Alternatives To Litigation
Emphasis on settlement, return of business executives to dispute cuts unreasonable litigation
There is no magic to the present interest in alternatives to litigation. The courts are inundated with the rising tide of litigation causing outrageous delays, and litigation costs are increasing even more dramatically than delays.
Everyone involved with the field of intellectual property law knows at least one story about litigation that has dragged on over a decade with legal fees matching in size the duration of the litigation. A good example is Jamesbury Corporation vs. U.S.1, filed in the U.S. Court of Claims in 1963 and finally settled in 1980 after 17 years of pendency and delay. The Plaintiff's legal fees were modest considering the extent of the litigation, amounting to about $600,000. (Fortunately an $8 million settlement was obtained for our client.)
Everyone who routinely deals with technology transfer has looked at the staggering cost of litigation. Many of us have certainly wrestled with situations where some violations of rights exist, but the cost of litigation in terms of cash and time outlays is simply too high to permit rights to be enforced. Yet these litigation costs are not artificial or arbitrarily inflated; they are real. In patent litigation, for example, one is routinely faced with the issue of establishing obviousness. Relevant evidence may be spread out in libraries, publications, laboratories, and in the minds of witnesses scattered across the face of the earth. Locating, gathering and analyzing the appropriate facts can be a monumental job. Because of this, you can expect any case of substance today to demand a quarter to a million dollars in legal fees, and the "big" cases go up from there. Much the same situation is true in many other fields of technology-related law.
This state of affairs is the backdrop for an anti-litigation movement sponsored to a large extent by corporations who are the parties that pay for the great law suits, and supported by the judiciary, which would like to remove as many of these complex cases as possible from its overcrowded docket.
In mentioning an "anti-litigation" movement, I do not mean to infer any pejorative overtones to this movement-although some view it with some suspicion and perhaps a little fear. The anti-litigation movement is promoting a very healthy new look at the litigation process and at alternative techniques for settling disputes. The battle cry of this movement could well be taken from advice once given by Abraham Lincoln:
Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser - in fees, expenses, and waste of time.
Chief Justice Burger has certainly done everything in his power to support the anti litigation movement, or movement toward Alternative Dispute Resolution, (ADR), as it is called. In speech after speech he has called upon individual lawyers and the ABA to make a concerted effort to stop the uncontrolled growth of litigation in this country. Justice Burger is aware that the adversary system that is so dear to us and so central to our legal system is also inefficient. Ninety six percent of all civil cases filed are settled, but usually not before fortunes are spent in discovery and trial preparation. It is reasonable to believe that a good percentage of these cases could be settled earlier, or perhaps need never have been filed, if more imaginative and more determined efforts at settlement had been made.
The most common techniques of alternative dispute resolution include the Minitrial, Arbitration, the Summary Jury Trial, the Rent-a-Judge program, Voluntary Settlement Conferences and Private Organizations established to assist in dispute resolution. In addition to these, there are other well-known, traditional settlement techniques including mediation, negotiation and court-ordered settlement conferences. One might even include summary judgment motions in this group.
These traditional techniques have been around for a long time, are generally well-known, and are probably familiar to all of you. The court-ordered summary jury trial, while interesting, is presently limited in application to only a few jurisdictions, although its use may gradually spread. The Rent-a-Judge concept is used in California and a few other jurisdictions. It is essentially arbitration using a retired judge as the arbitrator.
I would like to focus particularly on the Minitrial and Arbitration, as these are in my view the most promising ADR techniques. They are procedures that all of us will be involved with at some time.
Exactly what is a minitrial? A great deal has been written and said about the subject because it is relatively new, but there is still some disagreement as to exactly what constitutes a minitrial. I define the minitrial as a settlement technique which involves the following elements:
1. A brief presentation of arguments by both sides.
2. A "jury" comprised of at least one executive, or management or financial person, from each side with authority to settle. The jury must include business executives.
3. A neutral party acting as a moderator who functions to oversee the order of the proceedings and gives advisory opinions on subjects of concern - i.e. he may give his view as to how a court would decide a particular issue.
The key element is the presence of at least one business executive from each side who has the power to resolve the disputed issue in a businesslike manner. The presentation of arguments in a trial-like setting gives the executive an opportunity to compare the strengths of the arguments of both sides. This direct comparison of arguments in a quasi-courtroom environment is a very powerful tool in highlighting the weaknesses of one's own case and pointing out that the other fellow's position is not totally ridiculous after all.
