoid the claims of an asserted patent. That depends on the invention claimed. Some claims may go to the very basis of a product or service. Others are just improvements to known, unpatented designs.
How easily an accused infringer can design around an asserted patent is often a critical factor in evaluating the value of a patent case.
Defenses to infringement claims
Defenses to patent infringement claims include 1) non-infringement; 2) invalidity for lack of patentable subject matter, lack of novelty, the on-sale bar, lack of enablement, or lack of written description; and 3) unenforceability based on inequitable conduct. There are other defenses, but these are the most common.
Non-infringement
To succeed on an infringement claim, the patent owner must prove that the accused infringer practices every element of one or more claims of the asserted patent. Remember, patent claims are a legal description of intellectual property. The court is required to determine the meaning of each claim element. The accused infringer’s device or process is compared to see whether it practices very element of a claim. If so, it infringes the claim. If not, it doesn’t.
But there is an exception known as the doctrine of equivalents. Even if a device or process is not the same as claimed in the patent, it will be found to be equivalent – and infringing – if it if it performs substantially the same function in substantially the same way to obtain the same result. This prevents an infringer from stealing the benefit of a patented invention by changing only minor or insubstantial details of the claimed invention while retaining the same functional benefits.
The court often holds a Markman hearing at some point to determine what the claims mean. This hearing is named after a Federal Circuit case explaining that trial courts should make such a determination, commonly referred to as “claim construction.”
This is theoretically done so the court can instruct the jury what the claims mean because claims are construed as a matter of law. Application of the claims to the accused infringer's devices or processes is typically done by the jury, as a matter of fact finding.
As a practical matter, many cases turn on how a court construes a claim. An inventor may drop a case if the construction is unfavorable, or an accused infringer may give up on its non-infringement defense at the trial court.
Because claims are construed as a matter of law, the Federal Circuit takes a fresh look at the trial court’s claim construction on appeal and may well change it, requiring a new trial. Occasionally, the parties will agree a device or process would infringe if the trial court’s claim construction is correct, then position the case for an appeal of the trial court’s claim construction.
Invalidity
Invalidity defenses go to whether the inventor should have gotten a patent in the first place. If a patent is found invalid, it can’t be infringed. Then the accused infringer is not an infringer at all.
Ineligible for a patent
The Patent Act says an invention must be a “useful process, machine, manufacture, or composition of matter” to be eligible for a patent. 35 U.S.C. § 101. According to Supreme Court precedent, laws of nature, natural phenomena, and abstract ideas are not patent-eligible unless the invention includes an inventive concept that goes beyond the ineligible subject matter. Thus, courts apply a two-part test to determine whether an invention is eligible for a patent. They first determine whether the claims of the patent are directed to laws of nature, natural phenomena, or abstract ideas. If so, they determine whether the nature of the claims transforms the claims into a patent-eligible application. See Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014)
A recent example illustrates the use of this test. In Interactive Wearables v. Polar Electro Oy, No. 21-1491 (Fed. Cir. 2021), the Federal Circuit, which hears virtually all appeals in patent cases, affirmed the lower court’s decision, invalidating Interactive Wearables’ patents. That patents claimed a wearable content player connected to a remote control. The district court found that the claims were directed to the abstract idea of “providing information in conjunction with media content” and that “the recited physical components merely provide a generic environment in which to carry out the abstract idea.”
As you can imagine, the application of this test gives creative lawyers much to argue about. Many cases begin with an attack on patent eligibility by a motion filed shortly after the case is brought.
Courts address invalidity claim by claim. Most patents have many claims, often in the dozens. Usually, each claim must be addressed for invalidity separately. This means patent disputes are often complex and lengthy.
Not novel: anticipated or obvious
If an invention claimed in a patent is not novel because someone else earlier made it, often as found in an earlier patent or literature, a claim in the patent directed to that invention is not valid. If the invention is described in one reference, then invalidity is made out by “anticipation.” See 35 U.S.C. § 102. If it would be obvious for a person “skilled in the art” to combine earlier references or a reference with common knowledge to arrive at the claimed invention, claims directed to that invention are invalid as obvious. See 35 U.S.C. § 103. In many cases, reasonable minds can differ on all of this.
