Judician Strategies for Resolving IP Cases Without Trial: Early Neutral Evaluation

Early Neutral Evaluation, or ENE, is a new and increasingly accepted tool used by federal courts to enhance case management and, where the parties are so inclined, settlement. Over the last 15 years, its use has steadily increased in the federal court based in San Francisco, the United States District Court for the Northern District of California, and more recently in other U.S. district courts. Although the procedure has enjoyed broad success in a variety of cases, it has proven particularly well-suited for use in IP cases, where it has enjoyed especially strong popularity. There is no reason why the basic model now used in the Northern District of California cannot be replicated in whole or in part in other busy civil dockets with large IP case loads.

I.THE HISTORY OF EARLY NEUTRAL EVALUATION

Although ENE is a newly created alternative dispute resolution technique, it has a relatively long history in the Northern District of California. Its origins can be traced to the late Chief Judge Robert Peckham's desire to lower the cost of litigation to clients and to the vision of Magistrate Judge Wayne Brazil, who has developed and implemented the ENE program.

Judge Peckham was deeply concerned that the growing cost of even relatively routine civil litigation in federal court was becoming an unacceptable burden on the average litigant. The federal court was failing in its mission, mandated in Rule1 of the Federal Rules of Civil Procedure, to "secure the just, speedy, and inexpensive determination of every action." He charged a task force composed of experienced lawyers and judges to study the problem, and specifically asked one committee to develop new procedures to help resolve it. After studying the problem, the committee concluded that an early, candid and objective case evaluation would enable the parties and counsel to achieve efficiency in resolving disputes. This led to the idea of an "Early Neutral Evaluation" of the case.

A. Creation of the ENE program.

At the recommendation of this committee, the judges of Northern District of California first adopted an experimental ENE program in 1985. When initial feedback proved positive, the program was enlarged to 100 cases in 1986. In 1988, the judges of the Northern District voted to make ENE a permanent program. Today ENE is assigned to cases in two ways: (1)it is assigned to all qualified even-numbered cases not assigned to the Northern District's multi-option ADR program, and (2)it may be chosen by the parties in those cases assigned to the multi-option program.

B. ENE in the Northern District.

From its beginning, the heart of the ENE program has been a confidential case evaluation session before an experienced and respected neutral attorney. As originally implemented, the early neutral evaluation session consisted of four major components:

1. A 15- to 30-minute presentation by each party;
2. A discussion led by the evaluator of ways to reduce the scope of the dispute and to identify areas of agreement;
3. A candid evaluation of the strengths and weaknesses of the arguments and evidence presented, including a specific discussion of likely outcomes and the dollar range of potential damages; and
4. A plan for expeditious discovery designed to provide the parties with the information necessary to conduct early settlement discussions.¹

This basic outline of ENE has changed little in the years since. The principal change has been a recognition that in some cases, ENE may serve more than a purely evaluative function. Today, the parties are given the opportunity, where all agree, to change the ENE into mediation or a settlement negotiation.

C. The heart of the ENE is the candid evaluation.

The primary focus of ENE is to provide the parties with an early and frank evaluation by an objective observer of both the merits of the case and of expeditious ways to achieve resolution. The evaluation is not mediation. As the method has been refined, evaluators are now trained not to act as mediators, unless expressly requested by the parties to do so, and then normally only before the evaluation is given. Experience has shown that once an evaluation is delivered, one side or the other tends to be disappointed and the neutral may no longer be in a position to be perceived as an unbiased mediator. Neutrals advise the parties at the outset directly and unambiguously that they are acting as evaluators, not mediators.

Before delivering the evaluation, the neutral asks the parties if they want to discuss settlement. The neutral emphasizes that no party will be forced into such discussions, and unless all parties agree to discuss settlement, the neutral goes on with the evaluation. The neutrals are also trained to look the parties (not the attorneys) directly in the eye when the evaluation is delivered. This ensures that the parties realize when the evaluation is being given and listen. Early surveys had shown that some parties were not aware that the evaluation was being presented and did not focus on its significance.

