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At least one other court appears
sympathetic to the notion that vicari-
ous liability should apply to acts of
trade secret misappropriation. In
Hagen v. Burmeister & Assoc., Inc.
[633 N.W.2d 497, 504 (Minn. 2001)],
the Minnesota Supreme Court
assumed without deciding that an
employer can be held vicariously
liable. The court explained that vicar-
ious liability is not based on fault of
the employer, but rather is imposed
based on a policy choice that liability
for acts committed within the scope of
employment ought to be allocated to
employers as a cost of doing busi-
ness. [Id.] In other words, what the
employer knew or even what it did is
largely irrelevant. Rather, the focus is
on whether the employee committed
the act of trade secret misappropria-
tion within the scope of employ-
mentthat is, the conduct was related
to the employees work duties and
occurred within the work-related
limits of time and place. [Id.]
Practice Tips
Alternative Dispute
Resolution
Roderick M. Thompson
New Patent ADR
Materials from the
CPR Institute
As with most business disputes, con-
flicts in regard to intellectual property
are often better resolved by mediation
and arbitration rather than by litigation.
Alternative dispute resolution (ADR)
procedures, however, generally have
been slower to catch on in patent cases
than in other areas. In 2003, the CPR
(conflict prevention and resolution)
Institute for Dispute Resolution (the
34
This scope of employment require-
ment is construed broadly. For exam-
ple, in Microstrategy [331 F. Supp.2d
at 418], the employer argued that its
errant employees had signed an
employment agreement forbidding
them from obtaining or using confi-
dential information from competitors
and that its employees therefore acted
contrary to and outside the scope of
their employment by using their for-
mer employers trade secrets. The court
was not persuaded, ruling that [o]ne
can act in the scope of ones employ-
ment even if the specific acts per-
formed are explicitly forbidden by the
employer, so long as the act was
intended to further the employers
interests rather than being wholly
motivated by personal interest. [Id.]
Accordingly, vicarious liability for
trade secret misappropriation threatens
to leave employers virtually defenseless
against their employees misconduct.
Given the path charted by the courts in
Newport News Indus. and Hagen
CPR), long a source of ADR innovation,
formed a Patent Commission (the Com-
mission) with more than 30 members to
address the issues surrounding the inte-
gration of ADR processes into the patent
dispute landscape. The Commissions
Arbitration Subcommittee revised the
CPRs Rules for Non-Administered
Arbitration of Patent and Trade Secret
Disputes, first issued in 1993. The CPR
has now issued a new version, with
commentary, intended to refine the
process and meet some practical diffi-
culties. The new text can be found on the
IP Litigator
around the statutory knowledge require-
ment for trade secret misappropriation,
employers should find little comfort in
a head-in-the-sand approach to the
risks that accompany any new employee
hired from a competitor. Whether those
rulings or the ruling in Infinity Products
precluding vicarious liability will ulti-
mately prevail in the majority of courts
is open to debate. As a practical matter,
however, until the courts have more
thoroughly addressed the issue of vicar-
ious liability for trade secret misappro-
priation, employers are well advised to
generally inform themselves of the
trade secret baggage that new employ-
ees may bring with them to their new
job, identifying potential areas of con-
cern and taking steps to prevent the use
or disclosure of a former employers
trade secrets on the job.
York M. Faulkner is a partner in the
IP Specialties Group of Finnegan,
Henderson, Farabow, Garrett and
Dunner, LLP in Washington, DC.
CPRs Web site at www.cpradr.org/pdfs/
patentrulesmasterchanges05.pdf. It
also includes several model agree-
ments, including a listener agree-
ment, a confidentiality agreement, an
ex parte adjudication agreement, and
an agreement for neutral fact-finding
in intellectual property cases, the last
two with useful commentary.
Among the most important issues
affecting patent adjudication is its col-
lateral effect on the vitality of the
patent. Because a final adjudication of
invalidity supplies a defense to all
accused infringers [see Blonder-
Tongue Laboratories, Inc. v. University
of Illinois Foundation, 402 U.S. 313
(1971)], the outcome of a patent case
may extend beyond the immediate par-
ties involved. For this reason, a paten-
tee may prefer not to have a reasoned
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IP Lit 0905 #3.qxd 8/30/05 2:22 PM Page 35
decision adjudicating, even privately,
the validity of its patent. An arbitration
decision on infringement is generally
confined in its effect to the parties
themselves. [See 35 U.S.C. 294(c)
(award by arbitrator shall be final and
binding between the parties but shall
have no force and effect on any other
person); 3Com Corp. v. Willemijn
Houdstermaaschappij, BV, 1994 WL
619283, *1 (N.D.Cal.) (issue preclu-
sion in favor of third party by reason of
award prohibited).] The binding effect
of the award has been extended to oth-
ers in privity with a party [see Cardiac
Pacemakers, Inc. v. St. Jude Medical,
Inc., 149 F. Supp. 2d 610, 613 (S.D.
