A Dozen Tips for Technology-Related Mediations and Arbitrations

Or imagine that you learn one of your company’s biggest licensees has not been paying royalties on products that it claims are not covered by certain patents, and claims it is not using licensed know-how or trade secrets. You disagree, and need to ensure that your company is paid for the use of its intellectual property. Can this dispute be efficiently resolved through arbitration?

Alternative dispute resolution (ADR) has long since moved from a side course to the main course as a means for resolving many intellectual property and technology-related disputes. Although the commonly used processes of mediation and arbitration are applied similarly in technology as in other commercial cases, issues may arise in these cases that are worth noting. What follows are 12 tips to consider for mediating and arbitrating technology-related disputes.

Mediation Tips

1. Consider Whether Mediation Is Likely to Be Beneficial

Three key factors to consider in deciding whether to pursue mediation for a dispute are: (1) the parties’ goals for managing the dispute, (2) the suitability of the dispute for mediation, and (3) the general benefits of mediation.

A party’s goals may be overarching, legal, or pragmatic. For example, if the dispute is between a licensor and licensee, joint developers, or a supplier and distributor, an overarching goal for using mediation might be to provide the parties with an opportunity to work through issues in a cooperative fashion, thus preserving an important business relationship. Similarly, if a technology dispute has ramifications in global markets or multiple forums, mediation could provide a global resolution. In contrast, if a party’s goal is to obtain a pronouncement of legal precedent, then the privacy of the mediation process and the lack of any ruling would not meet that goal.

Factors to consider for whether a case is suitable for mediation include: (1) the motivation of the parties to pursue a problem-solving, rather than an adversarial, process; (2) the relationship between the parties and their counsel; and (3) the practical realities such as whether the parties have the necessary resources to negotiate worthwhile trade-offs. For example, do the parties have patents of interest to trade or do preexisting licenses prevent agreed-upon terms?

Mediation is not suitable for every dispute. It has potential benefits, but they must be in line with what a party and its counsel want or need. Consider whether the parties would be served by having a knowledgeable neutral intermediary provide a reality check on their positions or expectations. Might a mediator help address trust issues impeding progress or assist the parties in exploring creative solutions? Is control over the nature and timing of the outcome crucial when important business interests are at stake?

Even where agreements contain escalating pre-dispute resolution clauses, the parties should think about whether mediation is likely to benefit them. They may decide to waive the mediation step in favor of the next step, which is typically adversarial.

2. Set Realistic Expectations

Mediation is rarely a one-and-done session. Just as disputes do not typically arise from a one-day encounter, neither will they settle in one day. Mediations, even in technology cases, can uncover various issues that need attention beyond the one-day in-person session. These may include dealing with strong emotions, building trust, and obtaining necessary information. An in-person session might result in the execution of formal settlement documents that day. More often, however, the session results in the signing of a term sheet or serves as a catalyst for ongoing efforts of the mediator, the parties, and counsel. Those efforts may last days, weeks, or in some rare cases a few months.

Party representatives who attend a mediation session in technology cases may never have met or even spoken with one another before the in-person session. Even if a case does not settle after a one-day session, simply meeting each other may provide an opening for productive negotiations.

Mediation is a process, not a session. The first in-person session may lead to another session where the parties finally resolve the matter. But even if an in-person session does not result in a settlement, the parties will benefit from what they learn and discuss with each other. With a mediator’s help, the parties may be willing to share documents and information sooner rather than later to allow them to evaluate their liability and damages risks. Facts heard directly from executives attending the session often have a significant impact leading to changes in position. Based on this information a party may, for example, drop some claims, thus narrowing issues for trial or settlement. They may learn of information, business interests, and needs that may never have been uncovered in discovery, or receive expressions of conciliation, any of which could lead to a settlement.

3. Be Diligent in Choosing a Mediator

Choosing the “right” mediator is critical to success at mediation and requires taking these often-overlooked steps:

• Identify what the parties need from a mediator (e.g., particular credentials, style, skills);
• Compile a list of mediators who may satisfy those needs;
• Interview candidates to determine if they in fact meet the parties’ needs;
• Communicate to mediator candidates what the parties are looking for (e.g., “We want someone to bang heads”; “We do not want a touchy-feely mediator”; “We want an evaluative mediation”), so the candidate understands the expectations of the parties, and the parties get what they want;
• Obtain references from candidates and contact references to determine whether the mediator is likely to meet the required needs; and
• Select a mediator that best fits the parties’ most important identified needs.