The great benefit of the minitrial concept is that it combines strengths - it combines the lawyer's ability to take the facts and construct a coherent argument with the executive's business knowledge and ability to make a rational business decision once all the facts are presented to him. It eliminates many of the inefficiencies of litigation by requiring a short summary presentation of arguments - much like an appellate procedure - and is conducted in an informal manner to reduce time wasted purely on formalities. This combination of strengths is what makes the minitrial a promising new technique of dispute resolution.
The classic (and first) minitrial resolved a patent infringement suit between Telecredit and TRW in 1977.2 In this case rules were drafted for what was called an "information exchange." The parties were to assemble for two days in a loosely structured format something like an appellate proceeding. Present were the attorneys for both sides as well as businessmen including licensing executives and technical personnel. Jim Davis, former patent trial commissioner at the U.S. Court of Claims, was selected as the neutral advisor to oversee the proceedings. The advisor's role was specified as follows: "not to mediate or affect a compromise of this dispute but rather to advise in writing as to his opinion of the likely outcome of this litigation should it proceed to trial . . . " Note that the neutral party is neither arbitrator nor mediator - but a moderator, a completely neutral person who is not trying to foster a compromise or do anything except oversee the proceedings and offer strictly non-biased opinions.
The hearing or "information exchange" consisted of the plaintiff's four-hour argument on infringement followed by a one-and-one-half hour rebuttal and a one-half hour reply. A one-hour question-and-answer exchange on the infringement issue followed. Defendant then made a similar presentation on invalidity and unenforceability with plaintiff rebutting. Again, a one-hour question-and-answer period followed.
The businessmen from both sides met when the minitrial was over and, without the moderator being present, within one-half hour had outlined a settlement, thus launching the minitrial as a new settlement technique.
In my view, several key factors contributed to the success of this minitrial:
1. Selection of an experienced former trial judge as the moderator.
2. Reduction of issues to a few key questions-infringement and validity.
3. Careful structuring of the minitrial procedure.
4. A willingness of both sides to settle.
A circumstance that cannot be ignored is that the litigation had gone on for three years at a cost of over a million dollars in legal fees before the minitrial began. Thus a fortune had effectively been spent in preparation for the minitrial. After three miserable years of expensive litigation, both sides were probably much more settlement-minded than they were at the onset of the litigation. Nevertheless, the minitrial brought about settlement before trial, eliminating all trial expenses, which would have been very extensive, and all appeal expenses-because the losing side surely would have appealed had the case not been settled.
This case is typical of the large cases that have now been successfully settled by the use of a minitrial. Minitrials may have been used in over 100 proceedings, although there are no published decisions, so it is difficult to know exactly how many times the procedure has been used and how effectively.
In the case discussed, the minitrial was not a true alternative to litigation in the sense that the minitrial could not have been successful had not the discovery phases of the litigation first taken place. The minitrial served as a settlement technique before the case went to trial, but after both sides were essentially prepared for trial.
An interesting question is, can the minitrial be held very early in the litigation, or even before any suit is filed? Again, since there are no published opinions, it is difficult to know exactly what is happening in this area. The April 9, 1984 issue of Business Week reported that Gillette and Scripto settled a dispute over rights to an erasable ink in an out-of-court minitrial a few years ago, presumably before litigation had begun. Certainly the minitrial could be used before litigation, but as a practical matter I believe that its use would be limited because of the need to obtain and study evidence in preparation for the summary arguments. Yet creative people will certainly find new ways of using it.
The minitrial is an important technique to be aware of and will no doubt be used more in the future to settle litigation, if not to supplant it. There are efforts in progress to prepare model rules for minitrials which can be incorporated by reference into agreements, much the same as arbitration rules, to further simplify and expand the use of this promising settlement technique.
I have discussed what some call the "non-binding" minitrial. It is now popular to refer to another type of minitrial called a "binding" minitrial. In the "binding" minitrial, an arbitrator is selected and the parties agree to be bound by the decision of that arbitrator.
What is the difference between a "binding" minitrial and arbitration? There really is no difference; the binding minitrial is arbitration, the key element being that the parties agree to be bound by the award of a mutually agreed-upon arbitrator. This is a far different concept than relying upon an unbiased moderator and making a balanced presentation of arguments to a jury of businessmen, as in a true minitrial.