Ind. 2001)] but no further.
However, once an arbitration award
finds a patent invalid, it becomes very
perilous to rely on that patent at all or
to enforce it against anyone else.
Knowingly enforcing rights in an
invalid patent can be an antitrust viola-
tion. [See Walker Process Equip., Inc.
v. Food Machinery & Chem. Corp.,
382 U.S. 172 (1965).] If a patentee
does not know that its patent is invalid,
it may rely on the presentation of valid-
ity in good faith without liability. How-
ever, if it does know, enforcement can
be deemed in bad faith, which can sus-
tain antitrust liability. [See Handgards,
Inc. v. Ethicon, Inc., 601 F.2d 986 (9th
Cir. 1979).] Moreover, under 35 U.S.C.
294(d), a patentee must notify the
Patent Office of an arbitration award
concerning its patent and provide a
copy of the award, which will then be
entered in the prosecution history. An
award is not enforceable until this
notice has been made [see 35 U.S.C.
294(e)]. Having a bare award simply
stating who won it can avoid or at least
temper the undesirable consequences
of having to give this notice.
A company whose patent might be
impugned as invalid by a reasoned
award may therefore prefer that the
arbitrator of an infringement dispute
merely announce who won the award
and stop there. As such, a decision does
not explicitly rule on validity; it allows
even a losing patentee to continue
good-faith enforcement of its patent
SEPTEMBER/OCTOBER 2005
against everyone but the winning party.
The CPRs Rule 14.2 provides that the
award shall not include a statement of
the reasoning on which the award rests,
unless the parties otherwise agree.
This makes a bare award (which is also
cheaper and harder to challenge) than
the default option, relieving either
party of the need to request it. Of
course, it was always possible for par-
ties to modify the rules for their arbi-
tration, but it could be cumbersome,
and any agreement on modifications
was difficult to achieve after a dispute
had arisen. Rule 14.2 avoids this diffi-
culty. It can still be set aside by agree-
ment. In one recent case, for example,
the parties requested a reasoned award
on claims construction, for use if
future disputes arise under the original
settlement agreement. [See CPR
News, Infringement Award Demon-
strates Use of CPR Patent Rules, 23
Alternatives to the High Cost of Litiga-
tion (Feb. 2005), at 18.]
The Commissions concern to protect
the confidentiality of intellectual prop-
erty runs throughout the text. Rule
3.3(e), for example, provides that the
initial notice of a trade secrets claim
must specify the general area of
alleged trade secrets under which the
claim is made, a formulation that does
not require disclosure of any propri-
etary or confidential information at
that early stage. Similarly, under Rule
3.5(b), the respondent is required to
provide a statement of the general
nature of its defense. Even if there is
no actual basis for questioning the
respondents independence or impar-
tiality, the commentary to Rule 7.3
clearly allows a challenge to an arbitra-
tor when there are sound reasons for
not giving him or her access to confi-
dential information (e.g., prior affilia-
tion with a company in competition
with [a] party) not resolved infor-
mally before selection. New Rule 11
gives the tribunal the power to issue
orders to protect the confidentiality of
proprietary, trade-secret, or other sen-
sitive information disclosed in dis-
covery; Rule 17.5 gives similar
authority for material disclosed during
IP Litigator
the proceeding, including (new in this
version) confidential business infor-
mation . . . of commercial, financial or
industrial significance. Rule 17 con-
tains elaborate confidentiality provi-
sions, as does the separate annexed
confidentiality agreement; a separate
model agreement for ex parte adjudi-
cation provides a procedure that allows
parties unwilling to disclose technol-
ogy even under these safeguards to
make their disclosures in confidence
only to the chosen adjudicator, who
acts as a wall between the parties.
In keeping with the CPRs philoso-
phy of simplicity in arbitration, the
default composition of the tribunal is
still a single arbitrator. If party-
appointed arbitrators are desired, they
are to be independent and impartial,
and ex parte communication is forbid-
den after appointment. The CPR
believes, with good reason, that pro-
ceedings before single arbitrators are
faster and cheaper than those before
three-person panels. It also believes
that the adversary role should be per-
formed exclusively by each partys
counsel . . . and that permitting arbitra-
tors to play such a role is prejudicial to
the disinterested and candid delibera-
tions in which the panel should
engage. [See commentary to Rule 7.]