For example, parties in patent cases often seek a mediator with strong mediation skills, experience mediating patent cases, and a thorough understanding of patent law and litigation. A mediator who lacks strong mediation skills, despite knowledge of patent law, may not be effective in helping the parties reach an agreement. Likewise, because the parties often rely on mediators to conduct reality testing and to provide a reasoned explanation as to why they should alter their proposals, a mediator having strong mediation skills but little or no patent experience may be at a disadvantage.

Some counsel have go-to mediators that they rely on for a mediation style that fits the needs of particular cases (e.g., evaluators, hand-holders). In each case, diligence is the key to finding the right mediator.

4. Prepare Yourself

Airlines advise adults flying with children to put on their oxygen mask before assisting their children. Similar advice applies in mediation: prepare yourself before preparing the party representatives.

Think ahead about how the mediation session is likely to unfold in the case and find a proactive strategy for responding, rather than reacting. And start early. For example, before the commonly held joint conference planning call, be prepared to address: the date and location of the in-person session, information exchange, who is attending, specifics of the process, written submissions, and any issues particular to the case.

Before preparing the client, think about who should attend the mediation. Who is likely to be an effective representative, who should be excluded from the session, and who should be “on call” during the session? Determine who needs to be informed about the mediation before, during, and after the session, along with what information should be provided and by whom. For example, if the party involved in the dispute is a subsidiary of a foreign parent corporation, should the parent be briefed? In smaller companies, should the board of directors or investors be briefed before a session? How may the selection of participants be handled to avoid friction?

Counsel will want to investigate and gather key information related to the dispute from available sources and perform a thoughtful risk analysis. Information from the other side may already be available through discovery. If not, information helpful for the mediation may be obtained with the mediator’s assistance. Necessary information may relate to technical issues (e.g., infringement or design-around options), business issues (e.g., licensing options), damages issues (e.g., products sold, lost profits), and “out-of-the-box” considerations (e.g., is there something we can trade in value that relates to another part of the company). Relevant information may also be in the hands of third parties such as ex-employees who were involved in the dispute or companies having information (e.g., invalidating prior art, public release of alleged trade secret information by the plaintiff itself) that may impact the outcome.

Counsel should investigate the factual and legal issues in the case and understand their client’s business interests. This will help formulate possible negotiation strategies to discuss with the party representatives.

Drafting a set of key issues or terms to be addressed during the mediation helps ensure that important issues are not forgotten and are covered by party representatives at the right time. Drafting a settlement agreement that incorporates possible terms and conditions for the dispute provides another list, of sorts, and can expedite the memorialization of a settlement. When dealing with patents, trademarks, or copyrights, be sure to have a list of all involved and related registrations so that they can be properly identified in agreements. In patent cases, this will include the patent numbers and all patents or pending applications in the family, as well as the information to clearly identify and define alleged infringing products.

5. Prepare Party Representatives

Before preparing the party representatives, counsel should ensure that they: (1) leave adequate time for their own preparation, (2) do not assume the party representatives do not have the time to prepare, and (3) spend whatever time is necessary to prepare the party representatives and others (e.g., investors or board members). Mediation, by its very nature, takes time. The parties often want to tell their side of the story, explain their case strengths, and feel that they have been heard. Forming and evaluating proposals and counterproposals and dealing with stumbling blocks when the parties’ trust and confidence in one another is strained are all part of the process.

A well-prepared party representative will be much more effective than one who is not prepared or is ill-prepared. Here are some preparation tips.

Explain What Mediation Is and Is Not

Unlike an adversarial process in which counsel take center stage, mediation requires considerable preparation, focus, and patience from the party representatives. Even sophisticated and knowledgeable clients who have participated in other mediations need to be adequately prepared for the upcoming mediation, including discussing the various possible outcomes.

Review Key Facts

Counsel should review with party representatives key facts and documents to ensure that all relevant facts are known and there are no discrepancies. Counsel will also want to confirm that the party representatives have enough information to make an informed decision, and if not, determine how to get it.

Confirm the Parties’ Business Goals and Interests

Many mediated settlements are form-fit to the parties’ needs and circumstances, such as global settlements involving disputes over the same intellectual property and products ongoing in various forums. Because a party’s business interests often change over time, counsel must revisit the issue with their clients. For example, a patent owner may have certain interests and goals in mind when it first files an action, but those may change as the litigation continues, circumstances change within the company, or external changes (e.g., marketplace or political) materialize.

