Arbitrating the Patent Case Part XXV: Appeals

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In this series, we have been discussing patent arbitration.  The discussion has ranged from the benefits and drawbacks of arbitrating patent issues, to the statutory basis for patent arbitration, and from preparing and presenting your case at hearing, to attempts to vacate the award.  I had earlier promised to focus specifically on arbitration appeals and will do that now.

As noted in earlier articles, the standard for overturning an arbitration award is tough.  It is not like the standard for an appeal from a trial court judgment, which is itself fairly tough.  The arbitration standard is higher.  Erroneous factual or legal determinations are not enough. There generally has to be an issue with the integrity of the process including a reasonable perception of partiality of the arbitrator, refusing to hear material evidence, deciding matters not submitted to arbitration in the parties’ contract, or the like.

Enhanced appellate review

Since arbitration is a matter of contract, some lawyers have sought to change the standard of review of an arbitration award by contract so that it the same as the standard on appeal of a judgment entered by a court.  That would provide the benefits of arbitration, including a less formal process, the ability to choose a decision maker, less expense, and other advantages.  But the parties could still take an appeal to address what they consider to be erroneous factual or legal factual determinations.

This hasn’t worked lately.  It showed some promise at first.  For example, the Third Circuit, recognizing the importance of the parties’ freedom to contract, said in 2001 that it had decided to “[join] with the great weight of authority and hold that parties may opt out of the FAA’s off-the-rack vacatur standards and fashion their own . . . “  Roadway Package System, Inc. v. Kayser, 257 F.3d 287, 293 (3d Cir. 2001).  But in 2008, the Supreme Court held in Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 584 (2008) that an award could be vacated only upon the grounds stated in the Federal Arbitration Act, which cannot be supplemented by contract.

There may still be some hope under state arbitration acts, if they apply.  The United States Supreme Court recognized this in Hall Street.  Id. at 590.  And the California Supreme Court allowed the parties to contract that legal errors were in excess of arbitral authority, allowing vacation for misapplying the law.  Cable Connection, Inc. v. DIRECTV, Inc., 190 P.3d 586 (Cal.  2008). Of course, because the FAA applies to disputes involving interstate commerce, it most likely will apply to your patent arbitration.  So relying on a state arbitration act is not usually very promising.  And of course, your state would have to agree with the California Supreme Court that parties could change the state law standards for vacating an award, which typically mirror the FAA.  Not all courts agree.  The Main Supreme Court ,for example, does not agree  See HL 1, LLC v. Riverwalk, LLC, 15 .A.3d 725  (Me. 2011).

Forbidding judicial review

Parties have also tried to go the other way, forbidding judicial review of arbitration awards altogether in their contract.  That hasn’t worked either. For the example, the Ninth Circuit concluded in In Re: Wal-Mart Wage and Hour Employment Practices Litigation, 737 F.3d 1262, 1268 (9th Cir. 2013) that “[j]ust as the text of the FAA compels the conclusion that the grounds for vacatur of an arbitration award may not be supplemented, it also compels the conclusion that these grounds are not waivable, or subject to elimination by contract.”  This is because, among other things, eliminating judicial review would “frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration.”  Id.

Arbitral appeals 

Does all this mean parties must simply forego any hope of appellate review of an arbitration award?  No, it doesn’t.  The parties can contract for appellate review within arbitration.

AAA now provides, for example, optional rules for appealing an arbitration award.  (Available at adr.org. )  The grounds for overturning the award are:  “(1) an error of law that is material and prejudicial; or (2) determinations of fact that are clearly erroneous.”  Other providers, including JAMS and CPR, have similar appellate procedures.

Appellate review is not available unless the parties agree to it.  Agreement is unlikely after the award has been issued since a winning party is very unlikely to volunteer to take part in an appeal.  So to have any confidence this kind of review will be available, you will want to include appellate review in your arbitration agreement.  The AAA recommends the following language to allow appeal of an award:

Notwithstanding any language to the contrary in the contract documents, the parties hereby agree: that the Underlying Award may be appealed pursuant to the AAA’s Optional Appellate Arbitration Rules (“Appellate Rules”); that the Underlying Award rendered by the arbitrator(s) shall, at a minimum, be a reasoned award; and that the Underlying Award shall not be considered final until after the time for filing the notice of appeal pursuant to the Appellate Rules has expired. Appeals must be initiated within thirty (30) days of receipt of an Underlying Award, as defined by Rule A-3 of the Appellate Rules, by filing a Notice of Appeal with any AAA office. Following the appeal process the decision rendered by the appeal tribunal may be entered in any court having jurisdiction thereof.

Should you provide for arbitral appeal?

Should you include arbitration appeal in your next arbitration clause?  That depends.  There is much to be said for the finality of an arbitration award.  It gets the parties back to business, and saves further legal fees.  But if you have concerns that the arbitrator(s) you help choose could make an incorrect legal decision or will make clearly erroneous factual determinations, appellate review might provide you some comfort.  And allowing an appeal may help convince someone nervous about lack of robust appellate review to agree to arbitrate.

I suspect that in many patent matters there will be fairly intensely held notions of whether appeal should be allowed, depending on past experience.  Counsel who have, for example, had a case “saved” by a Federal Circuit decision reversing a broad claim construction or entering an invalidity determination as a matter of law are likely to be very fond of appeal.  Other counsel may simply regard an appeal as yet another step delaying a determination of what they see as a fairly straightforward dispute.

You might also consider providing for appeal only if the award is over a certain amount, includes an injunction, or the like.  This will help foreclose the need to spend money on a process that is not justified by the amount at stake. The specifics will all depend on the nature of the underlying contract and the sort of possible disputes you foresee.

But be careful.  In a consumer context, the California Supreme Court, applying the FAA, reviewed a provision that, among other things, provided for appeals only where the award was $0 or over $100,000, or an injunction was entered.  It concluded that, in the specific circumstances presented, it was valid.  Sanchez v. Valencia Holding Co., 353 P.2d 741, 752 (Cal. 2015).  Of course, your patent arbitration almost certainly won’t involve a consumer contract of adhesion.  But you may still face an argument by a disappointed opponent that the appeal provision is invalid as unconscionable because it unreasonably favors one party.  So to be safe, you will want to make sure any provision you draft is reasonably even handed.

In the end, it makes sense to think of arbitral appeal as another tool that can allow you to create a dispute resolution process tailored to your particular situation when you enter into a contract that could involve a patent dispute.  Whether it makes sense to use this tool depends on the specifics of your situation.  This kind of flexibility has made and will continue to make arbitration an attractive way to efficiently resolve business disputes involving patents.