Peter L. Michaelson, Esq., F.C.I. Arb

***P. L. Michaelson presentation script-

first session

APAA, Fukuoka, Japan 10/25/04***

Peter L. Michaelson, Esq., F.C.I. Arb.

ASIAN PATENT ATTORNEYS' ASSOCIATION

-- 50TH Council Meeting

IP ADR WORKSHOP PRESENTATION OCTOBER 25, 2004

AT FUKUOKA, JAPAN

Complete Presentation Script

-- First Session: IP ADR in the US --

Note: refer to my accompanying PowerPoint slides

***show slide 1 --- title ***

I am absolutely delighted and privileged to speak before you today. I am deeply honored to have been invited by Mr. Kwong of the APAA to do so. Thank you very much.

***show slide 2 --- PLM credential***

These are my abbreviated credentials. Aside from being a patent attorney for some 25 years now, during last 13 years or so, I mediated and arbitrated patent and technology cases both within the US and internationally -- with quite a few of them being high-stakes, high-risk cases involving hundreds of millions of US dollars.

For example, I have successfully co-mediated a $ 600 Million international patent dispute involving jet aircraft for the WIPO Arbitration and Mediation Center which, to date, is the largest dispute ever handled by the Center. I also arbitrated, under the auspices of CPR and as a member of a 3-person panel, a $ 400-800 Million US patent dispute involving coronary stents. I am presently mediating for the USDC EDNY a Hatch-Waxman patent dispute between a large US pharmaceutical manufacturer and two generic drug manufacturers involving a pharmaceutical drug having annual sales of $ 250 Million.

Well, why am I here?

It is not to make you an expert in IP ADR, which would take years and I only have 15 minutes this afternoon. Rather, my intent is to acquaint you with the dispute resolution processes now typically used in the US for resolving IP disputes.

A. General comments on Patent ADR

In recent years, mediation, arbitration and other ADR techniques have increasingly been used to resolve IP disputes in the US. This is particularly true in the area of patent disputes -- to which I will direct my comments -- as there the contrasts between litigation and ADR are the sharpest.

Why the increased use of ADR? As I see things, there are three basic simultaneously-occurring factors in the US:

(a) First, since the early-mid 1990's, all Federal District Courts are under statutory mandate to institute ADR programs, though each district can develop its own program to meet its particular needs. Most district court programs rely on court-annexed mediation. Some programs are welldeveloped and administered through a separate ADR coordinator; others are more informal.

(b) Second, Federal trial judges recognize that they do not have the time and/or subject matter, specifically technical and legal, expertise to handle complex patent/technical disputes and, as such, increasingly refer them to ADR and to neutrals having the expertise.

(c) Third, significant economic pressures now exist within corporate entities, large and small, to sharply reduce all costs, particularly including legal costs. The US technical community, notably in the electronics, networking and telecommunications sectors, has been hard hit by the immediately past recession and, as such, has experienced significant down-sizing. Litigation costs are a significant component of most legal budgets, with General Counsels under mandates to sharply reduce these expenses. ADR does this.

Now for some figures.

According to the Administrative Office of the US Courts, over the past 10 years, approximately 250,000 civil cases have been annually filed, on the average, throughout all the US District Courts with the number of patent cases increasing from 1450 in 1993 to about 2800 in 2003. Patent cases now constitute approximately 1% of total civil case filings -- a small number indeed, but the damage awards can be huge.

****show slide 3 -- Recent Patent Verdicts***

$ 520,600,000 -- Eolas Technologies v. Microsoft

(8/11/03)

This is a big number. It grabs your attention.

I have listed the largest patent verdicts over the past three years, two of which occurred about a year ago. Of course, the largest patent verdict was $873,000,000 – Polaroid v. Kodak back in 1991. This award was coupled with an injunction that caused Kodak to completely shut its instant photography film plants and exit the market for instant photography.

As you can see, US patent verdicts often and regularly run into the hundreds of millions of dollars. Patent disputes are clearly high stakes matters.

The second number shown in the table, $ 425 Million, is an arbitration award in one of the stent arbitrations -- very similar to the one I handled, though in my case, the parties settled 10 days before the Panel was scheduled to issue its bald award.

B. Characteristics of Patent Litigation

Now, let us consider some basic characteristics of US patent litigation -- which are undoubtedly familiar to those of you that have had the unfortunate experience to have been involved with such litigation.

***show Characteristics of Pat Lit slide -- slide 4***

First, as we have seen, patent litigation is clearly high stakes. Certainly not every case is a high-stakes one, but a good many of them are.

