Section 294 of the Patent Act requires that when
a patent dispute is arbitrated, a notice including a copy of the award
“shall” be given to the Director of the Patent and Trademark Office.
[B]ecause “confidentiality in [mediation] proceedings promotes
the free flow of information that may result in the settlement of a
dispute,” a party seeking discovery of confidential
communications must make a heightened showing
“demonstrat[ing] (1) a special need for the confidential material,
(2) resulting unfairness from a lack of discovery, and (3) that the
need for the evidence outweighs the interest in maintaining
confidentiality.
I. CONFIDENTIALITY AND PATENT DISPUTE RESOLUTION
The transparency of patent dispute resolution differs dramatically
between litigation and other forms of dispute resolution. The results of
courtroom litigation are rarely confidential. Although parties sometimes
seek to seal not just filings but also court decisions, those attempts
seldom succeed. In contrast, patent licenses, settlements of patent
litigation, and arbitration of patent disputes all are often accompanied by
confidentiality agreements. Such agreements are not always entirely
effective, because courts in subsequent proceedings may allow discovery
and sometimes admission of the information at issue. But even if parties
can ultimately obtain access to arbitration awards, settlements, or
licenses by initiating subsequent litigation, the need for litigation to
overcome confidentiality imposes a considerable cost and burden.
A. Confidentiality Agreements in Patent Dispute Resolution
A court seldom denies the public access to litigation documents, and
when it does, the decision to do so is the court’s, not the parties’. That gives some reason to believe that the decision will be made with
reference to the public interest. Outside the courtroom, however, parties
typically exercise control over whether the resolution of their dispute is
confidential, whether it comes through arbitration, pre-litigation
licensing, or settlement of litigation. That makes it less likely that the
confidentiality decision will be in the public interest.
1. Arbitration
Although confidentiality is often said to be one of the fundamental
attributes of arbitration, the rules of most arbitration bodies do not
require confidentiality. As many commentators point out, it is privacy,
not confidentiality, that is an essential part of arbitration. That is,
although the process takes place behind closed doors—it is “private” in
that sense—the parties must generally enter into a separate agreement to
keep the proceedings confidential. In the absence of such an agreement,
either of the parties would typically be permitted to reveal information
from the arbitration, though the tribunal itself is generally bound to
confidentiality.
The scope of a typical confidentiality agreement between parties to
arbitration can be illustrated by a recommended provision:
The parties shall maintain the confidential nature of the
arbitration proceeding and the Award, including the Hearing,
except as may be necessary to prepare for or conduct the
arbitration hearing on the merits, or as may be necessary in
connection with a court application for a preliminary remedy, a
judicial challenge to an Award or its enforcement, or unless
otherwise required by law or judicial decision.
Under this provision, neither party would be permitted, in the absence of
a legal obligation, to disclose information about the arbitration to
others without the permission of the other party.
The quoted confidentiality provision is one recommended by
practitioners because confidentiality is viewed by many as a benefit of
arbitration, in general and in the patent context. It is not entirely clear,
however, to what extent confidentiality really is viewed as essential by
parties to arbitration. Some descriptions of the advantages of
arbitration do not even mention confidentiality. Moreover, a study by
the Queen Mary School of International Arbitration found that only 35%
of respondents would not use arbitration if results were not
confidential, and 65% said that a lack of confidentiality in court was
not a principal reason for choosing arbitration.
In fact, there is arguably a move toward greater transparency in
arbitration, as evidenced by the United Nations Convention on
Transparency in Treaty-based Investor-State Arbitration, known as the
“Mauritius Convention on Transparency.” States parties to the
convention agree to apply the UNCITRAL Rules on Transparency in
Treaty-based Investor-State Arbitration. Those rules provide for
publication of documents, including awards, from the arbitration.
The rules also provide, however, that “confidential business information” shall not be made
public.
[C]onfidentiality of arbitral decisions may lead to inconsistent
resolution of disputes arising out of the same business
transaction but decided by different arbitral tribunals. This
carries the risk of conflicting awards. In these circumstances,
more transparency is desirable, especially for the stakeholders in
order to benefit of documents and information relevant
to each of the disputes.
A fundamental point of this Article, though, is that even if
confidentiality is preferred by the parties to dispute resolution, it may not
be beneficial to the public. Indeed, U.S. patent law requires that patent
arbitrations be public. Section 294 of the Patent Act requires that when
a patent dispute is arbitrated, a notice including a copy of the award
“shall” be given to the Director of the Patent and Trademark Office.
The Director then “shall” enter the notice in the prosecution history of
“each patent involved in such proceeding.” This requirement is,
however, widely ignored. The reason for the non-compliance,
presumably, is that the only penalty is that the award is unenforceable.
When parties ignore this requirement, they apparently benefit
sufficiently from keeping their resolution confidential so that neither
discloses the award, but the fact that parties do not typically comply
with the disclosure requirement should give us pause. Even if there are
private benefits to the parties from keeping the resolution of patent
disputes confidential, that confidentiality does not necessarily benefit the
public. If parties prefer that their patent arbitrations be confidential,
that preference may be one for competitive advantage rather than for a
more defensible reason.
