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Why are intellectual property disputes particularly suitable for negotiation and mediation?

Monday 20 December 2021

Martin Hauser​​​​​​​*
​Martin Hauser Mediation; Co-Chair, IBA Mediation Committee

Many times, I have been intrigued to find that in a negotiation the parties evaluate their intellectual property rights differently than in a parallel legal process. I will first present two anonymised disputes resulting from my practice as a negotiator and mediator, before asking the question of what determines the value of intellectual property rights and attempting an answer. A summary will conclude this article.

Two intellectual property disputes

Trademark and copyright licenses

The first matter concerns an international dispute in the luxury industry. A trademark license for luxury goods was due to expire after many years having not been renewed by the licensor. During the term of the trademark-license contract, the licensee created from scratch a new business activity for luxury products, which was very successful. After expiration of the license and after recovering the licensed rights, the licensor expected to be able to operate the luxury-products business activity created by the licensee under the license. The licensee was aware of the licensor’s plans to pursue the new business activity.

As the end of the trademark license approached, a competitor of the licensee purchased the business from the licensor with all the intellectual property rights attached. In the circumstances, the licensee offered to negotiate the operation of the new business activity with the licensor. The licensee sought considerable financial compensation to release the business based on its importance to the overall business and annual turnover. However, the licensor felt neither legally bound nor inclined to pay the amount sought in view of the coming expiration of the license agreement.

While the ensuing negotiations initially failed due to legal positions taken by representatives of both parties, the licensor eventually declared himself willing to pay a token amount in order to ensure a "smooth transfer of the business" from the licensee. The negotiations nevertheless faltered despite a good atmosphere between the participants. With the risk of legal action looming, the licensee changed his negotiating strategy to focus more on the interests of both parties and to give space for expressions of emotion consistent with principles of the Harvard Negotiation Concept. It soon became evident that the licensor had for several years underestimated the financial contribution of two flagship luxury products to the economic success of the licensee. The shapes of the packaging of these products were particularly original, a fact undisputed between the parties who considered that the packaging was protected by copyright.

Negotiations were protracted and highly emotional on both sides with the licensor insisting on the right to simply recover the rights held by the licensee including the activity developed by the licensee. The licensee finally succeeded in convincing the licensor that if the business created by the licensee were transferred, the licensor could achieve the same annual turnover as before the license with existing products, in particular the two flagship luxury products. As a result, the compensation claimed by the licensee was cast in a different light that was in the economic interest of the licensor.

During the negotiations, it became increasingly clear that the shapes of the packaging of the two luxury products, eligible for copyright protection, were of great value to the business as they were its main source of turnover. If the licensor wanted to continue operating the business successfully, he would need to use their existing shapes and would have committed a copyright infringement if the licensee had not transferred the copyrights. Meanwhile, the licensor repeatedly expressed incomprehension that the packaging of the two luxury products, though admittedly protected by copyright, could be of significant value. Nevertheless, once the mutual economic interests of the parties were clarified, they were able to settle the dispute to their mutual benefit in an amount that approximated the amount of compensation initially requested by the licensee and refused by the licensor.

Patent law

The second matter concerns an international patent case in the field of augmented reality, a technique that connects the digital and physical worlds in audio-visual media. The claimant in the dispute maintained a research and development department with various highly specialized technicians. Initially, it filed for patent protection for its technical developments in its home country. The dispute arose when a foreign party, a competitor, allegedly poached two of its technicians and filed for patent protection of technologies developed by the claimant. The claimant first brought a lawsuit in its home country against the foreign defendant to claim the patent application and obtain damages for the allegedly unlawful poaching of the two technicians.

