Patent Arbitration Part XXVI: Why Not Just Go for USPTO Review?

Post-grant review and Inter Partes Review now offer efficient ways to challenge a patent subject to such review. In a sort of administrative trial, the Patent Office will re-evaluate whether the patent is valid based on prior art and other issues often invoked to attack the validity of patents. The process is relatively quick and, because it is focused, it is likely to be much less expensive than litigation. So why would anyone opt for patent arbitration when these new tools are available?

Some commentators have argued you wouldn’t. But this position overlooks a number of things including: context, efficiency, flexibility, and privacy.

Context

The context in which the decision to arbitrate is made is critical. As noted in earlier articles in this series, patent arbitration generally won’t take place absent an arbitration clause in the parties’ contract. This could be a license, employment contract, development agreement, or the like. Generally, once a dispute has developed, one or the other of the parties is likely not to see the advantage to them of arbitration. Or a party decides that, if their opponent wants to arbitrate, they don’t. (I could devote a whole article to why this deserves more thought, but that is for another day.)

So the decision to provide for patent arbitration is typically made at the beginning of the contractual relationship. And both parties have to agree to it. So, in that context, it could be that the parties would see that arbitration makes a great deal of sense.

A licensor, for example, is not likely to see any benefit to further review of its patent in the Patent Office, but is looking for an efficient way to resolve licensing disputes. The licensee may well not have any reason to think the patent is invalid. After all, it likely did some due diligence before agreeing to license the patent in the first place and concluded it was valid. And, of course, patent issues that arise in an employment or development context often involve issues of ownership rather than validity. Those issues won’t be determined in review proceedings at the Patent Office except in the unlikely event of a derivation dispute that can be addressed under 35 U.S.C. § 135.

If patent validity is at the core of the dispute, then post-grant review or inter partes review at the Patent Office would ne of interest. If not, such review likely will have nothing to do with the resolving the disputes the parties are likely to have.

Efficiency

While Patent Office review might fully resolve the parties’ issues only in some limited circumstances, arbitration always will resolve them. In a typical licensing dispute, for example, the parties want an answer as soon as possible, so they can plan their business activities. If a product is subject to a royalty provision, that could well affect its pricing or even the amount of resources a company will put into its sales and promotion. If not, a different business calculation will apply. It won’t work well to find out only after a few years of sales whether the royalty applies.

Similarly, if there is a dispute with an employee or a development partner about ownership of patent rights, the parties will want that determined sooner rather than later to know where they stand. It is unlikely, except in a derivation dispute, that the Patent Office could do anything to resolve the issue.

An arbitration provision in the parties’ contract, if correctly drawn, could provide arbitration as a forum for resolving all disputes between the parties arising from their contract. No separate trip to the Patent Office is needed. No federal case needs to be filed. The parties just exchange necessary information, a hearing is held, and a decision rendered.

Of course, a licensee could still raise the defense of invalidity in the arbitration. But that too would be decided by the arbitrator rather than in a separate proceeding in the Patent Office.

Flexibility

I suppose a licensee’s counsel could be particularly enamored of post-grant review given the “broadest reasonable interpretation” standard for construing claims to be reviewed at the Patent Office. This broader standard makes it more likely prior art will invalidate the patent. But it seems unlikely that would be such a key consideration in a licensing situation that a party would actually forego the benefits of arbitration and opt for Patent Office review that could then be followed by a court proceeding if the Patent Office review didn’t turn out as hoped. The whole thing could take years.

A party may also be reluctant to assign a validity determination to a single arbitrator, preferring the review procedures available at the Patent Office. But that comes with a fairly heavy price tag in the form of time needed for the appeal and decision and the expense of taking an appeal. A good compromise might be to provide for a panel of arbitrators for disputes involving a key patent or providing for arbitral appeal. (See my last article in this series for more on that.)

You could even agree that a panel or appeal would only be available for disputes involving more than a stated amount, say $1 million. That would help assure the cost of resolution doesn’t overwhelm the amount at stake.

Privacy

Post grant and inter partes review is not a private process. Arbitration, by contrast, is private. Arbitrators are duty bound to keep the arbitration confidential. The parties aren’t necessarily so bound, but can agree to confidentiality. It is often to neither party’s advantage to have the facts and circumstances of their private contractual disagreement public. And arbitration allows the parties to keep it private. Review by a government agency does not.

Just as in litigation, almost all patent arbitrations include strict confidentiality orders to protect the parties’ confidential information. Because the proceedings are private and not in a public institution there is no weighing of the public’s right to know about the workings of a government institution against the sensitivity of the information. Because the public has no right to know about a private dispute in arbitration, the parties can agree to significant privacy protection.

But there is one caveat to all this in arbitration involving patents. The federal statute providing for patent arbitration states that the award is to be provided to the Director of the Patent Office. 35 U.S.C. §294(d). The award is not enforceable until the Director receives it. Section 294(e). The arbitrator’s decision is, however, binding only upon the parties to the arbitration. Section 294(c). Of course, how much information this actually provides to the public will depend on the form and detail of the award and the issues involved. The parties can control the form of award. And, of course, the underlying documents that reveal technical and financial specifics likely won’t be part of the award.

In short, don’t count on post-grant and inter partes review to solve patent issues that may arise under your contract. Review before the Patent Office may be attractive in cases eligible for it to a party trying to invalidate a patent. But, in most cases that review can’t be counted on to solve the parties’ full dispute. After all, possible invalidity of the patent may be only part of the dispute  or may not even be involved. Arbitration provides a means to fully resolve the dispute and offers enough flexibility to do so efficiently, effectively, and privately.