Discuss Who Should Attend

Success at mediation is unlikely unless the right people attend. Someone with full settlement authority must attend. But that person should also be able to exhibit a respectful and conciliatory demeanor with the other side, be patient with the process, have the confidence and ability to make proposals the other side will want to consider, and be able to evaluate the other side’s proposals objectively.

Review Risks, Benefits, and Expectations

A candid assessment and acknowledgment of the risks involved—whether business, monetary, or public relations—in not settling and their magnitude is critical. This will guide the negotiation strategy, help to assess proposals from the other side, and inform realistic counterproposals. Likewise, identify the benefits a party can achieve through mediation that may not be available through adjudication to help determine the potential value of any settlement.

Candidly Discuss the Party’s BATNA and WATNA

A party’s best alternative to a negotiated agreement (BATNA) is a party’s alternative to accepting the deal on the table. A strong, realistic BATNA allows a party to either negotiate a more favorable settlement or walk away from the session—at least for that day. A realistic worst alternative to a negotiated agreement (WATNA) lets a party know when it is time to accept a settlement rather than risk the worst, or reject a settlement that is not as favorable as the WATNA. Identifying a realistic and well-defined BATNA and WATNA requires planning, preparation, and flexibility.

Brainstorm Offers/Counteroffers and a Negotiation Strategy

Brainstorming may lead to settlement options that the parties would not have thought of during the in-person session or been able to offer. Reality testing with in-house or outside counsel who are not close to the dispute before the mediation session can help define the party’s BATNA/WATNA and inform reasonable settlement options.

6. Plan Ahead to Avoid Obstacles

The parties can become tired and frustrated with the process and the participants during the mediation session. They may feel their efforts are unappreciated and progress seems slow. The slowdown may be just that, but it also could be that the parties have reached an obstacle such that no further negotiation will be productive.

One of the best ways to avoid obstacles is to anticipate what could cause them and discuss the matter with the mediator and party representatives before the mediation session, if possible. For example, if the lack of information could stall negotiations, try to obtain that information in advance. If that isn’t feasible, find a source of information that can be tapped during the session, or have ready options that may be presented to the other side and the mediator for obtaining the information expeditiously, even if the parties need to take a short break to obtain it. Similarly, if the success of the mediation depends on having a certain person present, schedule around that person’s availability. Explain to the mediator and opposing counsel why having that person participate is critical.

Having the wrong party representative participate should be avoided by careful advance planning. This will take preparation and diplomacy.

Arbitration Tips

Some disputes don’t settle at mediation or aren’t necessarily right for mediation. Arbitration provides an alternative to litigation you will want to consider in the right circumstances. Here are some tips for arbitration of technology-related disputes.

1. Determine Whether Arbitration Is Best for Disputes That Could Arise

Disputes arising from technology-related agreements (e.g., licenses, employment, NDAs, supply, and development) lend themselves to arbitration. Arbitration is particularly attractive to parties in a business relationship who simply need their issue decided so they can move on. Similarly, arbitration provides businesses with a private forum where the confidentiality of sensitive information can be maintained. Arbitration is generally much less expensive than litigation. Disputes are usually resolved within a year rather than years. The parties select their arbitrators, so they can find decision makers they trust to be neutral and have significant background in the law and subject matter of the dispute. This is particularly important in technology-related disputes, which often involve complex technical and legal issues.

There are benefits in using arbitration for international disputes. First, the parties may be wary of legal proceedings in a foreign county. Arbitration can provide a neutral forum. Second—and somewhat counterintuitively—arbitration awards are usually easier to enforce internationally than court judgments. Foreign enforcement is governed by treaty, and more countries have agreed to recognize arbitration awards than court judgments.¹ Finally, technology-related disputes can involve suits in more than one country and may also involve patent office proceedings in each. The parties should look into consolidating these in one arbitration proceeding.²

If the parties want to resolve a dispute quickly to resume business, arbitration makes sense. Arbitration can be less disruptive to a business relationship than litigation. But to realize its advantages, the parties need to plan ahead and include a viable arbitration clause in their agreement.³ It is harder for the parties to agree after the fact to arbitrate a dispute, although it is still worth exploring.