Lack of enablement
A patent is invalid if the requirements for patent drafting are not met. See 35 U.S.C. § 112. A patent contains not only claims, but also a specification. The specification of the patent describes the invention in detail. The specification needs to enable one skilled in the art to practice the claimed invention without undue experimentation. The idea is that the government grants an exclusive right to use the invention for a given period in exchange for a disclosure to the public how to use it. Just what that means for a particular invention can be highly contested.
No proper written description
To be valid, the patent must also set out a written description of the invention in enough detail so one skilled in the art can reasonably conclude the inventor possessed the invention at the time the patent application was filed. See 35 U.S.C. § 112. This is easy to confuse with the enablement requirement, although it is separate.
On-sale bar
Inventors can’t wait too long to apply for a patent. If the invention sought to be patented was offered for sale or sold more than one year before the patent application was filed, it can’t be patented. 35 U.S.C. § 102. Thus, if it is found the defendant filed for its patent too late, the patent will be found invalid. This is known as the “on-sale bar.”
Unenforceable patent
A patent can be found unenforceable if the inventor intentionally misled the Patent Office during the process of obtaining the patent. This is colloquially referred to as “fraud on the Patent Office." But it is now generally referred to as “inequitable conduct.” Because examination of a patent is done ex parte between the patent office and the inventor, the inventor owes a duty of candor when seeking a patent. Failing to reveal, for example, known prior art that could invalidate the patent can render the patent unenforceable.
Skilled counsel can often find much to argue about regarding this defense because it can be successful only if the accused infringer can prove the inventor intended to mislead the Patent Office.
But wait; there’s more
An accused infringer may not only assert invalidity defenses in court. It may also attack the validity of a patent asserted against it at the Patent Office in an administrative proceeding.
One of these is known as re-exam. There the accused infringer is entitled to bring prior art – that is other inventions, products, or processes to the attention of the Patent Office and say, “Have another look at this claimed invention. It isn’t novel based on this prior art I’m now showing and explaining to you.” A re-exam is done on paper. A re-exam may not be cheap, but it is a lot cheaper than a full federal court jury trial. Often, courts will stay the case until the Patent Office decides the re-exam. If the asserted claims of the patent are found invalid, they can’t be infringed.
A newer procedure, which has become quite popular, is an inter partes review. These are filed with the Patent Trial and Appeal Board. If a party can convince the Board that there is a reasonable likelihood that the petitioner would prevail with respect to at least one patent claim challenged as anticipated or obvious, the Board hears the case, with input from the patent owner and challenger, an decides whether the challenged patent claims are valid. The process is to be completed within one year. This provides a more robust hearing regarding validity of the patent than re-exam.
The process isn’t cheap, but it is cheaper than a federal jury trial. And many patent lawyers like making technical and legal arguments to specialized hearing officers rather than to courts and juries. Courts often will stay cases until the Patent Office review is completed. And if the asserted patent claims are invalidated, there is nothing to try. Remember, you can’t infringe an invalid patent.
The interplay between Patent Office review strategies and trial strategies can get quite complex, as you can imagine. For example, inter partes review determinations can have a preclusive effect on court proceedings. This includes arguments that could reasonably have been raised in the inter partes proceedings but were not. Determining what could and could not reasonably have been raised can be an interesting inquiry.
Combined claims and counterclaims
Of course, parties’ disputes are not limited to patent issues. An accused infringer may assert patents it owns against the party initiating a patent suit. Many companies build up large portfolios of patents for this very purpose.
Some cases combine an employee leaving the patent owner’s employ and going to work for the accused infringer, perhaps also bringing with him or her trade secrets of the patent owners. Or maybe the accused infringer is accused of infringing the patent owner’s software patent and also of copying some code, earning itself a claim for copyright infringement. Maybe the accused infringer is accused of not only copying a device, thereby infringing a patent, but also of taking the name, thereby infringing a trademark.
The permutations are almost endless.
Contract claims
Some patent-based claims are less complex than a typical infringement claim. As noted above, patents can be rented, that is licensed. Sometimes, the licensee doesn’t pay. That could be because the payments ruin their profits. Sometimes licensees come out with new products that they don’t think are covered by the license or by the claims of the licensed patents – depending on how the license is written – and so they don't pay royalties on those. The licensor may think they should.
