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Role of Mediation in patent infringement disputes

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Mediation is a potentially efficient and cost-effective alternative to traditional litigation and arbitration. The use of mediation has become increasingly popular in several areas of dispute resolution and one such area is that of intellectual property (IP).

As the field of Intellectual property is vast, here the importance of mediation as an alternative to both litigation and arbitration in patent infringement disputes is discussed.

A patent can be defined as a set of exclusive rights granted by a sovereign state to an inventor or assignee for a limited period of time in exchange for detailed public disclosure of an invention typically for 20 years during which the product or process cannot be exploited by others.

Patent disputes typically arise when patent rights are breached i.e Patent infringement occurs when a third party makes, uses, sells, offers to sell a patented invention without the patent owner’s permission. The scope of the patented invention or the extent of protection is defined in the claims of the granted patent. Therefore, patent infringement disputes involve courts interpreting and evaluating the claims of a patent on which the protection is sought. This is a complex procedure and the litigation process often become expensive and complicated. In the defense of infringement party allegedly responds with a counterclaim of patent invalidity and a defendant involved in patent litigation may ask to reexamine the patent being litigated. During re-examination the court will reconsider the validity of original patent and whether it meets the statutory requirements of novelty, inventiveness and non-obviousness. If a defendant successfully pleads the defence of a patent the patent owner will lose not only the case but also the patent itself.

Alternatively, mediation in patent infringement disputes can save time and money by avoiding the interpretation and reinterpretation of patent claims. Also, mediation removes the risk of patent invalidation and promotes creative solution in patent disputes. Moreover, unlike litigation, mediation process is confidential.  

For example- A company holding patent rights for a technology founds that its competing company is selling the same technology without any license. The concerned company threatens to file patent infringement case in all jurisdictions in which the company is holding patent rights. But the mounting cost of legal action would take a toll on the company and the litigation process is very time consuming. In such a situation, mediation is instrumental in transforming a hostile situation in which the parties were preparing to engage in prolonged and expensive litigation into one in which they were able to conclude an arrangement which suits the business interests of both parties and ensures the profitable use of the technology in the service of those interests.

Mediation is a great idea and can offer people a way of working things out without spending lots of money which could be better spent elsewhere to grow a business.

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Facebook v/s ConnectU Mediation Case study

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The twin brothers- Tyler and Cameron Winklevoss claimed that Mark Zuckerberg stole the idea for Facebook from them and had brought Facebook against the Winklevoss’s company- ConnectU. The twin brothers initiated a law suit against Mr. Zuckerberg inorder to negotiate a settlement, accusing it of unfair business practices.

The district court in California ordered the parties to mediate.

Before the mediation began, both the parties signed a confidentiality agreement that stated that all statements made during mediation will not be made public and were inadmissible in any arbitral, judicial, or other proceeding. After all the arguments and discussions, a settlement agreement was signed that between both the parties and Winklevosses gave up ConnectU in return for cash and Facebook shares. The Settlement Agreement purported to end all disputes between the parties.

Just after signing the agreement, Winklevosses affirmed that there was a difference in their understanding of the value of the shares of Facebook that they had agreed to accept and that they had been defrauded (in violation of Section 10(b)-5) in the mediation. The twins claimed that Facebook led them to believe during the mediation discussions that Facebook’s share value was $35.90, even though Facebook’s internal tax valuation had determined its share value to be $8.88. Had they known about this valuation during the mediation, they claim, they would never have signed the Settlement Agreement.

Section 10(b)-5 is a regulation that deems it to be illegal for anybody to directly or indirectly use any measure to defraud, make false statements, omit relevant information or otherwise conduct operations of business that would deceive another person; in relation to conducting transactions involving stock and other securities. A party negotiating an exchange of shares to settle a lawsuit could violate Rule 10b-5 by misstating or hiding information that would materially change the other side’s evaluation of the settlement.

In support of these claims, the Winklevosses proffered evidence of what was said and not said during the mediation. However the statements were held inadmissible based on the confidentiality agreement signed by the parties that stated that “All statements made during the course of the mediation or in mediator follow-up thereafter at any time prior to complete settlement of the matter are privileged settlement discussions and are non-discoverable and inadmissible for any purpose including in any legal proceeding. Without such evidence, their securities claims must fail.

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Further, the Winklevoss twins sought to invalidate the settlement agreement under Section 29(b) of the Securities Exchange Act of 1934 that voids any settlement agreement made in violation of Rule 10b-5. Winklevosses hired a team of lawyers and a financial advisor. Finally, the Court noted that the current valuation of Facebook appears to be three times what the Winklevosses were claiming they were entitled to demonstrating the value of settlement to be $160 million, that was mere $65 million at the time of the settlement.

However, a number of lessons can be learnt from this mediation case study. Whatever happens in mediation stays in mediation. Parties need to be sure that all essential information is included in the settlement agreement. The settlement agreement should be clearly-written. Since no statements made during mediation will be admissible and settlement agreement is the only admissible and enforceable document of mediation.

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