IP Mediation Opportunities Increasing at the Federal Circuit – Part II
THE FEDERAL ARBITRATION ACT: Parties Must Proceed with Caution During Arbitration
Delaware Promotes Alternative Dispute Resolution in Superior Court and Court of Chancery Cases
Stradley Ronon at Work

IP Mediation Opportunities Increasing at the Federal Circuit – Part II

IV. The Federal Circuit Mediation Program
On Oct. 3, 2005, the Federal Circuit initiated its Appellate Mediation Program. The program is authorized by an en banc order, revised on Sept. 18, 2006, and is operated in accordance with a set of Guidelines, last revised on May 1, 2008. Relevant materials are available on the court’s Web site: www.cafc.uscourts.gov. A three-judge panel monitors the program; the court wants to see the program work. The expressly stated purpose of the program is perhaps self-evident, i.e., to help the parties settle.

The program was entirely voluntary at the outset; counsel could jointly ask to participate. Although court resources continue to be available for voluntary requests, subsequent amendments now make mediation “mandatory” for selected cases. Thus, parties enter the program either upon selection by the court staff, or by filing a confidential joint request to enter the mediation program. Of course, the mediation ceases once it appears that mediation will not be fruitful – so “mandatory” is a relative word. But the court does not hesitate to order the parties to a mediation session even if one or both parties do not want to try mediation. Curiously, the court reports a slightly higher settlement rate for those cases where one party came reluctantly than when both parties were initially willing to try mediation.

A Chief Circuit Mediator has been appointed to administer the program. His name is Jim Amend and he is assisted by a Circuit Mediation Officer, Wendy Dean. Together, they select cases and mediators “as early as possible.” To do so, they review the record and the parties’ own assessment provided in an initial Docketing Statement that, among other items, asks whether the case may be amenable to mediation. They also conduct a telephone assessment.

The FCBA was asked to compile a list of mediators who, preferably, are not in active practice. The requirements to qualify as a mediator are somewhat flexible. The mediators receive no compensation, but for minor expenses. The mediator list is available on the court’s Web site. For those who mediate, an application form is also available on the court’s Web site.

Based on its order and the authority provided in FRAP 33, the court has published guidelines for the program. The mediation process is confidential. Certain cases are excluded from selection for the program: namely, pro se cases. The appeal proceeds in parallel – sensitive to the court’s desire to keep current on its case load – but the court grants consent motions for extensions of time to allow mediation as needed.

V. Future
The trend is toward settlement of civil cases. A recent study by the American Bar Association showed that 98.2% of civil cases settled after the complaint was filed. This statistic augers well for the Federal Circuit’s mediation program.

Despite the finality of the judgment being appealed, each party has a significant risk that it will still lose on appeal. Statistics show a reversal rate somewhere between 35% and 50% on the issue of patent claim construction. This statistic, too, bodes well for the success of the mediation program.

And the court’s fledgling mediation program has proven successful. The court has consistently helped the parties to resolve their patent appeals through mediation in over 40% of the patent cases selected for the program. In remarks presented at the Annual Bench and Bar Conference of the FCBA held June 25-28, 2008 (the Conference), Chief Judge Michel noted the following statistics: 65% of patent cases are decided by the court; 12% are settled by the parties; 9% are dismissed by the court; and 8% are resolved by the court’s mediation program. Chief Judge Michel supports the program as a way to give the court docket relief, case management assistance, and enhanced service to litigants. His support appears warranted. Helped by its mediation program, the court has been able to issue opinions within three months after oral argument in about 80% of its cases.

Clearly, the program will require monitoring and shaping. Many issues must be resolved. For example, parties often neglect to complete and file a Docketing Statement (available on the court’s Web site). The court has a reminder letter that it sends. More substantively, when the parties settle during the appeal process, perhaps literally on the steps of the Federal Circuit courthouse on Lafayette Square in Washington, D.C., will the court vacate the decision being appealed?

