Mediating Patent Disputes: Getting Ready to Mediate

In earlier articles in this series, we discussed the general nature of patent disputes, who you should choose to mediate those disputes, and when you should mediate them. Today, we are going to consider how to best prepare to mediate the dispute.

Patent cases provide a rich stew of technical, business, and often emotional issues for which counsel need to prepare. Let’s consider some of them.

Technical Issues

In most patent cases, the parties have addressed technical issues early in the case.  Heightened pleading standards require early consideration of the claims alleged to be infringed and the devices or processes that are said to infringe.  Most jurisdictions require early provision of claims charts and responses to infringement contentions as well as invalidity contentions and identification of invalidating prior art.

There may also have been dispositive motion practice, including patent eligibility, infringement, and validity issues.  This can provide plenty of background to share with the mediator to allow him or her to become conversant with the technical issues.

But this can get to be too much.  You are probably best off providing this information, but using your pre-mediation letter and submissions to focus on your best claims and defenses.

In some cases, the mediation will not take place until the parties have completed expert reports.  These can be useful, but often they tend to cancel each other out.  It is probably more important that counsel provide a concise explanation of the technical matters in the case.  In cases ready for early mediation (which should be most of them, if approached right), you may well be able to mediate before spending a small fortune on expert reports.

Of course, these days many patent disputes end up back at the patent office with a post-grant review or inter partes proceeding attacking the validity of the patent or patents involved in the case.  If not pending, they are probably being threatened.  These will also need to be analyzed and understood by all.

Business Issues

I have come to believe there are very few legal problems.  Instead, there are business problems with legal aspects to them.  Fortunately, this provides many avenues for creative parties to explore in trying to resolve the case.

First, however, the parties will need to get some idea of the value of the case.  That is, if there is infringement, what are the damages likely to be?  These days, most cases will involve payment of a “reasonable royalty” on sales of infringing products or processes. The first order of business is, of course, to determine what has been sold. Then you must determine what portion of what was sold is royalty bearing.  It could be all of it or just some of it.  And, of course, you must determine what the royalty rate is.  

The parties may already have discovery regarding sales.  If not, the parties may be able to agree on early exchange of sales information to move the mediation process along.  After all, all parties need to have an idea of the possible range of damages to intelligently analyze the dispute.

Royalty information can be found in many sources, including other cases with comparable products or processes, as well as a wealth of sources for rates in the industry.  This can be a complex subject, but you should be able to get a good estimate of the likely range of royalties.  

If the case involves claims of lost profits, you will need to delve into the number of sales a party would have made but for the infringement and the likely amount and the profit margins.  Information on that may be available from public reports on public companies. The plaintiff will know its profit margins, although it will need to consider whether it should assert incremental profit margins as opposed to more traditional margins.

The parties likely won’t have exact numbers on all the above until discovery closes.   But they will be able to get a good sense of this all before the mediation.

Non-damages issues must also be considered.  Plaintiffs usually seek an injunction.  How would an injunction affect things for the accused infringer?  Can it simply design around the patent? If not, can the plaintiff make out the test for imposing a permanent injunction?   If so, the risk to the accused infringer is much greater, depending on how the accused products fit into is business.

Business provides other possibilities

Considering unique business issues may help forge a settlement.   For example, companies have simply acquired the accused infringer — or vice versa — to resolve patent disputes.  Perhaps the defendant has patents to which the plaintiff would like a license.  Maybe they can make a deal on a cross-license.  Perhaps the defendant has a sales network the plaintiff wants to access with some of its products. If so, a business deal that benefits both parties in some way while resolving the dispute may be available.

Of course, sometimes the parties have come to mistrust and vilify each other so much that the only goal is to move on with no further relationship other than a payment and ceasing infringement.  If so, a continuing business deal might not be in the cards.  And yet, a mediation might help straighten out misperceptions about the other side and its activities.   That may lead to a better relationship between the parties that can result in a deal.

In some cases, the accused infringer may not have resources to pay a big damages judgment. And it may be that neither party has the resources to continue expensive litigation.  This should lead to a settlement.

In some cases, the parties might consider agreeing to arbitrate the case to get an informed, objective decision on the key issues in dispute.  As I’ve said in my book, Arbitrating Patent Disputes, A Practical Guide (ABA Publications), jury trials of complex patent issues tend to turn into morality plays. The inventor may be portrayed as innovative hero or maybe a “patent troll.” The accused infringer may be portrayed as a thief of ideas, or perhaps a victim of a conniving troll.  And jury trials are expensive. 

Many parties would prefer to just resolve the technical issues without all the drama and move on with business.  Arbitration could provide a less expensive way to do that.

Structuring the resolution

Every settlement has a structure.  Understanding the structure the parties can live with will drive the direction of negotiations during the mediation.

In patent cases, the simplest structure mimics what would happen after a trial: stopping the alleged infringement and paying damages for past sales. Of course, the plaintiff must normally be willing to take a discount from claimed damages to settle the case.  But, as noted above, parties can be much creative than that in a settlement. 