The evaluation is not an off-the-cuff or "gut" reaction. The evaluator studies all materials provided in advance of the session, performs independent research into relevant caselaw as necessary, listens to the presentations carefully, clarifies positions and facts through questioning, and then drafts a carefully worded, but direct, evaluation. A sample of a real evaluation used in a trademark case is attached. It is a detailed 12-page analysis of the specific issues raised by the parties (or deemed important by the neutral). While the evaluation is delivered in a polite manner, there is no attempt to "soft-peddle" the evaluation to avoid ruffling feathers.

The evaluation focuses specifically on the key issues raised by the facts of a case and the controlling law. It is not, however, necessarily confined to the arguments raised by the parties. Evaluators identify the key factual and legal issues, whether or not spotted by the parties. The depth of analysis and subject matter expertise provided by the evaluator set ENE apart from other evaluative ADR methods, such as a judicial settlement conference or evaluative mediation.

D. The use of ENE has expanded significantly over the years.

Today, early neutral evaluation has become the single most popular ADR method in the Northern District. The table below shows the ADR method selected for multi-option program cases in which the parties were required to select an ADR option as reported by participants in actual ADR sessions in 1995.

Number of ADR Referrals in Cases of Attorneys Responding to the Survey for the Northern District of California²

Thus, in those cases where the parties were allowed to choose, 68 out of 227 cases (or 30%), the parties chose ENE, and in a slightly higher percentage, 52 out of the 143 (or 36%) of those cases actually conducting an ADR session, the ADR method selected was ENE. A magistrate judge settlement conference was almost as popular, with mediation a distant third. In 10 years, ENE has evolved from an experimental idea to the most popular ADR method in the district.

II. HOW IT WORKS: KEY FEATURES OF EARLY NEUTRAL EVALUATION AS USED IN THE NORTHERN DISTRICT OF CALIFORNIA.

It is important to realize that ENE or neutral evaluation is used differently in different districts. For example, an "ENE session" in San Diego (Southern District of California) was held before a Magistrate Judge and lasted for 1/2 hour. ENE outside of the Northern District of California may not match all of the details in the following overview of Early Neutral Evaluation as used in the Northern District of California.

A. Basic features.

• Free. After the first four hours of a session, however, the evaluator may charge at $150.00 per hour.
• Early. The ENE session generally takes place within 150 days of the filing of the complaint (or within 90 days of the first Rule16 Conference if the case is assigned to the ADR Multi-Option Program).
• Non-binding. The evaluation does not bind anyone and there are no penalties for not accepting the evaluator's assessment or procedural suggestions.
• Confidential. The court, counsel and parties "shall" treat as confidential all statements and communications made in the ENE. See Local ADR Rule 5-13. The written evaluation statements submitted by the parties, the ENE session discussions, and the "evaluation" by the neutral lawyer are confidential and will not be disclosed to the judge assigned to the case. (See the discussion of GTE Directories Service Corp.v. Pacific Bell Directory, below.)
• Evaluator has subject-matter expertise. The Northern District selects experienced lawyers and requires them to participate in a one-day training session. They are then assigned to cases according to availability and expertise.

B. The elements of ENE.

• Pre-session Conference Call with Counsel. Evaluator receives a preview of the case and ensures that the parties and counsel understand their obligations.
• Written Evaluation Statements. Required 10 days in advance; special disclosures required in IP cases.³
• The ENE Session. One half-day session attended by counsel and parties with authority to settle. Typically held in a conference room in the neutral's law office, but the court will make rooms available where warranted.

1. Introductions of all present and opening remarks by evaluator.
2. Presentations of claims/defenses by parties, usually by the attorneys, with client participation optional.
3. Responsive presentations by parties.
4. Questions by evaluator to clarify/probe, discussions of facts and law.
5. Evaluator identifies common ground and possible stipulations.
6. Evaluator identifies key disputed issues (issue clarification).
7. Evaluator leaves the room (or adjourns the session) and privately prepares the evaluation and reduces it to writing.
8. Evaluator determines if parties want to explore settlement before the evaluation is presented and, if so, conducts settlement negotiations and mediation.
9. Evaluator presents evaluation orally, looking parties squarely in the eye. (Written evaluation generally not handed out.)
10. Evaluator asks again if parties want to explore settlement.
11. Case development planning.
12. Discuss and schedule follow-up.

• Follow-up by evaluator, but only as desired by parties.