The conception of the term "binding minitrial" as a replacement for the shop-worn "arbitration" is a nice touch and credit must be given to whomever is responsible for it. Arbitration is a very old term that has accumulated some negative connotations over the years. It is referred to by some as an unpredictable form of legal Russian roulette. A one-shot deal -you live or die by the award of the arbitrator without appeal. Some think of it as an endless procedure with no set time limits - and it can become such if care is not exercised. But arbitration has a long history of successfully settling disputes and has many very attractive aspects. So now is a good time to take a fresh look at the positive aspects of arbitration. And perhaps thinking of it as something new and referring to it as a "binding minitrial" is a good way to start.
Arbitration, like the minitrial, is a completely wideopen procedure, a creature of contract. That is important to remember. Arbitration is not created by law, but by contract. It is enforceable by law. Like putty, you shape it by contract to fit your purpose. I think some believe that arbitration "rules" are somehow rigid or fixed like the Federal Rules of Civil Procedure or the rules of various courts. Nothing could be further from the truth. Arbitration "rules" are simply provided as a convenience, a package that can be easily incorporated by reference into an agreement. If they don't suit your needs, you can write your own rules, provided you do so before the agreement is executed.
A good example of the flexibility of arbitration is found in the Consent Judgment of the well-known recent trade secret case involving IBM and Hitachi.3 This document (on p. 10, Sec. 11) specifies that a dispute will first be referred to a panel of executives of both sides, a good starting point. If these executives cannot resolve the dispute in 14 days, the matter is referred to arbitration. The arbitration proceeds according to customized rules that provide for:
1. A panel of three arbitrators.
2. Power is given to the arbitrators to enjoin the manufacture and sale of products found to violate the agreement.
3. The duration of any such injunction.
4. An expedited schedule for the arbitration.
5. Discovery under the Federal Rules of Civil Procedure.
6. Techniques of handling confidential information.
7. Express submission by Hitachi to the jurisdiction of the court in any location selected for the arbitration.
In addition to the "customized" rules, the agreement incorporates by reference 13 of the AAA Rules of Commercial Arbitration. This is a well drafted document that demonstrates how arbitration can be molded to suit particular needs and provide a quick, efficient, relatively low cost vehicle for settling potentially troublesome disputes.
Another example of the use of arbitration - or a "binding minitrial" - is found in the settlement of a suit a few years ago between Shell and Intel over semiconductor memories. Shell had more than 30 patents in the field and had licensed IBM and sued both Texas Instruments and Mostek. After an exchange of correspondence with Intel, Shell also sued Intel.
Various settlement offers were proposed in the Intel suit, and eventually the dispute was narrowed to a question as to whether one class of Intel devices infringed one Shell patent. Rather than go to trial over this issue, it was agreed to submit it to arbitration. Accordingly, a license drafted and signed setting forth the terms of all issues that had been resolved and providing for arbitration of the single unresolved issue. The arbitration clauses provided:
1. The arbitrator would be named prior to signing the license.
2. Discovery procedures would be flexible.
3. There would be no review or appeal.
4. There would be no written opinion. The arbitrator would make his decision, then simply check a box marked Intel or Shell to cause (or prevent) payment of about $500,000.
The hearing was conducted much like an appeal with all evidence reduced to transcripts and the case was presented on briefs and arguments of counsel. The arbitrator, Hal Cooper, was requested to provide his decision in 30 days if possible, but not later than 60 days in any event. Cooper ruled for Shell within about 30 days.
The contrast between this neat, quick, efficient proceeding and a federal district court action is clear.
I have written about arbitration as a vehicle for settling litigation. Arbitration is also a true alternative to litigation - that is, a technique of completely avoiding the court system. Any license containing a provision to settle a controversy by arbitration "Shall be valid, irrevocable and enforceable" under Title 9, Sec. 2 of the U.S. Code. New Section 294 of the patent laws (Title 35) also specifies that any written provision requiring arbitration of any dispute relating to patent validity or infringement shall be valid, irrevocable and enforceable.
Arbitration takes precedence over litigation. Under (Title 9, Sec. 3) of the U.S. Code, any court will stay the trial until any arbitration provided for in writing has been concluded. This means that if you have a license with an arbitration clause, you will definitely avoid the courts and go straight into arbitration. So if you want to avoid litigation entirely, providing an arbitration clause in your license is probably the most foolproof method of doing so.