Or a licensee may decide the patents it licensed are invalid. The Supreme Court has said a licensee can avoid paying royalties on invalid patents. See Lear v. Atkins, Lear, Inc. v. Adkins, 395 U.S. 653 (1969). But under more recent law, if a license is taken in settlement of a case, things get more complex. Flex Foot Inc. v. CRP Inc., 238 F.3d 1362, 57 USPQ2d 1635 (Fed. Cir. 2001)(No-challenge to validity clause in license upheld in settlement agreement where the defendant had chance to review validity issues during discovery and on motions).
Things can get fraught pretty fast in a licensing dispute if the licensee stops paying. Often that gives the licensor grounds to terminate the license. That may render the former licensee a patent infringer. If the licensor can make out a good case for lost profits on lost sales, it may stand to gain more than license fees allegedly owed and maybe enhanced damages for willful infringement.
License disputes may be subject to arbitration. It is common for parties to insert arbitration clauses in their licenses to get a quicker and cheaper resolution of issues that may arise under the license. But things can be decided even faster and cheaper if they can work something out in mediation, of course.
Don’t forget about emotions
You might think since patents involve industry, science, and a careful application of law to technical subject matter, patent disputes would be scientific and detached. But in many – if not most – cases you would be wrong. Patent disputes are often highly emotional.
Inventors may, understandably, have strong feelings about their inventions. They may have spent long hours and risked everything to develop their products or processes, and their patented invention may have been critical to their success. Now, they may think, someone is stealing their life’s work and trying to profit from their efforts.
Or the party accused of infringement may just see the patent owner as a “troll.” There are, in fact, companies that do no manufacturing or product development, but instead buy up patents for the purpose of demanding money from companies, usually from licensing. Even companies that do make and sell products can be seen by accused infringers as patent trolls,” demanding payment for use of their inventions. Accused infringers often think they are victims of legal shakedown.
There may be the former employee or business partner who leaves to start a competing business or goes to work for a competitor with products that seem a lot like those of the patent owner. There likely was plenty of ill will that led to the “defection” by the former employee or business partner. That will keep playing out in the patent dispute.
And patent litigation is expensive. Very expensive. So, just being sued for infringement -- or having to sue to enforce perceived patent rights – may lead to strong feelings on both sides.
Jury trials
The parties are generally entitled to trial by jury in a patent case. Thus, the complicated law and technology involved in a patent case are determined by a lay jury. Success by either party depends in large part on the ability to explain technology to people who are not used to dealing with technology or law. Thus, Patent trials often tend to look more like morality plays than objective scientific and legal inquiry, although trial judges do what they can to confine the dispute to the facts and the law.
What all this means for mediation
With some general feeling for the nature of common patent disputes, let’s begin to look at how this affects mediation of those disputes.
Who should mediate?
Let’s start with what the nature of patent disputes tells us about who should mediate the dispute.
You might suppose that what you want is the smartest patent lawyer you can find to help the parties understand who’s right and who’s wrong. This is science, after all. Once the parties are told who is likely to win the case, they can settle it.
But that normally isn’t how it works. As discussed above, patent disputes often involve heightened emotions. Dispassionate analysis of patent claims doesn’t even begin to address that. And a jury trial is usually in the offing, meaning a morality play is also likely to be presented with parties working to “black hat” each other.
So, perhaps you would be better off with a mediator who is good at dealing with emotions. No patent background is really needed to deal with emotions, right?
That’s probably wrong, too. If part of the mediator’s job is to help the parties understand their alternatives and the value of their claims and defenses so they can make a good decision on settlement, simply dealing with emotions won’t do it.
In my experience, the parties expect the mediator to understand the whole patent landscape, including infringement and invalidity issue, patent office procedures and review, and all the rest of it. It’s hard for a mediator to understand the parties' positions if he or she doesn't understand what they are talking about. And they won’t be interested in the mediator’s help if the mediator doesn’t seem to understand what they are saying.
Experience with how patent issues play out to juries is also useful. After all, evaluating the value of a case rests on what a jury is likely to do with it.
So, where does all this leave the parties? Hopefully, with a mediator who is familiar with patent law, issues, and background, and also the practicalities of patent trials, reviews, and appeals. But they also need a mediator who has developed skill and experience in the mediation process. That sort of mediator is likely to have a good idea of what works to help people understand each other, to seek creative ways to resolve the dispute, and to know how to help the parties evaluate their positions, risks, and options.
More on all that later.