1. Telephone conference with attorneys.
2. Letters to and from evaluator.
3. Possible additional sessions (usually mediation)

C. Early Neutral Evaluation is different: Comparisons with mediation, settlement conferences, and arbitration.

• ENE is not mediation, although the parties (not the evaluator) may choose to convert the process to mediation.

1. ENE is explicitly evaluative. The mediator is not explicitly evaluative and evaluation is not a principal objective of the process.

In mediation, any evaluation--if communicated at all--is oblique and could be based on information learned in confidence.

In ENE, evaluation is direct and explicit, and is based only on information that all parties have shared.

2. The principal purpose of mediation is settlement. ENE has multiple case-management purposes, and the settlement purpose is secondary.
3. In mediation, the neutral primarily needs process expertise not necessarily subject matter expertise. In ENE the neutral must have subject matter expertise.
4. The presentations are directed to different targets.

In mediation, the presentations should be directed to the other side.

In ENE, the presentations are directed to the evaluator.

5. The principal focus is different.

In mediation, the focus is on interests (rather than positions), with each side trying to identify and explain its situation, needs and perspective.

In ENE, the focus at the case presentation stage is on evidence and law, and later on case management.

• ENE is not an early settlement conference.

1. The parties are under no duty to discuss or negotiate settlement at all. The evaluator does not have the authority to compel settlement negotiations.
2. Except with respect to matters related only to scheduling, in ENE there is no ex parte communication or caucusing with the evaluator before he/she formulates the evaluation.

In many settlement conferences, by contrast, there is considerable ex parte communication with the neutral before he/she articulates an assessment of the parties' positions.

• ENE is not judicial arbitration.

1. ENE involves no taking of testimony under oath and no cross-examination, resulting in less disclosure of trial strategy.
2. The proceedings in an ENE session may not be recorded, making it more confidential than arbitration.
3. ENE involves no "award" or filed result.
4. ENE is generally earlier than arbitration.
5. In ENE, the neutral not only passes judgment, but also helps with settlement and case development planning.

III. THE ENE TRACK RECORD.

As shown by its growing popularity, ENE has enjoyed a successful track record. Because the ENE program was new and experimental, from its beginning, the Northern District sought to obtain feedback from both lawyers and clients on the desirability of ENE generally, and on ways in which it could be refined and improved. As described in more detail below, the surveys consistently showed a majority of respondents favored ENE and believed its use beneficial to the efficient resolution of their cases. Very few considered the experience a waste of time. That is not to say that ENE (or ADR generally) has escaped criticism.

A. Potential criticisms of ENE.

ADR has been challenged on a number of points, but there has been little criticism singling out ENE alone. Nevertheless, critics have raised serious theoretical concerns. Some consumers and trial lawyers have dubbed ADR "secret justice for the privileged few," citing the high cost and confidentiality. In the context of commercial cases, most criticism has focused on compelled ADR and the added cost of an expensive neutral. Some of the generalized criticisms of ADR may apply with equal force to ENE.⁴

1. The use of lawyers, instead of judges, to evaluate cases has been criticized as being an abdication of judicial responsibility, and also potentially ineffective. The reality is that few judges or magistrates could devote the time (four hours plus preparation time) required for a meaningful evaluation session. Moreover, even if they could, litigants would fear that a judge's participation might taint the judge's ability to be objective and impartial in subsequent proceedings. While the mandatory training and screening process should ensure a generally high level of quality in evaluators, some unevenness is unavoidable. On balance, the use of lawyers who have subject matter expertise has worked well.

2. The early timing of ENE has been questioned. By requiring an early ENE session, lawyers and parties are forced to invest time, effort and expense to come to grips with the facts and the merits of their case much earlier than normal. Although this may be seen as a negative to some, it directly promotes the speedy and efficient resolution of cases. It is precisely because of the early intervention that the evaluator (and the parties) can devise efficient means to streamline the course of adjudication. Further, in the Northern District, special Local ADR Rules for patent cases were adopted in July 1997. These rules impose a very ambitious time line for specified disclosures of claim charts, prior art and claim construction statements. In patent cases, therefore, ENE's early but more limited required disclosure may not necessarily accelerate the schedule to any great degree.