Generally, arbitration or minitrial work best where the number of issues to be resolved is limited. For example, if the parties can agree that the solution to a dispute between them rests exclusively on determining whether a patent is or is not infringed, as in the Shell-Intel dispute, an arbitrator can be very effective in settling the matter. On the other hand, a dispute involving a broad range of issues, including a range of legal questions, is probably best settled in court. Factual issues or limited factual/legal issues are efficiently settled by arbitration.
Further, for an arbitration to be successful, both parties must be prepared to accept the award of the arbitrator. In essence this means that both parties must be prepared to lose should the arbitrator rule against them. Naturally, the parties can agree beforehand to set the terms and conditions of the loss, and simply leave to the arbitrator to determine who is going to suffer the loss as in the Shell-Intel case. The parties then know exactly what the risks are.
The fact that the parties must be able to bear the loss implies that arbitration should not be expected to be successful where the issues involved are so crucial or that the amount of money involved is so extensive that neither party can afford to lose. If the parties cannot afford to lose, they will try to drag out the arbitration proceeding to the extent that it may become as lengthy and expensive as a litigation proceeding. Selection of a strong and experienced arbitrator can help to prevent this.
I propose three basic rules that I feel will prevent an arbitration in particular from getting out of control:
1. Simplify as much as possible the issues to be arbitrated. The ideal situation as in the Shell-Intel case is to try to formulate a single issue for arbitration.
2. Select a strong, experienced arbitrator-preferably someone who has had judicial experience.
The arbitrator has control over the progress of the arbitration. He must use a firm hand and keep things moving. Otherwise you can find yourself in a painfully slow procedure.
3. To the extent possible, tailor the rules of the particular arbitration to suit the problem and the parties, i.e. discovery procedures. The time to think about arbitration provisions is while the parties are in agreement, when the license is being negotiated - not later when a dispute has arisen.
The same basic ideas apply equally well to the minitrial.
To evaluate whether one should consider trying arbitration, let's look at some of the characteristics and advantages that arbitration has to offer. Many of these apply equally to the minitrial.
Speed of Decision - Arbitration, properly conducted, is generally much faster than traditional litigation because it totally avoids the court system and, as a relatively informal procedure, can move very quickly.
Low Cost - Arbitration can be substantially less expensive than litigation because the procedure is generally shorter and discovery is generally limited to key areas by the arbitrator. Due to the informal nature of the arbitration, it may be possible to use corporate staff attorneys rather than outside litigation attorneys in some cases to make at least a portion of the presentation.
Selection of Arbitrators - Arbitrators can be selected who are familiar with the technology involved so that little time need be devoted to explaining basic technology. On the other hand, some feel that a highly technically skilled arbitrator might tend to view patented inventions as obvious.
Private Hearings - The record of the arbitration, with the exception of the award, is not a public record. Accordingly, trade secret information as well as unfavorable information which surfaces during the arbitration proceeding are not matters of public record. However, the arbitration record will probably be fully discoverable by a party to any subsequent litigation against the patent holder who was a party to the arbitration. A provision could be considered for expunging such information from the record and returning it to the party supplying it before relief is granted.
Resolution of International Disputes - Arbitration is particularly useful in resolving multinational disputes which would otherwise require litigation in a number of countries.
Protection of Business Relationships - Arbitration can often be carried on between parties having ongoing business relationships without totally disrupting these relationships, as often occurs when full litigation is commenced.
Informality of Proceedings - In general, the arbitrator is not required to follow the formal Rules of Evidence and will generally hear any relevant evidence. Because of the informality of the proceeding, attorneys who do not have extensive courtroom experience or extensive facility with the Rules of Evidence can participate in an arbitration hearing.
Arbitration Clause Encourages Settlement - If an arbitration clause is present in a license, a licensee cannot simply stop paying royalties and wait to be sued, knowing that several years may have elapsed before a final decision is reached after prolonged litigation and appeals. Rather, that party knows that arbitration may be started at once and the issues resolved rather quickly. Thus, the very presence of the arbitration clause will encourage such a party to try to settle whatever dispute has arisen.
Arbitrators Are Not Bound to Follow Any Particular Law - Arbitrators are clearly not bound by the Rules of Evidence and are not required to render a reasoned opinion that becomes a portion of the published case law. Rather, their awards tend to be brief. Some see in this a danger that the arbitrator may not abide by accepted principles of law. Although it is believed unlikely that a patent arbitrator would totally ignore acceptable principles of law, provisions can be made in the arbitration agreement that the parties agree to be bound by the patent statutes as interpreted by the CAFC (or some other court) on questions pertaining to patent validity and infringement.
