Anyone for baseball? The rise of "baseball arbitration" in FRAND patent disputes

Tim West, Associate, Sydney

Speedread

"Baseball" or Final Offer Arbitration is a specific form of arbitration frequently adopted in the United States. But just as the rules of baseball are somewhat enigmatic to most European sports fans, baseball arbitration has been slower to catch on this side of the pond and elsewhere. Recently though, there have been signs that its use could become more prevalent in FRAND patent litigation. This article examines the basics of baseball arbitration, when it is a desirable alternative form of dispute resolution, and looks at why some consider it appropriate to resolve FRAND patent litigation.

Not playing ball: when tribunals split the baby

The concept of baseball arbitration has been around for some time. It originated in the early 1900s in Major League Baseball when a club and player could not agree on a salary figure and could, under certain circumstances, submit their respective figures to a sole arbitrator who was required to pick one of the figures. Baseball arbitration is designed to eliminate a practice which has emerged in international arbitration, where arbitrators "split the baby". That is, arbitrators split the difference between the parties' positions in coming to a middle-of-the-road compromise. Anticipating this assumed practice, parties are inclined to adopt extreme positions, thereby potentially reducing the chances of successful settlement.

Superficially, baseball arbitration has its appeal. Parties are incentivised to put more credible quantum estimates on the table. The arbitration, therefore, can be characterised as a game with one winner: each player seeking to maximise their chance of winning by balancing the reward of a better number for them against the risk that that number won't get chosen. The problem, of course, is that most complex, commercial disputes are more than just a fight over an amount due.

However, disputes over what constitutes an appropriate FRAND rate in patent litigation is one such type of dispute which could potentially lend itself to baseball arbitration.

FRAND

The obligation to licence patents on Fair, Reasonable and Non-Discriminatory (FRAND) terms arises when patents are deemed "essential" to a particular industry standard (so-called "standard essential patents" or SEPs). In telecommunications, industry standards are absolutely critical, among other things, in ensuring interoperability. For example, if a Motorola handset in France needs to be able to make a call to a blackberry in Japan, this means agreeing industry standards and the patented technology which makes up those standards.

The key issue with SEPs is that compliance with the standard necessarily infringes the patent and therefore a licence is required from the SEP holder. For example, anyone wishing to make a 3G compliant phone needs access to those patents which are deemed "standard essential" to the 3G standard. It is a prerequisite to market entry. However, the potential issue is of course that SEP holders then enforce the "hold up value" of their patents and unreasonably demand high royalty rates from potential market participants. As a result, standards bodies such as the European Telecommunications Standards Institute (ETSI) generally require its members (i.e. holders of SEPs) to commit to license on FRAND terms those patents that they have declared essential to a particular standard. The principle of FRAND (in this context) is an attempt by the standards setting bodies to mediate between a monopoly right, which by its nature is anti-competitive, and a competition law which promotes a level playing field in the market place. In other words, on the one hand ensuring that innovation by SEP holders is adequately remunerated, but on the other hand, allowing consumers a far wider choice and access to interoperable products.

FRAND and baseball arbitration: at first base

The global "patent wars" litigation has been in full swing for the past couple of years. One recurring issue in this worldwide flurry of lawsuits is how to calculate FRAND royalties. It is an issue that is currently vexing numerous courts and competition authorities worldwide. There is very little authority and even fewer litigated cases.

But is baseball arbitration the answer? Two leading US antitrust IP scholars think so. Professors Mark Lemley and Carl Shapiro, from Stamford and the University of California respectively, have argued that baseball arbitration is the ideal method of dispute resolution for resolving FRAND disputes. Their argument is that parties who are bound to engage in arbitration will render much of the associated FRAND disputes (such as antitrust) moot and the amount of litigation consequently will be greatly reduced.

However, the Lemley-Shapiro view is not universally held and some commentators believe that the courts are more than equipped to do an adequate job; and that the saved efficiencies claimed under an approach which makes baseball arbitration mandatory, do not withstand closer scrutiny.

It remains to be seen whether baseball arbitration's prevalence will grow, using the apparently eternal patent wars as a springboard in order to gain recognition in international arbitration circles outside the US. Either way, it is clear that baseball arbitration will only be attractive in limited circumstances and is unlikely to be a home run for many parties involved in complex, multi-issue disputes.

Please click on the links below for the other articles in the November 2013 Arbflash:

• Arbitration in Australia and ACICA
• "Public policy of India" - not an easy excuse any more
• English High Court decision highlights the need for caution when drafting for expert determination
• Australian Federal Court enforces LMAA award
• South Korea: Two arbitral awards refused enforcement this year
• International news