Early Mediation of Intellectual Property Disputes: The Strategic Proposition

The peculiarities of different types of intellectual property disputes – patents, trademarks, copyrights and trade secrets – are often cited as reasons to defer settlement efforts. Patent cases are likened to a game of Chutes and Ladders, with multiple spots where a case can fail or proceed. Trade secrets often involve bitter accusations of theft, and trademark and copyright disputes frequently involve dense factual exploration as to how close is too close.

Yet, there is hope – indeed compelling reasons to mediate early on. Based upon work as an IP litigator, a general counsel managing all forms of IP disputes, and two decades mediating these matters, let me share a few countervailing thoughts as to when to start mediating IP disputes.

Patent: Patent owner plaintiffs face many hurdles pursuing alleged infringers, and the success rate on early dispositive rulings has significantly declined in the past few years, indicating that patent disputes are likely to last much longer and divert even more time and resources.

As one example, RPX Corp. recently reported on the success of Section 101 Alice motions¹ to challenge patent eligibility following the Federal Circuit’s 2018 decisions in Berkheimer v. HP, Inc., 881 F. 3d 1360, and Aatrix Software v. Green Shades Software, Inc., 882 F. 3d 1121. In the eighteen months since Berkheimer, the success rate on Alice motions to dismiss dropped from 70% to 45%, and similar summary judgment motions prevailed only 40% of the time (down from 59%). https://www.rpxcorp.com/intelligence/blog/q2-in-review-alice-reined-in-as-invalidation-rate-drops-while-patent-litigation-picks-up/ See also, MyMail, Ltd. v. ooVoo, LLC (Fed Cir. 8/16/19; 2018-1758)(reversing patent ineligibility ruling prior to district court’s claim construction).

Also noteworthy is the declining success rate of IPR proceedings. While over 70% of challenged patents were canceled during the first two years of the Patent Trademark and Appeal Board (PTAB)’s existence (counting IPR, covered business method challenges and post-grant reviews), that percentage has been cut in half by 2015. Apparently, much of the low-hanging fruit has already been picked.

Lower success rates on IPR and Alicechallenges coincide with a sharp uptick in direct spending per IP lawsuit, as reflected in a 2019 report by Morrison & Foerster and BTI Consulting Group measuring the volume and cost of IP litigation matters (not just patent cases, by the way) faced by 53 companies with at least $750 million in revenue. https://www.mofo.com/resources/press-releases/190807-mofo-study-ip-litigation.html

The suggestion here is to concurrently consider IPRs, §101 motions and other traditional litigation steps with early mediation efforts. Parties may indeed leverage these litigation tools and their uncertainty to resolve cases faster and under terms that the parties choose — rather than what a judge or jury may otherwise impose.

Trademark and Copyright: Battles over consumer confusion, secondary meaning, actual infringement are often dense factual disputes requiring significant outlays for litigation counsel and experts. As well, trademark and copyright complaints sometimes include allegations that may trigger insurance coverage.

The confluence of an expensive IP dispute, possible insurance coverage and potential coverage disputes argues for everyone mediating early on. Carriers versed in the expense and uncertain outcome of many trademark and copyright disputes have good reason to fund or partially fund a settlement before the litigation expands.

Trade secrets: Trade secret misappropriation claims frequently, if not always, include allegations of theft and other intentional wrongdoing, making an early compromise between warring parties seem unworkable. But consider these countervailing considerations:

Has (or will) a temporary restraining order or preliminary injunction be granted? A preliminary injunction not only enjoins further alleged misuse; it arguably cuts off or significantly reduces the damage done. A preliminary injunction in many instances will limit the scope of damage, allowing the parties to assess early on what’s left.

How will customers be impacted? Many high-profile trade secret cases attract media attention and can damage customer perceptions and loyalty. Think of Uber’s battle with Waymo over allegations of stolen trade secrets regarding the development of autonomous vehicles. Yet even lower profile trade secret cases harm customer relations if – as is often the case – the trade secret plaintiff must show that specific customers were lost due to the alleged misuse of confidential information. Proving or disproving such losses invariably intrudes on customers and customer relationships, often leaving its own negative residue.