In efforts to enhance the success that the mediation program of the Federal Circuit has already enjoyed in its short existence, Chief Circuit Mediator Amend identified at the Conference eight impediments to settlement of patent cases on appeal. The impediments are:

(1) the case involves a “troll” (which might be defined as a non-inventive entity with no commercial product that acquires and asserts overbroad patents in an attempt to extort a toll from others) and the defendant company wishes to avoid a “bulls-eye” inviting further litigation;

(2) party representatives with settlement authority are not present for the mediation session;

(3) the party having lost the judgment appealed is reluctant to mediate (although perhaps counterintuitive, because the winning party might seem more reluctant, the cost of rolling the die on appeal may appear small relative to the cost already sunk into the case);

(4) the patent was held invalid (one solution might be to ask the district court to vacate its invalidity holding as part of a settlement award);

(5) counsel is representing the appellant on a contingent fee basis;

(6) an emotional, entrepreneur patent owner appeals a loss and seeks “justice;"

(7) a summary judgment of non-infringement is appealed and the plaintiff seeks millions (the “lottery” case); and

(8) a party believes it is entitled to attorney fees or enhanced damages. The court is in the process of refining the selection criteria for, and the techniques used in, its mediation program to take these impediments into account and improve the program.

Ultimately, however, the success of the program depends on the parties using it. The court likely would, as it should, cancel the program at some point if they do not. Attorneys do a disservice to their clients without placing the appropriate case in the mediation program. In addition, it is perhaps a breach of ethical duty not to at least advise clients of the existence and availability of the court’s mediation program.

In summary, the belief that IP cases cannot be mediated with sufficient success rates to justify an appellate mediation program has been dispelled. The consequence is that you should become familiar with the Federal Circuit’s mediation program and, in your next patent case, be ready to participate. And the odds that you just might settle the case through mediation are good.

THE FEDERAL ARBITRATION ACT: Parties Must Proceed with Caution During Arbitrations

Parties that rely on §4 of the Federal Arbitration Act (FAA) when seeking to enforce arbitration agreements now must proceed with caution when characterizing the controversy to be arbitrated. Until recently, a circuit split existed on the issue of whether a federal court could or should “look through” a petition to compel arbitration in order to determine whether it has jurisdiction over the controversy. On Mar. 9, 2009, a deeply divided United States Supreme Court broke from the majority of circuit courts in Vaden v. Discover Bank.1 Both the majority and the dissent held that district courts may “look through” the petition to compel arbitration. The majority further held that a district court must determine whether the entire controversy between the parties complies with the rules governing federal subject matter jurisdiction before it may rule on the petition. Otherwise, parties may not apply to a district court when seeking to compel arbitration. This article details the Court’s analysis in Vaden and summarizes its effect on parties’ choice of forum for petitions to compel arbitration.

A. Overview
The Vaden Court summarily held that district courts may “look through” a petition to compel arbitration “to determine whether it is predicated on an action that arises under federal law.”² The Court based this decision on the “nonjurisdictional cast of the FAA” and the state courts’ “prominent role . . . as enforcers of agreements to arbitrate.”3 The remainder of both the majority and the dissenting opinions focused on the proper methodology for defining the underlying action; in other words, the justices wrestled with the question of how to decide whether the parties’ dispute arose under federal law.

B. The Majority Opinion
The majority looked to the text of §4 of the FAA. Section 4 states that “any United States district court which, save for [the arbitration] agreement, would have jurisdiction . . . in a civil action . . . arising out of the controversy between the parties” may consider a petition to compel arbitration.4 The majority resolved that “the controversy between the parties” meant the substance of their actual or anticipated civil action – the complaint as it has been or would be filed. Thus, the rules that apply to a determination as to federal jurisdiction over litigation now apply to a decision about whether a petition to compel arbitration may be heard in a district court. Specifically, federal question jurisdiction is only available pursuant to the well-pleaded complaint rule: the complaint on its face must create federal jurisdiction, not the defendant’s counterclaim or defense.5 Therefore, under the majority’s rule, parties may not petition a district court to compel arbitration if the party that initiates the dispute does not state a claim on which federal jurisdiction may be predicated.