2. Settlement and Licensing
Many patent disputes are resolved through litigation settlements or
private licensing rather than through arbitration or litigation to judgment.
In some cases, litigation may be initiated, but the parties subsequently
settle the case through private agreement. In others, the parties may
come to a private agreement on licensing terms without any formal
dispute resolution. These circumstances present somewhat different
issues than arbitration, particularly in evaluating the potential benefits of
secrecy, but these private forms of dispute resolution are, as with
arbitration, often confidential.
The absence of transparency in the settlement context has been
recognized for many years, most notably in Owen Fiss’s 1984 article
“Against Settlement.” The issue has been taken up more recently both
in the patent and arbitration contexts. However, the primary concern
of Fiss and others has been the legitimacy of confidential dispute
resolution, and the focus in the present article is different. The focus here
is on the competitive implications of confidentiality, given the
importance of information to the functioning of markets.
As with arbitration, “[p]arties regularly opt to keep terms, conditions
and licensing agreements confidential when settling patent infringement
disputes.”As will be discussed below, the effectiveness of such
provisions, like those for confidentiality of arbitrations, is not entirely
clear, but the provisions are similar, as this example from a “Settlement
and Patent License Agreement and Mutual Release” shows:
5.3 The contents, but not the mere existence[,] of this
Agreement are and shall be kept confidential by the Parties and
their Affiliates. Philips shall be permitted to list the Licensee on
a Philips website identifying the Licensee as having obtained a
license under the Philips SSL Luminaire and Retrofit Bulb
License Program. [redacted]
5.4 No confidentiality obligation shall apply to the extent
information so acquired:
. . .
(iv) must be disclosed pursuant to an order of a competent court
or administrative authority or pursuant to any mandatory law.
Licensing agreements in the absence of litigation typically have similar
provisions.
The agreement quoted above was available because it was included in
a required securities filing. Securities law requires that a party must
include as exhibits to its filings material agreements that were not
entered into in the ordinary course of business. This requirement might
be expected, then, to result in the disclosure of the terms of many
significant license agreements. However, license terms may remain
undisclosed because the filing party may request, and receive,
confidential treatment for important information in the filing.
“Common examples of this kind of information include pricing terms,
technical specifications and milestone payments.” As a result, the
relevant licensing terms of the contracts included as exhibits may in fact
be redacted, as they were in both the agreements cited above.
Settlements and licenses differ from arbitration awards in a number of
respects, but an important one is the time at which the parties agree on
confidentiality. Settlements and licenses are agreements on particular
terms, so when parties include a confidentiality provision in such an
agreement, they do so with knowledge of those terms. In arbitration,
however, the parties typically enter into a confidentiality agreement
when they agree to arbitrate, when the royalty or other terms are as yet
undetermined. As a result, parties entering into licenses and settlements
can make decisions on confidentiality based on how favorable are the
terms they have received. One commentator says that often “patentees
do not want the license terms to serve as precedent in other assertions of
the patent(s),” but that will depend, of course, on whether the terms are
favorable or not. For example, a patentee might insist on confidentiality
when it accepts a low royalty rate but negotiate for disclosure when it
receives a high one. Licensees would surely be a constraint on this
practice because licensees “may also not want other potential patent
plaintiffs to believe they are a ‘soft touch,’” but the point is that there
are opportunities for gaming the disclosure in a way that also
exacerbates the potential competition problems.
B. Limits on Confidentiality
A confidentiality agreement between parties resolving a patent
dispute will not always maintain confidentiality. Most importantly, as
the confidentiality clauses quoted above illustrate, legal requirements
such as court orders or discovery obligations may require disclosure of
information that the parties have agreed to keep confidential. As the
paragraphs below explain, however, the law in this area is not very clear,
with courts often, but not always, ordering disclosure. Even if courts were always willing to issue such orders, though, confidentiality
agreements would still be important, because many disputes do not, or
do not immediately, come before a court, as discussed in the subsequent
section.
1. Discovery and Admissibility in Court
In the U.S., the tests for discovery and admissibility of patent-related
agreements are generally decided by the United States Court of Appeals
for the Federal Circuit. The rules for settlements, licenses, and
arbitration documents differ, to the extent that those rules can be
determined. The Federal Circuit has addressed a number of cases on
settlements and license agreements, and although it has found both
admissible in certain circumstances, it has been more willing to allow
agreements that did not involve litigation. With respect to arbitration, the
law both in the U.S. and in other countries is even less clear.
The Federal Circuit has issued a series of not-always-consistent
decisions on discovery of settlement agreements and negotiations, and
many of these decisions have focused on the relevance of such discovery
to royalty rates. The court has indicated that both patent law and
evidence law have changed significantly enough so that it is not bound
by the Supreme Court’s 130-year-old statement that “t is clear that a
payment of any sum in settlement of a claim for an alleged infringement
cannot be taken as a standard to measure the value of the improvements
patented, in determining the damages sustained by the owners of the
patent in other cases of infringement.”