Maybe the defendant sees a risk of an infringement finding and believes it can design around the patent.  The parties might then be willing to agree to a design that would not infringe. And for saving litigation expenses and avoiding the risk of loss — including a possibility its patent could be found invalid — a plaintiff might be willing to take a more modest payment for past infringement.

As noted, a license or cross license might be in the cards.  If so, the parties will want to be familiar with the particulars of the patents and products involved in the licenses.  Attention must be paid to the patents involved in the dispute as well as pending or future patents in the family to be able to understand the licenses and how they will operate in the future.  Foreign patents may also be involved.  Some settlements are global.

And a word of practical advice: have all the patent numbers and identifying information at hand for all patents, applications, products, and devices at issue.  When you reach a deal, you will want to document as much of it as you can on the spot.  This will include patent and patent application numbers and product identification numbers and names. You will want to have an outline of a draft license to draw on if that structure seems likely.

As noted above, other structures might also work. This might involve a sale of a product line, use of a parties’ sales network to increase access to customers, or other creative solutions. Outcomes that a court could never order are possible in mediation.  

Analyzing the risks

Armed with the above considerations, the parties aren’t done yet.  They need to also consider what we often call their Worst Alternative to a Negotiated Agreement (“WATNA”) and Best Alternative to a Negotiated Agreement (“BATNA”).  The worst is losing at trial. The best is winning. Of course there are costs and risks associated with each.  The actual outcome is almost always somewhere in between. This all needs to be evaluated as objectively as possible.  Simply put, consider this simple question:  “If we don’t settle at mediation, then what?” Parties may decide a settlement they don’t like very well is still better than the alternatives.

With all that in mind the parties will be in a position to intelligently analyze the other side’s offers and best respond to them during the mediation.  

Managing emotions:  who should attend the mediation session?

Surprisingly, emotions often play a big part in the mediation.  One or both parties are often upset about someone “stealing” the work that they may have spent years developing, or being accused of stealing someone’s work when they think they are engaged in fair competition.  Your mediation will go well if you recognize this and prepare for it. One of the key issues there is determining who will attend for your side.

In some ways, the person or people that should represent your client at the mediation isn’t all up to the parties.  Most courts and mediators require that the folks attending for your side must have sufficient authority to settle the case.  Be sure you do that, or the mediation will falter early, and you will be in trouble with the court.

But there are other considerations.  Ideally, your party representative will be an experienced negotiator who understands the dynamics of a mediation. If you are serious about settling the case, you need someone who can present information well, and more importantly, listen and analyze information from the other side to find a way to solve a business problem. 

Importantly, you will need someone who has time to collaborate with counsel to understand the factual and legal issues in the case and analyze the business issues involved. Successfully reaching a settlement depends as much or more on the work of the business folks as the lawyers.  After all, it’s their business and their dispute.

In many cases, you will also want to include technical folks from the company who can help your side understand the other sides’ technical contentions and analyze possible proposals.  I have seen mediations falter when part of a resolution involved evaluating technical proposals of what a party would or wouldn’t be entitled to do.  But the technical people who could understand the ramifications weren’t there to consult, so a settlement couldn’t be reached – at least that night. 

Similarly, access to financial professionals may be required to analyze damages claims and proposed royalty amounts for licenses or similar issues that might arise.  

And, you may even want to have access to antitrust professionals if questions of competitive effects of cross licenses arise. 

Positioning

Mediations generally start with the parties working with the mediator to understand and evaluate the other side’s position.  This often leads to re-evaluation of parties’ positions and deeper understanding of the risks and possible rewards of proceeding with the case. 

At some point, though, the mediation usually become an exercise in positional bargaining.  One side starts high, the other starts low, and on it goes. 

Opening positions affect the bargaining dance.  So, you will want to spend some time on where you start and the message that sends. Often, your opening offer will be revealed in the pre-mediation submissions — many arbitrators require that. 

If you are interested in settling the case, you will want to make an opening offer that reflects the strength of the case, but also recognizes that you need to make concessions to settle a case.  But you will, of course, need to give yourself room to move during the mediation. Start too high, and you may doom the mediation to a standoff, with the other side protesting you aren’t taking a reasonable settlement seriously. Start too low and you will run out of room to compromise as the day goes on.  Give this some serious thought with your mediation team before the mediation.

The opening session

You will want to prepare for the opening session. At one time, the parties were often called on to present their positions to the other side.  The idea was that hearing the other side’s position presented in in its best light would lead a party to reevaluate its position.  This in turn could lead to a settlement.  In many cases, though, the parties’ positions were presented in an adversarial way that hardened each parties’ position. 

So, the joint session with presentations is relatively rare these days,  Still, the parties will need to know what is expected and plan for it.   

Take Away

Getting ready a mediation session in a patent dispute is different than getting ready for trial. But it is no less important.  To make your mediation a success, you will need to master the technical and legal issues as well as the business issues and emotional issues involved in the dispute.  You need to involve your client on the team as you explore all aspects of a possible resolution of the dispute.  And you need to be able to identify and take advantage of creative solutions that are available only in mediation.