The Delaware Court of Chancery is a nationally renowned business court that expeditiously deals with IP and technology issues. Vice Chancellor Donald F. Parsons, Jr. graduated from Lehigh University with a B.S. degree in electrical engineering and from Georgetown University Law Center before becoming an IP litigator in Delaware. In 2009, he became one of the prestigious ASTAR (Advanced Science and Technology Adjudication Resource Center)i fellows, where he took science courses focused on complex litigation. Vice Chancellor Parsons met with DLA Piper lawyers Denise Kraft and Aleine Porterfield to share his thoughts on the Delaware Court of Chancery and its role in handling technology-related disputes.
IPT: Before becoming a Vice Chancellor on the Delaware Court of Chancery, you practiced IP law for over 21 years. What led you to become an IP litigator?
Vice Chancellor Parsons: I graduated from Georgetown University Law Center in 1977. Before that, I received a B.S. in electrical engineering from Lehigh University. I intended on becoming a commercial litigator, but about three years into practicing, I had my first trade secret case and everything changed. I was drawn to intellectual property cases because they were so fact-intensive and complemented my engineering background. I just like complicated cases. I eventually litigated well over 100 intellectual property cases as lead and Delaware local counsel.
IPT: Have you continued your pursuit of technology-related issues?
Vice Chancellor Parsons: Yes. I read a variety of intellectual property publications and articles from sources such as the AIPLA and ABA Intellectual Property Section. In 2009, I became an ASTAR (Advanced Science and Technology Adjudication Resource Center) fellow, after I took several in-depth science, technology and forensics courses in matters such as nanotechnology to assist me with complex scientific concepts.. Keeping current on intellectual property law interests me as well as assists me with my cases. In the Court of Chancery, I preside over technology cases that often involve multiple products, licenses and trade secrets or other intellectual property rights. Sometimes patent portfolios must be valued in my appraisal cases. Pursuant to the Court of Chancery’s jurisdiction to mediate business disputes under 10 Del. C. § 347, I also mediate cases for the Federal Circuit. Understanding developments in intellectual property law – for example, the recent enactment of patent reform legislation, the Leahy-Smith America Invents Act, and changes in the standards for obviousness and willful infringement—is very helpful when mediating a technology case in the Court of Chancery or a patent case from the Federal Circuit.
IPT: The Court of Chancery is regarded as the premier business court in the United States because it regularly handles some of the most publicly followed business disputes for large companies. How has your IP background assisted you in your role as Vice Chancellor?
Vice Chancellor Parsons: My experience in intellectual property litigation helped prepare me for the Court of Chancery in a number of ways. As a practitioner, my electrical engineering background and interest in technical subjects helped me to be an effective intermediary between my technical clients and a generalist judge. In some respects, I acted as an interpreter for the judge and jury, explaining complex, fact-intensive cases. Dealing with the complexities of patent damages as a litigator also prepared me well for some of the difficult damages and valuation issues that arise in the corporate and commercial litigation before our court.
On the Court of Chancery, I encounter appraisal actions and other business valuation cases, which increasingly include patent portfolios. I have decided complicated motions, presided over document-heavy trials, and devised creative equitable forms of relief. I also have presided over many trade secret and non-competition cases, which often involve large numbers of document and technical issues relating to prior art and similar matters. Because of my experience with massive document cases as an IP litigator and then a judge, I took a special interest in and helped shape the newly-introduced Court of Chancery Guidelines for the Preservation of Electronically Stored Information or ESI. I continue to work on ESI-related issues today.
IPT: What is a “technology dispute” for purposes of the Court of Chancery’s jurisdiction and why was the Court of Chancery’s jurisdiction expanded to include them?
Vice Chancellor Parsons: To understand, it may help to review Chancery’s traditional, limited jurisdiction. Chancery hears disputes in which there is no adequate remedy at law. Historically, Chancery has been important for trade secret actions, which usually seek injunctive relief. Delaware enacted legislation in 2003 empowering the court to mediate and adjudicate technology disputes that arise out of agreements, broadly defined as: "[A] dispute arising out of an agreement and relating primarily to: the purchase or lease of computer hardware; the development, use, licensing or transfer of computer software; information, biological, pharmaceutical, agricultural or other technology of a complex or scientific nature that has commercial value, or the intellectual property rights pertaining thereto; the creation or operation of Internet web sites; rights or electronic access to electronic, digital or similar information; or support or maintenance of the above." 10 Del. C. § 346(c). The statute directs the court to liberally interpret "technology disputes" and to adopt rules that facilitate mediation and adjudication to provide an "expeditious and expert forum for the handling of technology disputes."
In terms of mediation, the Court of Chancery has two types of voluntary mediation. Since 1998, it has offered parties involved in litigation the option of voluntary mediation under its Rule 174, to provide them "convenient access to dispute resolution proceedings that are fair, confidential, effective, inexpensive, and expeditious." The 2003 legislation gave the Court of Chancery the power to mediate "business disputes" in a broader sense, through the Section 347 Mediation Only Program. When the court expanded its jurisdiction in this way, it created a vehicle for parties to resolve a dispute even before an action had been filed anywhere. The main difference between the court’s mediation and technology dispute statutes is that to litigate a technology issue, the dispute has to arise out of an agreement.