C. The Dissenting Opinion
The dissent agreed with the first part of the majority’s holding – that a federal court may “look through” a petition to compel arbitration – but disagreed with the majority’s process of “looking through” the petition. The majority advocated an examination of the complaint and its characterization of the controversy to be resolved. This inquiry necessitates that a complaint has been filed and that the need to compel arbitration arises out of that filing. In taking issue with this approach, the dissent claimed that “[t]he majority is diverted off [a] straightforward path by the fortuity that a complaint happens to have been filed in this case” and does not offer suggestions for “looking through” a §4 petition if a complaint has not been filed.6

The dissent advocates “looking through” the petition and examining the “controversy” to be arbitrated as described by the §4 petitioner. It noted that a “§4 petitioner must set forth the nature of the dispute – the one he seeks to arbitrate – in the §4 petition seeking an order to compel arbitration.”⁷ Thus, a federal district court should analyze that characterization of the controversy and determine whether it supports federal jurisdiction. This approach comports with the FAA’s “repeated and consistent use of the term ‘controversy’ to mean the specific dispute asserted to be subject to arbitration”; the dissent reasoned that this practice should control an inquiry into whether the controversy falls within federal jurisdiction.⁸ Additionally, the dissent’s methodology is consistent with the fact that §4 petitions normally are “brought in independent proceedings,” and when a court “looks through” the petition, it may not have pleadings upon which to determine whether the underlying substantive dispute (e.g., the plaintiff’s well-pleaded complaint) arises under federal law. Therefore, the dissent would have a district court determine jurisdiction based on whether the controversy raises issues of federal law – not on whether a complaint had been filed and on the complaint’s characterization of the controversy.

D. Recommendations
The Supreme Court’s ruling in Vaden limits parties’ ability to compel arbitration in federal court. More specifically, it forces parties to petition state courts to compel arbitration when a complaint fails to plead a federal cause of action. Moreover, some state courts have determined that they are not bound by §4 of the FAA, and in those states, parties would be limited to a common-law right to compel arbitration or to other remedial provisions in the FAA, such as §2.⁹ For instance, Maryland courts view §4 of the FAA as a federal procedural rule that does not bind the state courts. If a party, like Discover Bank in Vaden, cannot petition a district court to compel arbitration under §4 of the FAA, then the options for enforcing its arbitration agreement are few. Parties that are contemplating an arbitration agreement should be aware of these new limitations.

¹Vaden v. Discover Bank, S. Ct., 2009 WL 578636 (Mar. 9, 2009).

²Id. at *8.

³Id. at *4.

⁴9 U.S.C. §4.

⁵Ultimately, the Vaden Court found that a district court lacked power to compel arbitration between Vaden and Discover Bank because the controversy between the parties “originated as a garden-variety, state-law based contract action.” 2009 WL 578636 at *4. Although Discover Bank’s counterclaim created federal question jurisdiction because federal banking law preempted state banking laws, the counterclaim was not enough to confer jurisdiction on the district court.

⁶Id. at *13.

⁷Id.

⁸Id.

⁹The Vaden majority asserts that state courts, specifically courts in Maryland, should recognize §2 of the FAA as grounds upon which a party may compel arbitration, because that section secures the right to enforce arbitration agreements in the federal and state forums. Whether case law bears out this conclusion remains to be seen.

Delaware Promotes Alternative Dispute Resolution in Superior Court and Court of Chancery Cases

The Delaware legal community has been a proponent of alternative dispute resolution (ADR) since Jan. 1, 1991, when Rule 16.1 was adopted in the Superior Court’s Civil Rules. Pursuant to Rule 16.1, all civil actions, except certain enumerated actions, in which (1) trial was available, (2) monetary damages were sought, (3) any nonmonetary claims sought were nominal and (4) counsel for the claimant had not certified that damages exceeded $100,000, were subject to compulsory ADR. The parties could choose among arbitration, mediation or neutral assessment. In 2003, 10 Del. C. §§346 and 347 were adopted, permitting mediation of technology disputes and business disputes in Delaware’s Court of Chancery; and in 2006, 10 Del. C. §348 was adopted, requiring mediation of certain disputes involving the enforcement of deed covenants or restrictions in the Court of Chancery. Furthermore, effective Mar. 1, 2008, the Superior Court repealed Rule 16.1 and amended Rule 16 in order to require compulsory ADR in all Superior Court civil cases regardless of the extent of claimed damages, with the exception of class actions subject to Superior Court Rule 23, special proceedings subject to Superior Court Rule 81(a), replevin actions, foreign or domestic attachment actions, statutory penalty actions, mortgage foreclosure actions, and in forma pauperis actions.

