Lueders: Intellectual property mediation: Inverted divorce mediation

Intellectual property mediation normally is complex mainly in that nonmonetary terms often are as important or more important than the monetary terms. Much commercial mediation tends to be linear, with money as the prime or only variable. By contrast, the closest analog to IP mediation, in my opinion, is divorce mediation. It raises not only central monetary issues, but also profoundly important nonmonetary issues such as child custody, who keeps the home, who keeps the dog, etc. However, that is where the analogy breaks down; often, IP litigation mediation is more like a mediated marriage rather than a mediated divorce.

Timing

In most IP cases, there are four logical times for mediation: pre-discovery, post-discovery, post-significant court rulings (e.g., summary judgment; patent claim interpretation; key motions in limine) and post-verdict. Most pros and cons tend to be self-evident, but I touch on a few considerations.

Pre-discovery avoids massive legal fees on both sides. Post-discovery incurs most, but not all, legal fees but affords each party their factual due diligence. Post-key ruling produces debate regarding application of law to your facts but still leaves the prospect in the case, without settlement, of possible reversal on appeal. Such rulings tend to be more legal in nature rather than factual, elevating appeal uncertainty. Post-verdict greatly narrows the issues but is normally quite expensive. The fees spent by both sides leave less in the “kitty” for settlement.

Nonmonetary structure

Money is the great equalizer, and my preference is to see the major nonmonetary terms hammered out before much discussion of money. You do not walk into a car dealership, haggle with the salesman, agree to a $60,000 price for a car and then, after agreeing to the purchase price, walk out on the showroom floor and haggle over which of the many cars you are going to get for $60,000. You pick the car and its options first and then you haggle price. The same normally works best with IP mediation.

From a nonmonetary standpoint, there are three basic settlement structures: a) licensing (exclusive, semi-exclusive or nonexclusive) of the IP to the defendant; b) the defendant ceases the alleged infringement; or c) the defendant changes the product design to (an agreed) noninfringing design.

Within those three basic structures, licensing can be the most complex and, per above, presents the challenge of a de facto marriage between competitors.

While licensing presents the opportunity for win-win, it also can have several sticking points. For example, the terms of the license agreement, including which products are covered and/or royalty bearing, often is the source of follow-on litigation. Second, businesses hate paying money to their competitors. Third, if the royalty is a “per unit” or volume-based royalty, the licensee is effectively giving a meter on the defendant’s business volume to their competitor. That said, compared to the cost of litigation, it may be the best solution. Indeed, there is opportunity for creativity, and one major area for that is to evaluate and divide up the market, affording the defendant licensee a license in those markets where the IP owner has limited market share. This can be geographic, product type, customer segment and/or otherwise. For example, suppose the IP owner has a patent on an improved automatic car wash facility. Suppose further that the IP owner’s physical presence of its car washes is in New England and the West Coast, whereas the defendant’s car washes are predominantly located in the Southeast. A win-win can be achieved by licensing the defendant only in the Southeast, thereby achieving royalties where market share penetration is not on the foreseeable horizon for the IP owner.

In addition to the major nonmonetary terms, it is good before the mediation begins to have the lawyers for each side agree to boilerplate contract terms (e.g., choice of law; term and termination; confidentiality; insurance and indemnity; integration clause; etc.). This gives both parties a sense of modest momentum going into the mediation; more importantly, it reduces squabbles after the major nonmonetary and monetary terms have been hammered out.

Monetary terms

Despite an obvious one-time dollar amount, there may be room for creativity. For example, settlement payment may be structured over a period of years in an installment promissory note. This helps smooth cash flow and facilitate budgeting. Of course, if there is a license, royalties are common. However, they could be hybridized as fixed sum amounts, minimum payment amounts for quarterly or annual fees (independent of unit volume) and otherwise. This avoids the metering problem mentioned above. Also, proxies for money, such as cross-licensing or transfer of some other asset, may be worth exploring. If so, the parties should consult their tax advisers regarding how it is structured and the implications of that structure (e.g., capital asset transfer, ordinary income, etc.).

Human factors

Despite IP mediation typically being business-to-business, human emotions (real and feigned) can come into play. As mediator, you need to keep this in mind and adapt, because there is no one-size-fits-all. Beyond the constraints of required civility, be aware that often the participants in the mediation are competitors who know each other well, see each other at trade shows, and try to take business and customers from one another. Sometimes defendants feel like the matter is just a legal shakedown. Moreover, when the participants are inventors or authors, the IP tends to be “their baby” and they may see the adversary as diabolical copyist. Sometimes it is best to allow such parties to vent and say their peace — again, civilly. While unusual, I have had a mediation where the one party actually apologized to the other, and that seemed to help move the parties on to the objective business terms.•

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Dan Lueders is a registered mediator, patent and trademark attorney, and an IP litigator with more than 30 years of experience with Woodard Emhardt Henry Reeves & Wagner LLP. Opinions expressed are those of the author.