Discovery in Arbitration - The discovery question is one of the most controversial issues with regard to arbitration. Technically, discovery is not available in arbitration because all evidence must be taken in the presence of the arbitrator under the AAA Rules of Patent Arbitration (Rules 29 and 31). Thus, questioning of arbitration witnesses cannot be carried out without the tryer of fact being present, as in conventional depositions. As a result, evidence gathering becomes part of the hearing at which the arbitrator is present. This may significantly affect the strategy used in gathering evidence, since the arbitrator can act to limit any irrelevant or immaterial lines of questioning. Also, he will be aware of the demeanor of the witnesses and of any circumstances where counsel advising the witnesses seems to be blocking testimony which may be relevant to the issues. If the parties regard this as being a problem rather than a benefit, they could presumably agree to conduct discovery proceedings according to conventional formats as in the IBM Hitachi case, although at the risk of discarding some of the desired aspects of arbitration.
No Appeal - Technically, there is no appeal from the award of an arbitrator in the sense that one can normally appeal a judge's decision on the basis that it is inconsistent with the law. There is no requirement to apply law in an arbitration proceeding, and thus any basis for appeal is eliminated. However, Title 9 of the U.S. Code provides, in Sections 10 and 11, grounds for vacating and modifying an arbitrator's award. Some view these provisions of Title 9 as the Achilles' heel of arbitration, i.e. as the techniques of converting an arbitration procedure into a fullblown court action. While this is certainly a possibility in some instances, the long history of successful resolution of disputes through arbitration in other fields suggests that it is somewhat unlikely. Furthermore, courts will not rehear issues decided by the arbitrator, but will consider only whether the arbitration itself was conducted in a fair and unbiased manner. There is no case to my knowledge in which a loser has sought to overturn the arbitrator's award. To do so would be extremely difficult.
If you are involved in a minitrial or an arbitration but are not sure how to proceed, there are a growing number of private organizations and law firms that are available to help you. One is ENDISPUTE based in Washington, D.C. This organization serves as a general consultant in the field of dispute resolution and can assist in structuring a minitrial, providing private judges, or provide training in dispute management.
Another organization called the Center for Public Resources (CPR) is based in New York. This is a nonprofit organization that is funded by membership contributions - the membership including law firms and major corporations. CPR will provide assistance in setting up a minitrial or similar activity at no cost. CPR also sponsors a judicial panel including many distinguished members such as Griffin Bell, Archibald Cox, Elliott Richardson, and many more. These individuals can be retained to provide opinions or assist in out-of-court dispute resolution.
Many other organizations and firms specializing in ADR techniques are springing up in major cities across the country. Books and articles are appearing more and more frequently, and even law schools are now beginning to teach dispute resolution techniques.
The National Institute for Dispute Resolution is a Washington-based, charitable, nonprofit organization funded by a series of grants from a number of foundations. The purpose of the organization is to provide grants to help finance research and experimentation with new techniques of dispute resolution. This organization is just now awarding its first grants. The Institute has a program on legal education which is designed to provide grants to law schools to encourage instruction in nonlitigious forms of dispute resolution.
I hope that this article has presented a positive impression of the movement toward using alternatives to litigation and will encourage readers to try one of the techniques discussed. While I don't believe that litigation will ever cease to be an important tool in business, I believe that at times litigation takes on a life of its own and tends to become somewhat unreasonable. Perhaps the new emphasis on settlement and bringing business executives back into the dispute settlement process will result in less unreasonable litigation and more efficient business.
Reprinted with permission. First published in Les Nouvelles, the Journal of the Licensing Executives Society International, Volume XIX, No. 4, December 1984, pages 206-210.
.207 USPQ 131 (U.S. Court of Claims, Trial Div.) 1980. Also see 153 USPQ 672, 172 USPQ 160, 183 USPQ 484, 187 USPQ 720, 198 USPQ 455
.Davis, A New Approach to Resolving Costly Litigation, 61 J. Pat. Off. Socy. 482, August 1979; Borovoy and Janicke, The Minitrial Approach to Resolving Patent Disputes, 11 APLA Quart. J. 258, No. 4.
.U.S. Dist. Ct., N.D. Calif., Civil No. C-82-4976-SW