3. The role of evaluator could interfere with the relationship between attorney and client. One fear is that clients will view the evaluator as being critical of their attorneys, perhaps offering new and more persuasive arguments not previously voiced by their attorneys. Evaluators are trained to explain their neutral role in the process to parties. It is possible that the evaluator will seem more able than attorneys who do not prepare well. To the extent that parties are able to more accurately assess the performance of their counsel as a result of ENE, it seems a small price to pay for efficiency.

4. An evaluation by a skilled practitioner in the field may upset the balance of power among the parties. This appears to be the most serious theoretical criticism. Before the ENE, one counsel may be more experienced and savvy about the facts and law presented. By exposing all sides to a penetrating analysis, and thereby filling holes left open by the weaker advocate, the evaluator may effectively rearrange the relative assessments of the merits and thus the power balance. Specifically, the evaluator may offer a key legal theory or avenue for factual inquiry that profoundly changes the direction of the case. Should this outcome-changing behavior be encouraged? Or should the evaluator refrain from volunteering new and different theories no matter how compelling? The Northern District has--we believe rightfully--come down on the side of full penetrating disclosure. The goal of achieving a just and speedy resolution of cases requires nothing less.

B. ENE has generally proved popular in survey results.

As noted, ENE was recently rated as the most popular of the various ADR options offered by the courts multi-option program. ENE has also been studied extensively since its beginning in 1985, sometimes promoting refinement and minor adjustment.

The data is not sufficient to allow any firm conclusion as to which type of case is best suited for ENE (or any other particular ADR method). According to general comments, however, the parties chose ENE when they sought the opinion of an expert. In contrast, for example, they chose a judicial settlement conference when seeking a judge's opinion. And where the attorneys had the choice of any ADR method, the 1997 Federal Judicial Center report concluded that "most selected ENE, suggesting that in this district attorneys want an expert evaluation when they use ADR."⁵

Early feedback on ENE strongly suggested that it was well suited for intellectual property cases. In a 1989 survey by Professor Levine of Hastings College of the Law, 90% of attorneys and 100% of clients and evaluators surveyed opined that intellectual property cases would benefit from ENE.⁶ It is thus not surprising the local rules for the Northern District of California have long provided for the early neutral evaluation of intellectual property cases.

Another early survey, published in 1988, found that a significant majority of lawyers who had taken part in ENE preferred ENE to initial status conferences (ISCs). Approximately three out of four lawyers surveyed found ENE superior to ISCs in clarifying issues; roughly four out of five preferred ENE for communicating information about the case across party lines and enhancing the prospects of settlement; and a large majority preferred ENE for setting the groundwork for cost-effective discovery.⁷

IV. SPECIAL PROVISIONS FOR INTELLECTUAL PROPERTY CASES.

The Northern District Local ADR Rules treat IP cases specially in two ways. As noted above, all new civil filings are screened for eligibility for automatic referral to the ENE program. Generally speaking, all civil actions not involving civil rights claims are eligible unless falling under an excepted category. The rules exclude from ENE all class actions, cases involving a party proceeding in pro per, and cases in which the "principal relief sought is injunctive." ADR Rule5.2(a)(2). The exception for injunctive relief, however, does not cover cases designated as copyright, patent or trademark cases on the civil cover sheet. This special treatment of IP cases is in apparent recognition that injunctive relief is common in IP cases and reflects the belief that ENE can still provide meaningful benefits in IP cases where the primary relief sought is injunctive.

The Local ADR Rules also impose special, additional requirements for the written ENE Statement in IP cases. ADR Rule5-9 specifies the required contents of the ENE Statement for all cases. ADR Rule 5-10 sets out a special set of added requirements for litigants in cases that include trademark, patent, or copyright claims. This is the only area of law for which the Rules make such requirements. The ENE session occurs early (within 3-6 months of filing), and this rule requires significant preparation over and above that required at the same stage for other types of cases.

A. Requirements in trademark cases.

In cases involving allegations of trademark or trade dress infringement, or unfair competition, the party making such an allegation must provide the evaluator with the following:

• Any relevant trademark registrations;
• Exemplars of the use of the mark by both the plaintiff and the defendant, including a description of the goods and services in connection with which the marks are used;
• Any evidence of actual confusion;
• The nature and extent of advertising and the volume of goods sold (where secondary meaning is in issue).