The claimant also brought an action before the labour court in its country against the two former technicians. For its part, the foreign defendant brought an action abroad against the claimant for alleged infringements of its patent filed abroad. The dispute raged for more than six years with no resolution. Finally, the parties were able to agree to initiate a mediation administered by an international institution. The mediated negotiations were at first extremely emotional. The claimant accused the defendant of theft, wrongfully filing the patent application, and abusive poaching of the technicians with the aim of eliminating the claimant as a competitor. On this basis, the claimant argued that the defendant was required to return the patent application. The defendant refused, and negotiation stalled on this basis.

It was only when the interests of the parties were meaningfully explored, in accordance with the principles of the Harvard Concept, that a breakthrough was reached. After the strong emotions of the parties had been addressed, it emerged, somewhat surprisingly, that the claimant had no economic interest in the restitution of the invention despite that it vigorously pursued its claim in the court proceedings. When questioned by the mediator, the claimant stated that it had no objection to each party maintaining their respective patent applications because technological developments and product cycles had gone far beyond the respective patent applications and because the two parties had developed the invention differently.

With the interests of the parties regarding clarified, they developed a solution to the conflict that brought an end to both the judicial patent proceedings and the proceeding before the labour court against the former employees. In the wake of this amicable turn of events, the defendant expressed amazement that the parties to the mediation negotiated matters completely different from those that were at the heart of the pleadings before the courts. In other words, the defendant was surprised that the patent applications challenged and claimed ultimately had no importance or economic value in the negotiations.

What determines the value of intellectual property rights?

In the two cases described, it is striking that the parties assessed the intellectual property rights in question in differently and even in opposing ways.

In the trademark and copyright matter, the copyright was initially irrelevant. The licensor assumed that if the trademark license expired, the activity created by the licensee would revert to it with the return of trademark rights. It was only by exploring the parties’ interests that the forms of the copyright-protected packaging of the two flagship luxury items were found to be of considerable economic importance. As it turned out, the value of the copyright only increased within the framework of the negotiations.

In the patent matter, by contrast, the multi-year disputes and early mediated negotiations focused entirely on the issue of patent restitution. The claimant had argued in the courts that the defendant's patent application should be returned to him as if the application itself had value. It was therefore striking to later discover in the mediation that the claimant had no particular interest in the return of the patent application filed by the defendant. It was only after investigating the interests of both parties in mediation, in particular those of the claimant, that the request for restitution was found to have no economic interest either for the claimant or for the defendant. This realization opened a path to an amicable solution to the long-standing dispute between the parties.

How can parties assess intellectual property rights so differently? What ultimately determines the value of intellectual property rights? Do intellectual property rights have no value in themselves? Are they different from material goods in this respect? To what extent do the negative right of prohibition and the positive right of exploitation, attributed to intellectual property rights, come into play? What use are intellectual property rights when their implementation and value are based on the interests of the parties?

Attempting a response

One might think that the value of an intellectual property right is clearly determined by the interests of its owner and not by the mere existence of the intellectual property right as such. By this reasoning, valuing intellectual property rights seems no different than valuing material property rights. Is this really the case?

However, the material existence of material property rights gives the owner the possibility of use. Possession attributes material property rights to the owner and provides protection against claims of ownership by third parties. The interest in the use of material objects may be greater or lesser and strongly shaped by economic interests. Following this reasoning, one might conclude that the owner of intellectual property rights can use copyrighted packaging or patented augmented-reality technology. This conclusion would be mistaken.

Applied to the matters considered, copyright does not grant an owner the physical use of the packaging, and patent law does not grant the actual use of augmented reality technology. Intellectual property rights instead grant their owners, upstream of respective use, the right to exclusively reproduce packaging and implement the protected technology of augmented reality in the material world. These issues are primary and separate from the issue of use.  

While material property rights are based on existing material goods, intellectual property rights derive from legislative determinations about the extent to which the holder of such rights has an interest in converting them into the material world: in the matters considered, the material use of manufactured packaging and technical objects for augmented reality. How is this interest of the owner of an intellectual property right determined, and what does it depend on?