The legal fees involved in a typical patent case are huge. US litigating law forms generally estimate their fees in the range of $1.5-2.5 M/patent/side. Often, if one side asserts some patents against another side, the latter side retaliates by asserting some of its patents against the former. Just total up all the patents in suit and multiply by $ 1.5-2.5 Million and the resulting sum is a rough estimate what each side pays in legal fees. The sum gets very large, very quickly. Even still this sum, as large as it can be, is still often dwarfed, by an order of magnitude or two, by the damages at stake. Expensive indeed!

Patent litigation is very time consuming, with case lifetimes measured in years: now 3-5+ years from start to finish is not uncommon. One Federal judge in NJ, for whom I mediate cases, told me a few weeks ago that she has a Hatch-Waxman pharmaceutical patent dispute that has gone on for 3 years and it still hasn't reached trial.

Patent cases are extraordinarily complex. They often necessitate making extremely fine, linguistic distinctions involving the patent specification, its file history and the prior art for purposes of assessing claim validity and infringement (both literal and via equivalence), and properly construing the claims.

Factual decision-makers, particularly if a jury is used, lack requisite technical knowledge to fully understand the technical subject matter involved, including its various nuances, and make accurate, informed decisions. It is even a very rare Federal judge who has a technical background.

Discovery under the Fed Rules of Civil Procedure and the Federal Rules of Evidence in patent cases is protracted, highly intrusive and disruptive. Patent litigants are obsessed with uncovering every possible document (frequently on a "scorched earth" basis) that might have some bearing on the validity, meaning and infringement of the patent in suit. This is one basic reason (not the only one by any means) that foreign disputants deplore US patent litigation. Why is this overbearing discovery done? Simply economics: the damages at stake are huge.

Patent trials are public and, owing to the money/reputations of the disputants and counsel involved, these trials attract significant media attention -- often to the consternation of the alleged infringer.

Like most litigation particularly that which extends out in time, patent litigation polarizes and wears down the disputants and generally destroys any ongoing business relationships as well as any hope for potential future relationships.

Lastly, as to damages, civil litigation in general, of which patent litigation is no exception, is a distributional "zero-sum" exercise. In the patent arena, the Court, in a liability phase, measures the total liability, whether, e.g., by a reasonable royalty or lost profits, and awards whatever portion of it the Court deems appropriate under the circumstances. Though attorneys' fees and treble damages may be awarded, such awards are only limited to instances where infringement is found to be egregious, i.e. "willful". In the absence of such a finding -- which Courts are rather reluctant to make, both sides bear their own fees and costs: which, as noted, are inordinate. Furthermore, even if one gets an award of attorneys' fees and costs in a large patent case, the potential exists that the resulting damage award may be so large as to bankrupt the infringer, hence precluding any real recovery for the patent owner.

What's the end result of all of this? It's simple: all the disputants involved are usually very dissatisfied with the results. Just ask the general counsel of any large corporation that just went through it. You're likely to get an earful -- and it won't be pleasant.

C. Comparison of Patent Mediation/Arbitration/Litigation

Now, I'll address and contrast a few basic factors that underlie patent mediation, arbitration and litigation. Though these factors are set out in a patent context, many of them could equally apply to the resolution of any complex technical dispute in the US.

***show slide 5, then click for "Fundamental Goal" entry***

First, we must not lose sight of the basic goal of mediation: empowering disputants, through joint problem-solving, to find a business solution, and not just any business solution but one that mutually meets their interests and needs. In short, mediation is about finding a business "deal".

This starkly differs from the purpose of arbitration and litigation: to find the truth. In both arbitration and litigation, an independent decision-maker undertakes requisite and often extensive fact finding, then chooses between conflicting legal positions with the chosen position being transformed into legal rights. One side wins; the other side loses. Mediation involves none of this.

Ultimately, if a commercial dispute is to settle -- and in general now over 98% of all Federal civil litigation settles prior to trial, it does so because the parties reached a business deal. A deal which meets their interests. That's it. It's no more complicated than that. This is the goal of mediation: to reach a deal -- quickly, directly and economically.

Now, this is not to say that information exchanged and discussed at a mediation should not completely and absolutely truthful and accurate; it clearly needs to be. However, since mediation, by its very nature, is not a fact-finding task, the sheer volume of information which each side needs is substantially, and I stress the word "substantially", less than that needed in an arbitration and particularly a litigation. What is needed in a mediation? Enough fundamental information that is directly material to the dispute so that the business persons of each side can properly assess the business risk both sides face away from the table (i.e. what are their "best" and "worst" alternatives to a negotiated agreement, along with the corresponding probabilities). Mediation does not require an adversarial relationship of opposing counsel and the disputants -- actually such a relationship would very likely frustrate the mediation, but rather a cooperative, clientdriven joint problem-solving approach. The latter is a significantly different role than that in which most US litigation counsel serve and are accustomed.