The Federal Circuit’s approach to the issue relies both on the rules of
evidence and on the context of the agreement. Some authors have
suggested that Federal Rule of Evidence 408 prohibits the introduction
of settlement agreements. But Rule 408 makes inadmissible evidence
of “furnishing, promising, or offering—or accepting, promising to
accept, or offering to accept—a valuable consideration in compromising
or attempting to compromise the claim,” which appears to focus on
settlement of the claim at issue, not settlement of prior, related claims.
On this point, the Federal Circuit states that “[t]he propriety of using
prior settlement agreements to prove the amount of a reasonable royalty
is questionable,” but apparently as a result not of Rule 408 but of the
settlement context, which makes it difficult to determine whether any
payments were in exchange for use of the technology or in exchange for
termination of litigation.
For that reason, the Federal Circuit has instead balanced the probative
value of the prior settlement agreement with possible prejudicial effects
under Federal Rule of Evidence 403. In its most recent case on the issue,
it noted the obvious “strong connection a settlement can have to the
merits of an issue common to the earlier and later suits,” but it also
emphasized other considerations:
On the other side of the balance, for various reasons a settlement
may be pushed toward being either too low . . . or too
high . . . relative to the value of the patented technology at issue
in a later suit. As to the former, for example, even if the
technology is identical in the earlier and later suits, the earlier
suit’s settlement figure may be too low to the extent that it was
lowered by the patent owner’s discounting of value by a
probability of losing on validity or infringement. As the
unchallenged jury instructions in this case indicate, the
hypothetical-negotiation rubric for the assessment of royalty
damages assumes that the asserted patents are valid and
infringed. . . .
At the same time, various factors may work in the opposite
direction, tending to make a settlement of an earlier suit too high
as evidence on the valuation question presented in a later
suit. . . . The earlier suit may have included a risk of enhanced
damages, a factor in the settling parties’ assessment of risk that
would push settlement value above the value of the technology.
And, of course, the litigation costs still to come at the time of
settlement may loom large in parties’ decisions to settle.
Ultimately, then, the court concluded that “[t]he particulars of the case
that was settled and the settlement, as well as of the case in which the
settlement is offered as evidence, matter to the Rule 403 balance.”
Included in those particulars, perhaps, is the significance of
confidentiality itself. Quoting a Second Circuit decision from the
mediation context, the court said that
[B]ecause “confidentiality in [mediation] proceedings promotes
the free flow of information that may result in the settlement of a
dispute,” a party seeking discovery of confidential
communications must make a heightened showing
“demonstrat[ing] (1) a special need for the confidential material,
(2) resulting unfairness from a lack of discovery, and (3) that the
need for the evidence outweighs the interest in maintaining
confidentiality.
The case in which it made this statement involved an attempt to
introduce evidence of settlement discussions, not just settlement terms,
though, so it is possible that the court would be more willing to admit a
settlement agreement itself.
In contrast to settlement agreements, licenses agreed to in the absence
of litigation, and thus arguably undistorted by it, are more generally
admissible. The Federal Circuit’s concerns about admission of
settlements relate primarily to the particular distortions that can be
introduced by the litigation context, as shown in the quotation above.
Licenses agreed to in the absence of litigation are less likely to be
subject to those distortions, though the obvious possibility of subsequent
litigation could presumably have similar effect. Licenses are often
admitted only under seal, though, given that they often contain
confidential information like royalty rates. As a result, admission of a
license in one litigation (or, of course, one arbitration) may not make it
generally available, and subsequent litigation may be required to gain
access to it.
The availability in court of prior arbitration awards and documents
from arbitration proceedings is less clear. Some courts have been willing
to order disclosure of arbitration documents, but in many of these cases
there was not a confidentiality agreement between the parties. That is,
the argument for confidentiality was based solely on the fact of
arbitration. In that context, given that confidentiality is not in fact an
inherent characteristic of arbitration, disclosure is unsurprising.
Furthermore, many arbitrations required that arbitration documents be
destroyed following the arbitration, so it is possible that only the award
itself would be available. If that award did not provide all the
information in the other documents, discovery of the award alone would
be of limited value.
In any event, even within a single court, decisions on these issues can
differ dramatically. For example, in a case in which a party sought
confirmation of an arbitration award and both parties moved to keep
documents apparently from that arbitration under seal, the Seventh
Circuit in Baxter International, Inc. v. Abbott Laboratories denied the
motion without prejudice, but said that the party opposing confirmation
of the award “had, and spurned, a sure path to dispute resolution with
complete confidentiality: accept the result of the closed arbitration.”
Although it is not entirely clear that the court meant to say that
“complete confidentiality” would also be maintained in other,
subsequent cases, the statement appears to support such an
interpretation.
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