By virtue of market policies, States seek to promote technical progress by granting the holders of intellectual property rights preferential treatment that contributes to competitive advantage in the market. Intellectual property rights thus seek to extend the time between an original creation or innovation and imitations by competitors in order to give holders of intellectual property rights a "head start" to cover creation or development costs.

An owner's interest in the exploitation of an intellectual property right will be strongly influenced by the competitive position that the owner expects or hopes to obtain in a specific market under the protection of the intellectual property title. In other words, the competitive position of the owner of the intellectual property right will determine interest in the exploitation of the intellectual property right.

This insight can help to explain the different behaviours of the parties in the two disputes discussed above:

In the trademark and copyright matter, the two copyrighted packages were suddenly given an importance and value that no one expected and that even seemed to the licensor to be exaggerated. By applying the above considerations, a different picture emerges. The licensee, whose trademark license expired, did not request compensation for the expiration but rather sought to monetize the transfer to its competitor of the business created under the license. It is a happy coincidence that the trademark licensor had in the meantime been acquired by a competitor. If the licensor were from a completely different industry, it is unlikely that such a sales opportunity would have seen the light of day.

This allowed the licensee the possibility of selling the business activity he had developed because the competitor offered a priori the conditions to continue use in an equally profitable manner. The decisive factor was the market position of the licensor. In other words, the key was not the ability to reproduce, under copyright law, the two packages of highly profitable luxury items but rather the right of use in copyright which had been strengthened by the competitive position of the licensor in the market. At the same time, the negative, prohibitive right inherent in copyright served as a protective measure framing the sale of the business activity as protection of the acquirer of the business against third-party imitators of luxury goods. This explains why the negotiating parties ultimately felt that a high price had been paid for the copyright in the forms of the packaging. In effect, this price reflected the market value of the activity transferred by the licensee to the licensor after negotiation.

In the patent matter, the claims for restitution of patent applications and patent infringement in the negotiations ultimately proved to be meaningless and to some extent without economic value. This could be explained by rapid technological progress in the field of augmented reality. The competitive advantage in the relevant market expected from patent applications was ultimately unimportant given the economic positions of both parties who had developed in the same market.

The diminished relevance of the claims for restitution of patents and patent applications was borne out in their settlement agreement. The parties were surprised themselves that claims that had played a central role in court proceedings for years were of little importance. Nonetheless, the negative, prohibitive right flowing from patent law ultimately led the parties to sit down at a negotiating table. As valuable as the effect might be, a court judgment would not have accounted for the interests of the parties.

Apprehension about an intellectual property right can mask the economic interests pursued by its owner. However, the pursuit of interests by a party helps to clarify market positions and competitive interests, which are ultimately germane to the exploitation of intellectual property rights and their value. For this reason, the field of intellectual property is particularly suitable for principled negotiations according to the Harvard Concept in particular within the framework of mediation. If a party refuses to come to the negotiating table and legal proceedings to assert intellectual property rights appear necessary, the parties should be advised that a subsequent judgment may not be in their interests. Asserting an intellectual property right could at the same time serve as a means to convince the opposing party to negotiate.

Summary

Intellectual property rights are interpreted based on the competitive situation of the rights holder. Unlike physical goods, their use in itself has no value. Their value to a party is determined by economic interests and not by the legal options conferred by the rights. In the two matters described above, the economic interests of the parties underlying the intellectual property rights were clearly different or even opposed. In the case concerning trademark licensing and copyright, both packages appeared to be overvalued to the parties, while in the case concerning patents, the patent applications ultimately came to be regarded as valueless by the parties. In both cases, these dynamics may be explained by the competitive positions in the relevant market of the rights holders and their respective economic interests. It follows that intellectual property right disputes are particularly suitable for interest-based negotiations, in particular within the framework of mediation.

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*My thanks go to Professor James Claxton, Newsletter Editor of the IBA Mediation Committee, for his careful review and proofreading of this English translation.