2. Draft a Viable Arbitration Clause

Key advantages of arbitration are the cost and time efficiencies. If the parties must have a side litigation about whether to arbitrate the dispute, they have lost a key advantage of arbitration. To avoid this, make sure the clause is clear and unambiguous. Instead of blindly copying an arbitration clause from another agreement, it is much better to start with a model clause of an arbitration provider such as the American Arbitration Association (AAA) or the International Institute for Conflict Prevention & Resolution (CPR). Then decide the number of arbitrators—one or three—and the location for the arbitration. Be sure that either the contract or arbitration clause specifies what law will govern the dispute. Choice of law disputes can be expensive and complicated to resolve.

The clause can also address the qualifications of the arbitrators, limitations or guarantees of discovery, time to decision, and even require mediation before an arbitration is filed.⁴ Understand, though, that unnecessarily detailed arbitration clauses can cause problems. Micromanaging the specifics of the process before the parties know the nature of future disputes and amounts in controversy may be counterproductive. The parties may be best off by simply identifying the arbitral organization to administer the arbitration and rely on its rules. They can then put their energy into picking a well-qualified and experienced arbitrator who can work with the parties to best fashion a process suited to the dispute that has arisen.

3. Be Ready for the Preliminary Hearing

One of the key advantages of arbitration in a technology-related dispute is that the parties can help fashion a process uniquely suited to their dispute. Counsel should think through scheduling and procedural issues before the preliminary hearing so that they can discuss areas of agreement and disagreement with the arbitrator at the hearing to set the course of the case.

If the dispute involves patent issues, for example, counsel will want to consult the governing arbitration organization’s rules. The AAA has useful Supplemental Patent Rules that address all stages of a patent case from claim charts to validity contentions to claim construction hearings and beyond. But, unlike local patent rules in courts, the steps are not mandatory. The parties and arbitrator can adopt the procedures and steps that will best help resolve the dispute and disregard the rest.

It may be, for example, that an early claim construction determination will resolve the dispute. If so, the parties can focus discovery and effort on that first, saving the expense of other discovery and preparation. Or it may be that patent validity is the key. If so, an early hearing directed to that issue might be the best way to proceed.

The parties can also adopt discovery procedures—usually called “information exchange” in arbitration—best suited for the case. Discovery in arbitration is usually more focused and limited than in court. There will usually be fewer depositions and no interrogatories, but the parties will have access to necessary documents. If the parties embrace the efficiency this creates, they can do well in arbitration. They may, for example, agree to a certain limited number of hours of deposition per side to focus and streamline fact gathering. Or they may decide to forgo depositions altogether where the real issues are covered by the documents and technical considerations. Moreover, because the rules of evidence in arbitration are relaxed, the parties may be able to short-circuit some of the discovery common in technology cases in court. For example, foundational depositions to determine whether documents are authentic or mean what they say often are unnecessary.

Counsel must plan ahead to obtain information from third parties. Subpoenas are available in arbitration, but different jurisdictions have different approaches.⁵ Be prepared to address the need for subpoenas at the preliminary hearing, including whether the cooperation of opposing counsel or the arbitrator is necessary.

4. Think Differently about Experts

Lawyers accustomed to jury trials tend to pick experts who will “play well” for a jury and are expert at testifying in court. In arbitration, the same considerations do not apply. With technical experts, for example, the parties often employ highly knowledgeable and experienced persons who can serve as experts. Arbitrators understand the bias that an employee might have, but also know that expert witnesses are handsomely paid and often serve as advocates for the side that hired them. An arbitrator versed in the issues and technology can gauge the expert’s testimony by whether it makes sense technically, not by external factors. Thus, counsel should consider using qualified employee scientists and engineers as experts. This can save money and also be more persuasive.

The same may be true for financial issues. For example, in a patent case that involves only a dispute about royalty payments due, it may be unnecessary to pay a financial expert to multiply the sales of licensed products by the royalty rate. On the other hand, if the dispute presents more sophisticated damages—patent disputes being the poster children for that concern, with trade secrets disputes not far behind—the parties will likely want experts who know those issues better than in-house accountants usually do.

5. Embrace Flexibility at the Hearing—But Be Persuasive

The rules of evidence do not apply in arbitration. Rule 34 of the AAA Commercial Rules, for example, requires only that the evidence be “relevant and material to the dispute . . . as the arbitrator may deem necessary to an understanding and determination of the dispute. Conformity to legal rules of evidence shall not be necessary.” Thus, hearsay will likely be admitted, as will evidence that might not be admissible in court. This provides counsel with opportunities to provide evidence in a logical way without as much concern for technical evidentiary requirements. That can be quite useful in a case involving complicated technology.

