Tag Archives: collateral estoppel

Arbitrating the Patent Case Part IX: Statutory provisions

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In earlier articles in this series we looked at patent disputes most suitable for arbitration, choice of arbitrator, arbitration clauses to use and avoid, the prehearing conference, discovery, and prehearing matters such as claim construction and summary judgment.  Before we continue on, let’s stop to explore the statutes that specifically provide for arbitration of patent disputes:  35 U.S.C. §§135 and 294.  I’ve received a question on patent statutes and arbitration, so there is no time like the present to address the matter.

Derivation proceedings.  Section 135 is straightforward.  It allows parties to a derivation proceeding to submit their contest to an arbitrator.  A derivation proceeding is used to determined whether the first-to-file inventor was the true inventor or whether he or she derived the invention from another.

If the parties determine to arbitrate the matter instead of submit it to the Patent Office, they are to give the Director of the Patent Office notice of the arbitration award – which is the arbitration term for a decision or order. The award is then binding on the parties.  The arbitration award is not enforceable until notice is given to the Director.  The award is noted as part of the patent’s prosecution record.  The Director may still determine the patentability of the invention claimed in the patent.

This makes sense. The arbitration will bind the parties.  But the patentability of the invention goes to the public interest in having only valid patents in existence.  That is not something the parties should be able determine for others in a private arbitration.  It remains the Director’s responsibility.

Contracts involving patent rights.  Section 294 allows arbitration of any contractual dispute relating to patent validity or infringement. This would most typically relate to patent license agreements, although it is not limited to that.  The parties can provide for arbitration either in the contract itself or later agree to it in writing. Section 294(a) says such a provision is “valid, irrevocable, and enforceable, except for any grounds that exist at law or in equity for revocation of a contract.”   Those grounds are very narrow.

According to House Report 97-542 (1982), this provision was enacted, in part, in response to cases such as Beckman Instruments, Inc. v. Technical Developments Corp., 433 F.2d 55 (7th Cir. 1965).  The Beckman court found that patent issues were “inappropriate for arbitration proceedings and should be decided by a court of law, given the great public interest in challenging invalid patents.”  Congress decided allowing arbitration was in the public interest to save time, money and burden on the courts.

The arbitration is governed by the Federal Arbitration Act.  The arbitrator must consider defenses under 35 U.S.C. § 282.  These include  (1) non-infringement, (2) invalidity, (2) unenforceability,  (3) failure to comply with 35 U.S.C. §112 – including, for example, failure to meet the written description, definiteness, enablement, and other requirements of section 112, and (4) failure to comply with any requirement of 35 U.S.C. § 251, which among other things prohibits broadening the scope of re-issued patents.

Significantly, section 294(c) provides that the arbitration award binds the parties, but no one else.  This may have some benefit for the patent holder, but that is not clear.  Consider a case where the licensee successfully defends by proving the licensed patent is invalid   Recall that in  Lear v. Atkins, 295 U.S. 653 (1969), the Supreme Court held that, in light of “the strong federal policy favoring the full and free use of ideas in the public domain,” licensees are not required not to pay patent royalties if they establish the licensed patent is invalid.

But does an invalidity finding bind the patent holder when it later sues someone else on the patent or seeks royalty payments from a different licensee of the patent?  The issue is unclear.  In fact, section 294(c) says the arbitration binds parties, and the patent holder is a party.  So one might think that a later accused infringer could make use of the arbitration decision to invalidate the patent.  After all, in Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, (1971), the Supreme Court held that, where a patent has been declared invalid in a proceeding in which the patent holder “ has had a full and fair chance to litigate the validity of his patent,” the patent holder is collaterally estopped from re-litigating the patent’s validity.

But one might suppose there must be some reason Congress made it clear that the arbitration decision only binds parties to the arbitration. An arbitrator’s finding the patent is valid wouldn’t bind a third part in later proceedings anyway, so why does the statute specifically say third parties aren’t bound?  Maybe the idea was just to make it clear that the drafters understood that.

Or perhaps the idea was to meet the concern that validity issues implicate the public interest so much, as recognized by Lear and later cases, that an arbitration is not the way to determine them except as between the parties who agreed to arbitrate.  Just as the issue of validity was specifically carved out from derivation arbitrations under section 135, noted above, perhaps Congress meant to carve it out so that only within the arbitration itself would the validity decision be of any effect.

But that isn’t what the literal language of the statute says. After all, if a patent holder is satisfied to submit the issue of validity of a patent to arbitration and loses, the only interest at stake is the holder’s interest in having a patent monopoly.  The public’s interest in eliminating invalid patents is not disserved.

And if the arbitration decision is to have no effect on the patent’s validity in other proceedings, why does section 294(d) of the statute require that one of the parties inform the Director of the arbitration award on pain of the award otherwise being unenforceable?  In fact, the award is also entered publicly in the patent’s prosecution record.  One might assume that making the award of record is necessary to give the award preclusive effect.  But perhaps the idea is only to give a later licensee notice that a validity challenge has been successful even though it isn’t binding in subsequent proceedings.

Unfortunately, there appear to be no decided cases on the matter, so we are left to wonder.

Practical considerations.  A few observations can be made about all this as a practical matter. First, whether or not the arbitration has a collateral estoppel effect or not provides no real disincentive to a licensor to include an arbitration clause.  Collateral estoppel would surely apply if the licensor chose to litigate instead of arbitrate, unless it could show it did not have a full and fair opportunity to present its case.  Thus, arbitration provides no disadvantage over court in this regard.

Second, a licensor worried about the matter could suggest a provision in the arbitration clause that the award would simply say what if anything was owed in royalties without specifying the reasons.   Thus, no specific finding of validity would be required.  To be sure, the arbitrator is required to consider an invalidity defense, as noted above.  But that probably doesn’t mean the arbitrator has to include a specific finding on it in the award. Without a specific finding, no collateral estoppel effect is likely.

Third, the licensor still has an argument that section 294(c) should be read to eliminate the effect of an invalidity finding concerning a third party, as noted above.  This is no sure thing, but the issue could be decided in the licensor’s favor.

Finally, it seems unlikely the licensee will be concerned about whether a third party could or could not raise invalidity as a defense against its former licensor.  So long as the licensee is found not to have to pay royalties because the patent is invalid, whether or not its competitors have to pay is of little concern to the licensee. In fact, if its competitors have to pay and the licensee doesn’t, it will enjoy a competitive advantage.

Similar questions could arise concerning infringement findings in an arbitration.  Section 294 requires that the award be provided to the Director, which would include an infringement determination.  Again, a finding that the products at issue infringe the licensed patent would not be binding on a party in a later proceeding that was not a party to the arbitration.  A finding of non-infringement is much less likely to bind the licensor in subsequent disputes than a finding of invalidity.  The requirements of collateral estoppel may well not be met under the facts of the second case because different issues are being presented, depending on the products involved and the like.  And section 294(c) may foreclose use of a non-infringement finding in a later dispute involving a different licensee.  But it may not, as discussed above in the context of an invalidity finding.

Thus, arbitration remains a viable way to settle contractual disputes involving patents.  While it would be better if the statute was clearer on the precise effect arbitration determinations have in later proceedings, it is a benefit that there is a statute with the express purpose of allowing arbitration of patent disputes.

Next up. In the next article, we will proceed through the next stages in the process of arbitrating patent disputes, focusing on the use of experts.