To me, all the other differences between, on the one hand, mediation and, on the other, arbitration and litigation are rooted in this fundamental difference between the goal of mediation and that of arbitration and litigation: a noncontentious joint problemsolving approach directed at satisfying business interests contrasted with contentious approaches aimed at uncovering truth.

***show slide 5, click for "Transaction Cost" entry***

A patent mediation is the least costly ADR technique of the three. Patent mediations, at least those that I have conducted, cost less than 5% of the expected cost of a complex patent litigation, and often less than about 1-2%. Mediation generally carries an 80% success rate across all substantive areas, patent disputes are no exception (though court-annexed mediations carry a lower success rate). And even where a settlement is not reached at a mediation session, often it occurs a few weeks later based on the information each side learns at the session.

Arbitration carries a moderate price tag; while, as I discussed earlier, patent litigation costs are inordinate -- just inordinate.

Now, to put things starkly, if your client was faced with expected transaction costs in the millions or tens of millions of dollars, it just makes simple sense to try mediation. The client has an 80% chance of settling the dispute in a way that meets its interests, far better than a court can ever award and at a savings of generally at least 95% of the cost of a litigation. Further, if the mediation fails, the client simply goes back to where it started other than having spent a relatively small amount of money (well below the "noise level") for the mediator, but most importantly with added information about it and its adversary's interests and risks away from the table -- business information it would not likely obtain through discovery.

***show slide 6, Party Autonomy ***

ADR is a creature of contract, i.e. it is consensual, the disputants own an ADR process; they fully control a mediation and an arbitration. They choose their own neutrals, rule set, governing law, venue, site, language; and are free to change these as needed by mutual agreement.

In sharp contrast, once a complaint is filed, the parties essentially lose all control over a litigation as control is ceded to a judge and the litigation takes on a "life of its own". US litigation is governed by inflexible, though very broad, "one size fits all" Court rules: the Federal Rules of Civil Procedure and Federal Rules of Evidence. The presiding judge is often randomly selected with absolutely no input whatsoever from the parties.

***show slide 7, then click for "Speed of Process" entry***

Patent mediations are relatively fast: usually just a few months from start to finish, with the mediation session itself lasting a few days. The mediator will normally require a decent amount of study time as well as time in advance of the session to separately work with each party and consider its submissions, e.g. mediation statements, etc.

Arbitration requires a longer period of time to complete: typically measured in months. Depending on the complexity of the process chosen, e.g., whether a Markman Hearing will be held or not, and the nature, extent and number of the submissions of the parties, the time period can be anywhere from a few months to typically a year or so.

Litigations are slow, very slow. A litigation can last for years (3-5+ as I have noted), particularly if the trial decision is appealed. Take heart, this period is shorter than in the past where patent litigators could make a career out of a single case.

***show slide 7, then click for "Result" entry***

In the US, mediation, as I have said, is successful approximately 80% of the time across all substantive areas. If anything, given the multiplicity and breadth of all the disputants' interests, many of which are shared -- as contrasted in much civil litigation which often is narrowly focused on a simple distributional result, the settlement rate, for nonCourt annexed patent mediations may well exceed 80% making mediation an even better choice for patent disputes. For various reasons, court-annexed mediations carry a lower success rate.

In contrast, arbitration and litigation simply impose a distributional result decided by the decision-maker. This result is often a monetary payment and might also entail an injunction to cease infringement -- which is the extent of which a Court or an arbitration panel can award; but which usually falls far short of meeting the interests of the parties.

***show slide 7, then click for "Appeal" entry***

Appeals are not applicable in a mediation. Either a mediation succeeds and results in a signed settlement agreement or it fails (impasse occurs or one side just terminates the process). If it fails, the parties' just return to their pre-mediation status quo. You might think that, in the US, a party to a failed mediation runs the a risk of having exposed its litigation strategy. Not true. Modern US discovery and procedural rules effectively eliminate any "surprises". Consequently, any advantage that may inure to one side from "prematurely" learning the litigation strategy of the other side is very short-lived indeed; hence, the ensuing risk to the "disclosing" side is really rather low.

An arbitration award is final, binding and nonappealable. However, some rules sets, such as CPR and I believe AAA, provide for an appeal process, but the parties must expressly and contractually agree to it, such as in their ADR provision or through a later agreement. Absent an appeal process, as we will soon see, the grounds to vacate an arbitration award under the Federal Arbitration Act are very limited, with Federal Courts being very reluctant to vacate arbitration awards. The lack of an effective appeal process, particularly to remediate the risk of a "knucklehead" award, is a main factor (though clearly not the only one) that, to this date, has greatly inhibited the use of patent-related arbitration.