Both parties are required to describe in their evaluation statements the manner in which the public is exposed to their respective marks and goods or services. Photographic or other demonstrative evidence of this is required if available.

The alleged infringer is required to reveal the dollar volume of sales and profits from the goods or services sold in connection with the allegedly infringing mark.

B. Requirements in copyright cases.

A copyright claimant is required to provide the following:

• The copyright registration for the allegedly infringed work;
• Exemplars of the copyrighted work and the allegedly infringing work;
• A "systematic comparison showing points of similarity" between the works;
• Any available direct or indirect evidence of copying;
• A statement indicating whether it intends to seek statutory or actual damages.

The accused infringer must include in its written statement the dollar volume of sales and profits from the allegedly infringing works "that it and any entities for which it is legally responsible have made." Local ADR Rule 5-10.

C. Requirements in patent cases.

A party who alleges patent infringement is required to submit an element-by-element analysis comparing the claimed invention to the accused device or process. This party's written statement must also include its theory or theories of damages and "all available information" in support of each theory.

Accused infringers who intend to base their defense on prior art must submit an exhibit that describes each example of prior art and the relationship between the prior art and the claimed invention. The statement must also explicitly describe the basis for any claim of non-infringement. The accused infringer is not expressly required to submit or summarize any prosecution history excerpts upon which a claim interpretation or prosecution history estoppel defense might be based. However, this information is likely to be submitted as part of the "basis" for a non-infringement claim. (And, as noted above, the Local Patent Rules impose an ambitious schedule for detailed disclosure in patent cases.)

D. Analysis of intellectual property requirements.

The special requirements for intellectual property cases are directed toward focusing discovery and motions at this early stage of the dispute. The required information is the sort that often goes to the heart of a trademark, copyright, or patent claim or defense. By probing the sufficiency of the evidence upon which such a claim or defense is based, the evaluator can identify the relative merits of positions and areas where further detail is crucial.

Some of the intellectual property requirements come close to crossing the line between fostering discovery and actually being discovery. For example, as noted above, an alleged copyright infringer must provide the dollar volume of its sales of the allegedly infringing work and the profits derived from those sales. In order to recover profits under the Copyright Act, the claimant must prove only the infringer's gross revenues from the infringing work, before the burden shifts to the infringer to prove deductible expenses and ultimately, profits. 17U.S.C. '504(b). Although statements and communications disclosed in an ENE proceeding are not admissible in any subsequent proceeding, Local ADR Rule 5-13, information on the infringer's gross sales, once revealed, may be proved independently by the party alleging infringement.

The intellectual property requirements also help serve the "reality check" function of ENE. They permit both attorney and client to see, perhaps for the first time, the elements of the claim or defense and the support for each element laid out in detail. For example, with the elements and evidence laid out this way, a copyright claimant may recognize for the first time that although the copyrighted work and the allegedly infringing work demonstrate some points of similarity, the likelihood of proving access is remote. Similarly, a patentee who is forced to pay close attention to its attorney's claim chart in an adversarial atmosphere where some of the patentee's assumptions are challenged may discover that the claims of the patent do not read as closely on the accused device as initially thought. Obviously, the evaluator's comments on the disclosed information may serve this purpose as well.

V. PRIVILEGE AND WAIVER IN ENE PROCEEDINGS.

The application of the Northern District's ENE Rules has raised an interesting privilege waiver issue in intellectual property cases. Assume that your client--an accused patent infringer--discloses to the evaluator and the other side during the course of an ENE proceeding that it obtained a non-infringement opinion letter from counsel before using the accused product. Assume further that your client actually produces a copy of this letter to the evaluator and the other side as part of the ENE proceeding. This is a waiver, right? Production of such a letter in discovery is clearly a waiver of the attorney-client privilege, not only for the letter itself, but for any otherwise privileged materials on the subject of the attorney's analysis of the non-infringement issue.

In an ENE proceeding in the Northern District, however, such a disclosure by itself apparently would not waive the privilege in either the document or its subject matter. Rule5-13 of the court's Local ADR Rules requires that the court and all participants and other attendees shall "treat as confidential all written and oral communications made in connection with or during an ENE session," and prohibits any such communication from being used for any purpose, including impeachment, in any pending or future proceeding in the court.