That doesn’t mean anything goes. First, there is little use in presenting double hearsay or other evidence arbitrators will not find useful in deciding the case even if it will be part of the record. Arbitrators will disregard unreliable evidence. Worse, relying on questionable evidence undermines your case.

Second, despite popular opinion, arbitrators do not have to listen to all evidence presented. It is true that the Federal Arbitration Act lists as a ground for overturning an award “refusing to hear evidence pertinent and material to the controversy.”⁶ Note, however, the evidence must still be “pertinent and material.” Arbitration rules allow arbitrators to decide what evidence meets that standard.⁷

Arbitration allows the parties to play a little more “inside baseball,” so to speak. In a patent case, for example, the parties need not present eye-catching graphics and computer animations. It is likely that the arbitrator will be used to looking at patents, file histories, drawings, devices, technical specifications, and whatever else needs to be reviewed. Counsel do not need to explain how one gets a patent or the difference between dependent and independent claims. Thus, they can present the factual, technical, and legal issues in the case in a sophisticated and focused way to a decision maker well versed in the sorts of issues the case presents. This is a great advantage in a complicated technology case.

6. Plan to “Win” at the Arbitration or Build in an Arbitral Appeal Process

Judicial review of an arbitration award is much more limited. Arbitration awards can be vacated only where, for example, the award was procured by fraud or corruption or an arbitrator exhibited evident partiality, refused to postpone the hearing for good cause, refused to hear material evidence, or exceeded powers.⁸

Note that none of the grounds for vacating an award is that the arbitrator erred in factual findings or the law. In choosing arbitration, if the lack of appeal is a concern, counsel should consider building in an arbitral appeal. Most arbitration organizations provide for an appeal to a three-arbitrator panel, but only if the parties agree.⁹ The winning party isn’t going to agree to an appeal after it has won, so the parties need to build any appeal into the arbitration clause.

The arbitration appellate rules allow vacation of the award for erroneous fact finding or material and prejudicial errors of law, akin to an appeal from a trial court judgment.¹⁰ The appeal is expedited, but it will still increase costs and take longer to resolve the dispute. This additional process exists if a party wants the comfort of an appeal and can convince the other side to accept it in the arbitration clause.

Final Thoughts

Mediation and arbitration can provide significant advantages in the right technology-related dispute. Many of those benefits arise from the flexibility of those processes. Exploiting the flexibility and thus realizing the benefits that mediation and arbitration offer takes planning and an understanding of the nature of both processes.

Endnotes

1. The New York Convention is the main treaty recognizing foreign awards, although there are others. For a listing of New York Convention signatories, see http://www.newyorkconvention.org/countries.

2. You will want to check to be sure that the countries involved will recognize an arbitration award involving intellectual property.

3. For language to put an existing dispute without an arbitration clause into arbitration, see the arbitration organization’s rules, which have sample language. See, e.g., Am. Arbitration Ass’n, Commercial Arbitration Rules and Mediation Procedures (2013) [hereinafter AAA Commercial Rules], https://adr.org/sites/default/files/CommercialRules_Web.pdf.

4. The AAA’s ClauseBuilder® (www.clausebuilder.org), or similar tools from other arbitration providers, provides a good starting point for aspects of the arbitration process to consider.

5. Compare Shlumberger Sema, Inc. v. Xcel Energy, Inc., No. 02-4304, 2004 WL 67647 (D. Minn. Jan. 9, 2004) (allowing prehearing subpoena of nonparty documents but prohibiting nonparty depositions), with Hay Grp., Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 407 (3d Cir. 2004) (prohibiting prehearing subpoena of nonparty documents or depositions). Obtaining information from nonparties may take place at a separate part of the hearing held in a jurisdiction where the party is subject to a subpoena. See Stolt-Nielsen Co. v. Celanese AG, 430 F.3d 567, 577 (2d Cir. 2005).

6. 9 U.S.C. § 10(a)(3).

7. E.g., AAA Commercial Rules, supra note 3, at R-34(b) (“The arbitrator shall determine the admissibility, relevance, and materiality of the evidence offered and may exclude evidence deemed by the arbitrator to be cumulative or irrelevant.”).

8. See 9 U.S.C. § 10.

9. See, e.g., Am. Arbitration Ass’n, Optional Appellate Arbitration Rules (2013), https://adr.org/sites/default/files/AAA%20ICDR%20Optional%20Appellate%20Arbitration%20Rules.pdf.

10. E.g., id. at A-10.