Below are summaries of the statutes addressing ADR proceedings in Delaware’s Court of Chancery and Superior Court.

I. Court of Chancery

The only form of ADR utilized in Court of Chancery proceedings is mediation. Unlike the role of a judge in an adjudicatory proceeding or an arbitrator in an arbitration proceeding, the role of a mediator in a mediation proceeding is not to rule in favor of one of the parties in a dispute, but rather to assist the parties in reaching a mutually satisfactory resolution of their dispute. Accordingly, mediation proceedings are ideal for parties that have an ongoing business relationship that they ultimately wish to preserve. In order to encourage meaningful communication between the parties during mediation, the relevant Court of Chancery statutes provide that mediation proceedings are confidential and are not of public record.

A. Technology Disputes
Pursuant to 10 Del. C. §346, the Court of Chancery has both (1) the power to mediate and (2) jurisdiction to hear and determine technology disputes arising out of an agreement and relating primarily to the purchase or lease of computer hardware; the development, use, licensing or transfer of computer software; the creation or operation of Internet Web sites; information, biological, pharmaceutical, agricultural or other technology of a complex or scientific nature that has commercial value or the intellectual property rights pertaining thereto; or rights or electronic access to electronic, digital or similar information or support or maintenance of such technology. Furthermore, §346 gives the parties the option to have the Court mediate their dispute; mediate their dispute initially, and if that fails, adjudicate their dispute; or simply adjudicate their dispute in the first instance. Specifically, §346 gives the Court of Chancery the power to mediate and the jurisdiction to hear and determine technology disputes when:

(1) the parties have consented to the jurisdiction of, or mediation by, the Court of Chancery by agreement or by stipulation;

(2) at least one party is a business entity formed or organized under the laws of Delaware or has its principal place of business in Delaware;

(3) no party is a consumer with respect to the technology dispute; and

(4) in the case of technology disputes involving solely a claim for monetary damages, the amount in controversy is no less than $1 million or such greater amount as the Court of Chancery determines by a Court rule.

Neither punitive damages nor a jury trial would be available for technology disputes heard and determined by the Court of Chancery pursuant to this section.

B. Business Disputes
Although the Court of Chancery has had jurisdiction to adjudicate business disputes for many years, 10 Del. C. §347, gives the Court the power to mediate business disputes if:

(1) the parties to the dispute consent to mediation by the Court of Chancery by agreement or by stipulation;

(2) at least one party is a business entity formed or organized under the laws of Delaware or has its principal place of business in Delaware;

(3) no party is a consumer with respect to the business dispute; and

(4) in the case of business disputes involving solely a claim for monetary damages, the amount in controversy is no less than $1 million or such greater amount as the Court of Chancery determines by a Court rule.

The parties can request that either a member of the Court of Chancery or another person authorized under rules of the Court act as mediator.

C. Disputes Involving Deed Covenants or Restrictions
Pursuant to 10 Del. C. §348, the Master in Chancery or another person appointed as the Master’s designee is required to mediate disputes involving the enforcement of deed covenants or restrictions when:

(1) the action is filed with the Court of Chancery;

(2) at least one party is an existing association or other entity representing the homeowners or lot owners of a subdivision; and

(3) at least one party is a homeowner or lot owner in that subdivision.

When an action involving the enforcement of deed covenants or restrictions is filed with the Court of Chancery, the Court has to schedule a mandatory mediation hearing within 60 days of the filing. If the parties fail to resolve the dispute during the mediation, the Court has to schedule a trial to take place within 120 days of the failed mediation proceeding, unless the Court concludes that a longer period of time is warranted. A Master in Chancery would preside over any such trial.