The court takes this rule very seriously. In GTE Directories Service Corp.v. Pacific Bell Directory, 135F.R.D. 187 (N.D. Cal. 1991), a trademark infringement case, the defendant submitted to the plaintiff and the ENE evaluator a copy of a privileged analysis of a trademark search. (A copy of this decision is attached.) Later, and inexplicably, but apparently because the plaintiff had already seen the document during the ENE session, the defendant produced the document in response to the plaintiff's discovery request. The court (Magistrate Judge Brazil) held that because the issue may not have been clear, in that case, the production of the document in discovery did not waive the privilege for other documents dealing with the subject matter of the disclosed document.

The court emphatically endorsed the notion that a party cannot waive the privilege--even for the disclosed document itself--by submitting it in connection with an ENE proceeding:

The capacity of the ENE program to deliver the services it promises would be seriously jeopardized if parties could not communicate frankly about the case and share with the evaluator and their opponents materials that arguably are protected by privilege or the work product doctrine. One key purpose of ENE is to create a setting that permits common sense and frank communication to break through the posturing that can so needlessly increase the cost and delay the disposition of civil litigation. That objective would be much more difficult to achieve if litigants and lawyers had to worry about whether the disclosure or communications they made in connection with the program could be used as bases for claims of waiver.

135 F.R.D. at 190 (footnote omitted). The court also made explicit, however, that any disclosure in discovery (whether or not disclosed initially through ENE) would thereafter be a waiver.

Disclosure is therefore the rule in a Northern District ENE session. An accused patent infringer can theoretically rebut a patentee's assertion of willful infringement with an ordinarily privileged document, without adverse collateral consequences. There are, nonetheless, still tactical considerations that militate against such a course. If the suit does not settle, the contents of the opinion letter will be known to the adversary. There would be little possibility of "unringing the bell." While the letter itself would not be discoverable or admissible per se, the adversary could use the information to help shape theories and prepare for the possibility of a later waiver on the willfulness issue. In short, disclosure of an opinion letter in ENE is still a high-risk strategy.

VI. CONCLUSION.

ENE is a case-management tool that has particular utility in IP cases. The Northern District of California, where IP cases make up the single most common type of new civil case filing, has demonstrated success with ENE. IP cases are subject to special rules to help promote the desired case-management efficiencies. In short, there appears to be a close fit between ENE and IP.

ENDNOTES:

* ©1998 by Roderick Thompson and Michael Sacksteder, Pillsbury Madison & Sutro LLP. The authors were assisted immensely by information provided by the ADR Program of the U.S. District Court for the Northern District of California, and particularly by Howard Herman, the ADR Program Counsel, and Carroll De Andreis, the Program Administrator.

¹ See generally, Brazil, Kahn, Newman& Gold, Early Neutral Evaluation: An Experimental Effort to Expedite Dispute Resolution, 69Judicature 279 (1986), where the authors discuss the origins of the ENE program in the Northern District and its status as of that time.

^{2 Source: FJC Report to the Judicial Conference Committee on Court Administration and Case Management on the Civil Justice Reform Act Demonstration Programs. January24, 1997. P.197. During that time, even-numbered cases which met the qualifications for ENE were also required to participate in the ENE program; these cases are not reflected in the table.}

³ The special requirements in IP cases are discussed below.

⁴ Somewhat ironically, these criticisms are presented persuasively in a detailed discussion by Magistrate Judge Brazil, the principal architect of ENE. See Brazil, A Close Look at Three Court-Sponsored ADR Programs: Why They Exist, How They Operate, What They Deliver, and Whether They Threaten Important Values, 1990U. of Chi. Legal Forum 303, 345-59.

⁵ The Northern District of California's ADR and Multi-Option Programs, in Report to the Judicial Conference Committee on Court Administration and Case Management 173 (1997).

⁶ Levine, Early Neutral Evaluation: The Second Phase, 1989J. Dispute Res. 1.

⁷ Lawyers Prefer Early Neutral Evaluation to Court's Initial Status Conferences, ADR Report (BNA) 294 (Aug.18, 1988) (Vol.2).