How can we possibly reach a compromise with the other side? Given the underlying allegations of theft of confidential information, the prospects for a civil exchange between adversaries often seems daunting. All the more reasons to bring in a third party neutral experienced in the underlying substantive law.

The Hallmarks of an Effective Early Mediation Strategy:

Test all key assumptions and alternatives as soon as possible: Two decades ago, while still litigating IP and other business cases, I began mediating IP and other complex disputes for the federal court in San Francisco. Under that Court’s ADR program, cases are often steered to early mediation, allowing everyone to test assumptions and sort out facts that otherwise perpetuate a series of “false positives” and unfortunate results.

Later, while general counsel to different companies, I inherited hundreds of IP disputes. In that role, I parsed through each case bigger than a bread box to first assess the key facts and assumptions made about the parties, their intentions and the value of the disputes. Notably, in all three roles as litigator, general counsel and mediator, opportunities for clarity as well as early resolution routinely surface.

Thorough due diligence combined with early mediation routinely dispels misunderstandings and surfaces opportunities. Those opportunities often have their own “shelf life,” so seizing them early can be critical. Before litigation and other sunk costs create a major barrier to a reasoned resolution, take the time to explore, for example, taking a fixed-term license, an assignment and license back, a negotiated sell-off, or possible co-existence arrangements.

Leverage the uncertainty: A pending IPR petition – like an Alice motion or preliminary injunction motion — can be leveraged to drive a resolution. Aided by a mediator with both legal and business acumen, the prospects for a reasonable compromise may be at their peak.

Avoid bad becoming much worse: Another factor warranting early efforts to settle is the evolving and uncertain prospects for attorneys’ fees and enhanced damages awards. Prior to the Octane Fitness v. Icon Health, 134 S. Ct. 1749 (2014), attorneys’ fees awards were limited to a very extreme showing of “exceptional circumstances” under 35 U.S.C. 285. Octane lowered that bar, allowing courts to look at the “totality of the circumstances,” factoring in the merits, the facts and the litigation behavior. These decisions provide district courts more leeway to award attorney’s fees, increasing risk and reasons to mediate sooner.

Halo Electronics, Inc. v. Pulse Electronics, Inc. 136 S. Ct. 1923, 1926-26 (2016)also raised the stakes for alleged infringers, and in turn their incentive to mediate sooner, by exposing them to greater risk of enhanced damages under 35 U.S.C. Section 284. After Octane Fitness and Halo, we see a full spectrum of findings as to enhanced damages and attorneys’ fees, leaving more uncertainty than before is more reason to mediate early on.

The arguable tradeoffs of an early mediation approach:

The principal arguments against mediating early on are (a) we’re not ready, and (b) mediation is costly. Those arguments in fact carry less weight as to IP disputes. First, the 2015 amendments to federal pleading requirements and detailed district court disclosure requirements for IP cases compel more specificity than ever. Hence everyone should be more informed early on.

Second, while thorough preparation to mediate an IP case takes substantial effort, such work and expense typically pales by comparison to the time and effort entailed in a fully litigated IP matter. As importantly, early mediation exchanges better inform everyone early on, allowing for reasoned decisions factoring in the good, bad and ambiguity of most disputes.

[1]“Alice motions” refer to legal challenges as to whether an issued patent indeed claims patentable subject matter, or instead is directed to a judicially-excluded law of nature, a natural phenomenon, or an abstract idea, or in turn whether it amounts to significantly more than one of these judicial exclusions. Based upon a line of United States Supreme Court and lower court decisions, including Alice Corp. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014), these motions are brought pursuant to 35 U.S.C. 101, and are typically asserted as either a motion to dismiss or motion for summary judgment.

[2]“IPRs” refer to inter partes review proceeding, allowed under the America Invents Act (35 U.S.C. 318 et seq.), to challenge whether a patent was improvidently granted. Unlike Alice motions, IPR proceedings are instituted and conducted before the US Patent Trials and Appeals Board (PTAB) and may similarly lead to a determination of patent invalidity.