II. Superior Court

As noted in the introduction, although ADR was required only in certain cases when it was first introduced in the Superior Court Rules in 1991, the Mar. 1, 2008, amendments require compulsory ADR in all civil matters filed in Superior Court, with the exception of matters subject to Superior Court Rules 23 (class actions) and 81(a) (special proceedings); replevin, foreign or domestic attachment, statutory penalty and mortgage foreclosure actions; and in forma pauperis actions. Pursuant to amended Rule 16, after a civil action is filed in Superior Court, the Court will establish the timing for compulsory ADR within its scheduling order. ADR may include, but is not limited to, nonbinding or, if agreed to by the parties, binding arbitration, mediation or neutral case assessment.

Arbitration is defined in Rule 16 as a process by which a neutral arbitrator hears both sides of a controversy and renders a fair decision based on the facts and the law. If the parties stipulate in writing that an arbitration decision shall be binding, the case is removed from the Court’s docket. Similar to mediation in the Court of Chancery, mediation in Superior Court is defined as a process by which a mediator facilitates the reaching of a mutually acceptable resolution of a controversy between parties. A mediation proceeding includes all contracts between the mediator and any party or parties until a resolution is agreed to, the parties discharge the mediator or the mediator determines that the parties cannot agree. A neutral case assessment, on the other hand, is a process by which an experienced neutral assessor gives a nonbinding, reasoned oral or written evaluation of a controversy, on its merits, to the parties. The neutral assessor may use mediation and/or arbitration techniques to aid the parties in reaching a settlement.

Rule 16 provides that if the parties cannot agree on the format of ADR, the default format would be mediation, unless otherwise ordered by the Superior Court. Unlike mediation proceedings in the Court of Chancery where a Chancellor or a Master of Chancery may serve as a mediator, the judges in Superior Court typically do not serve as arbitrators, mediators or neutral assessors in ADR proceedings. Pursuant to Rule 16, the parties are required to make a good faith effort to select, on their own, an ADR practitioner to serve in the proceeding. If the parties cannot agree on an ADR practitioner, they must file a joint motion with the court within 30 days of the Superior Court’s issuance of the scheduling order requesting that the Court appoint an ADR practitioner for the parties. The Court may, however, impose sanctions upon one or both of the parties if it determines that the parties have not attempted in good faith to agree upon an ADR practitioner. The parties are required to pay an ADR practitioner in accordance with the allocation and amount of fees established by the practitioner and agreed to by the parties.

If the parties are not able to resolve their dispute during the selected ADR proceeding, the Superior Court and the parties would continue with the civil case proceedings in accordance with the Court’s scheduling order.

Stradley Ronon at Work

The International Institute for Conflict Prevention & Resolution has announced the appointment of Stradley Ronon partner Lee A. Rosengard to its Panel of Distinguished Neutrals. Lee will serve on the Philadelphia Panel and the Employment and Franchise Panels, providing alternative dispute resolution services to the CPR Dispute Resolution Services Group and the general public. The CPR Institute is a nonprofit organization promoting excellence in public and private dispute resolution.

Stradley Ronon partners Lee Rosengard and Kevin Casey presented Alexander Oddy of the London-headquartered firm Herbert Smith LLP with the International Institute for Conflict Prevention & Resolution “Law Firm Award for Excellence in Alternative Dispute Resolution (ADR).” The award recognizes law firms that demonstrate firmwide commitment to using ADR principles and techniques. Recognized firms have set a benchmark for addressing the resolution, prevention and creative management of major disputes involving public or business institutions or among multiple parties. Stradley Ronon received the inaugural award in October 2007.

Bennet G. Picker was designated a Distinguished Fellow of the International Academy of Mediators - a fellowship that defines standards and qualifications for professional mediators of commercial disputes and promotes the mediation process as the preferred means of resolving disputes.

Stradley Ronon will host a meeting of the International Institute for Conflict Prevention & Resolution’s National Diversity Task Force on June 22. Ben Picker, senior counsel, is a founding member.

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