Although the substance of the rules
remains generally the same, some sec-
tions have been extensively revised
and simplified. For instance, the rules
for selection of arbitrators by the par-
ties (Rule 5) and by the CPR (Rule 6),
for challenging and replacing them
(Rule 7), for establishing case-spe-
cific procedures (Rule 9), and for set-
tlement and mediation (Rule 18) have
all been reorganized, with some elab-
orate procedures having been dropped
and others modified. An innovation in
new Rule 7.5(b) gives the CPR the
discretion not to allow a party to
appoint a new arbitrator if its previous
one has been challenged for cause
about which the party knew or should
have known. Under the former Rule
10, interrogatories were not used, but
new Rule 11 permits 10 interrogato-
ries and five depositions for each
35
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party unless otherwise ordered or
agreed. Under Rule 12.2, good cause
is now required to supplement infor-
mation in the prehearing memoran-
dum; under Rule 12.4, there are to be
no hearing transcripts unless other-
wise agreed; and a number of the evi-
dence and hearings provisions in Rule
12 have also been changed. Resort to
court for urgent interim measures of
protection is still specifically autho-
rized, but Rule 13.1 now allows this
only if the tribunal is unable to act
itself on an urgent request. Whereas
former Rule 15.2 allowed the tribunal
(after a hearing) to apportion costs in
such manner as it deems reasonable,
new Rule 16.3 prescribes that costs
are to be shared equally, unless there
is a contrary agreement or there has
been obstruction or bad faith. Rule
21.3 now binds arbitrators to the Code
of Ethics for Arbitrators in Commer-
cial Disputes (2004). Examples could
be multiplied.
In some situations, there may be good
reason not to agree to arbitration, even
if the alternative is more burdensome
and less private. The CPRs rules make
arbitration of patent cases an attractive
and flexible optionbut it is important
to use an up-to-date rulebook.
Another product of the CPRs Patent
Commission comes from its Mediation
Subcommittee in the form of a new 32-
Federal Circuit Report
Robert A. Matthews, Jr. and
George D. Medlock, Jr.
Proper Marking
Requires Coverage by
at Least One Claim of
Each Patent Listed
A patent grants its owner the valuable
right to exclude others from making,
using, selling, or offering to sell an
invention. In exchange for this right, a
36
page Patent Mediation Deskbook: Better
Solutions for Business. The document
ably states the case for patent mediation.
Patents are crucial business assets, and
there are many more of them than there
used to be; 64 percent of all US patents
were issued from 1990 to 2001. The cost
of patent litigation is rising enormously,
however, and a majority of patent cases
settle anyway. Why not, then, settle them
sooner and cheaper, with less distraction,
and more discreetly?
Even though most of the points in
favor of mediation apply to disputes
generally, the technique is well suited
for patent disputes. As with arbitration,
neutrals can be selected for their under-
standing of the technology, and the pri-
vacy of process and particulars can be
closely guarded. Arbitration is still an
adversary process, however, with a win-
ner and a loser; mediation removes the
adversary element and tries to work
around competitive postures toward a
mutually satisfactory solution. Active
involvement of the parties decision-
makers, experts, and especially business
(as opposed to technical or legal) repre-
sentatives, fosters creative, interest-
related solutions. Mediation may go
beyond disputed rights, for example, to
produce a cross-licensing agreement
that satisfies everyone. Achieving such
a result would be impossible through
either litigation or arbitration.
patentee is required to meet certain
conditions, one of which is giving
notice to the public that a product man-
ufactured or licensed by the patentee is
covered by its patents. Such notice
avoids the unintentional infringement
of a patent by the public. Under Sec-
tion 287 of the Patent Act, a patent
owner is required to give notice by
IP Litigator
In its Case for Patent Mediation, the
Deskbook expresses the CPRs rational
business approach to conflict resolution.
The detailed Five-Step CPR Roadmap
for Effective Patent Mediations that fol-
lows is a helpful guide to envisioning the
mediation solution, structuring it, and
then executing it. Although mediation
fans may be familiar with much of this
material, not everyone is as knowledge-
able. A lot of the information may be
new to generalists or even to some intel-
lectual property lawyers. The Deskbook
may be most useful in helping those who
favor mediation persuade decisionmak-
ers on both sides that it is worth a try.
The CPRs Patent Mediation Desk-
book: Better Solutions for Business is
available from the CPRs Web site
www.cpradr.org.
Roderick M. Thompson, a litigation
partner in the San Francisco firm of
Farella Braun and Martel LLP,
specializes in trials, arbitrations, and
mediations of intellectual property,
antitrust, and technology cases. He can
be reached at (415) 954-4445 or
rthompson@fbm.com. He is a member
of the Arbitration Subcommittee of the
CPRs Patent Commission and serves as
a neutral on the CPRs Technology Panel.
Mr. Thompson gratefully acknowledges
the contributions of his colleague, David
Phillips, in preparing this column.
marking its patented product with the
appropriate patents. [35 U.S.C. 287
(2004).] Failure of the patent owner to
mark a product results in the forfeiture
of damages for acts that occurred
before the infringer received actual
notice of the patent from the patentee.
[35 U.S.C. 287(a).] This penalty only
serves as a limitation on possible dam-
ages, however, and does not prevent the
patent owner from obtaining an injunc-
tion against further infringement.
Given the valuable right to exclusion
associated with a patent, it should come
as no surprise that occasionally,
unpatented products are falsely marked
as if they are covered by patents. False
marking, however, is barred by Section
SEPTEMBER/OCTOBER 2005
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.