The new 2010 arbitration statute provides another avenue for parties to resolve intellectual property or technology disputes.ii For arbitration, the parties can set their own ground rules and time frame. Absent a different agreement among the parties, the default provision calls for an arbitration hearing no later than 90 days following receipt of the petition – a useful benefit for business parties.
IPT: Are there any other requirements for litigating, arbitrating or mediating a technology dispute in the Court of Chancery?
Vice Chancellor Parsons: To invoke the court's technology dispute jurisdiction for adjudication, mediation or arbitration, parties must satisfy the following requirements:
The parties must have consented to the jurisdiction of, or mediation or arbitration by, the Court of Chancery by agreement or stipulation
At least one party must be a "business entity"
At least one business entity must be formed or organized under the laws of Delaware or have its principal place of business in Delaware
No party may be a "consumer" in the context of the business dispute, and
For disputes involving solely a claim for monetary damages, the amount in controversy may not be less than $1 million
Technology disputes that can now be litigated in the Court of Chancery include, for example, a dispute over an intellectual property license agreement or an action for money damages only for breach of a contract relating to software, provided the prerequisites listed above are met. The class of business disputes eligible for mediation or arbitration is even broader in that it is not limited to disputes arising out of an agreement.
An important prerequisite, however, is that at least one of the parties must be a Delaware company. Delaware has been the favored state of incorporation for US businesses for almost a century, and the number of Delaware corporations continues to grow. Currently, there are approximately 600,000 Delaware business entities, including corporations. Almost 63 percent of Fortune 500 corporations and more than half the corporations with shares listed on the NYSE are Delaware corporations. Thus, many significant disputes likely involve at least one Delaware company. Each such dispute would be a potential candidate for adjudication, mediation or arbitration in the Court of Chancery.
Under Delaware law, mediation only proceedings have a separate docket and are entirely confidential. There is no requirement that the parties litigate in Delaware, or even that litigation be pending anywhere, to participate in mediation in the Court of Chancery. There also is no requirement as to the timing of the parties' agreement to mediate in Chancery. The consent could be contained in a license agreement, for example, that includes an alternative dispute resolution provision requiring mediation in Chancery either before or in parallel with any litigation. We hope this provides an additional and valuable benefit to companies formed under Delaware law. Rule 92 of the Court of Chancery provides that a written agreement to litigate a technology dispute here is acceptable if it contains the following language: "The parties agree that any dispute arising under this agreement shall be litigated in the Court of Chancery of the State of Delaware, pursuant to 10 Del. C. § 346. The parties agree to submit to the jurisdiction of the Court of Chancery of the State of Delaware and waive trial by jury."
IPT: What are the parameters of a technology dispute regarding damages and juries?
Vice Chancellor Parsons: Chancery’s equitable jurisdiction allows the court to craft creative and flexible remedies. Due to this limited, equitable jurisdiction, however, Chancery does not hear criminal cases or tort actions seeking only money damages and does not entertain claims for punitive damages. There also are no jury trials in Chancery. In the case of Section 346, the Delaware legislature expanded Chancery’s jurisdiction over technology disputes to enable the court to hear those cases even if they seek only money damages, but the amount in controversy must be at least $1 million.
IPT: If the parties choose to mediate a technology dispute in the Court of Chancery, who is the mediator, and is the mediation in the public record?
Vice Chancellor Parsons: To initiate a mediation, the parties must submit a simple petition confirming that the prerequisites have been met and identifying the issues to be mediated. The petition and all supporting documents are confidential and not of public record. The parties may request a particular mediator or the court will appoint one. Having the Chancellor or one of the four Vice Chancellors as the mediator provides the parties with an opportunity to present their case to a judge who routinely handles complex legal and factual issues. Although I am proud of the results of our mediations, I cannot say much about them because parties generally do not authorize or issue press releases on what is meant to be, and is, a private proceeding.
IPT: Are there any court costs associated with litigating, arbitrating or mediating a technology dispute in the Court of Chancery?
Vice Chancellor Parsons: The Court of Chancery will handle a request to adjudicate a technology dispute the same way as any other litigation. The filing fee for a technology dispute litigation is the same as for filing a class or derivative action, currently ranging from $250 to $600. The Supreme Court of Delaware could hear any appeal; however, the parties may agree to waive the right to appeal in connection with their consent to invoke Chancery jurisdiction. In that event, the case would be more in the nature of an ADR proceeding. The filing fee for a Rule 174 mediation of a case pending in Chancery is $5,000 for the first day of mediation, with an additional fee of $5,000 for each additional day beyond the first day, to be split equally among the parties. The Mediation Only Program pursuant to Section 347 costs $10,000 for the first day of mediation and $5,000 for each additional day of mediation. Similar fees are associated with a petition for arbitration. They are specified in a schedule maintained by the Register in Chancery.
IPT: Is the Court of Chancery’s technology dispute jurisdiction different from the patent dispute jurisdiction of the United States District Court for the District Court of Delaware?
Vice Chancellor Parsons: Yes. Under federal law, the district courts have exclusive jurisdiction “of any civil action arising under any Act of Congress relating to patents . . . .” Therefore, the federal courts have exclusive jurisdiction over actions for patent infringement or a declaration that a patent is invalid. The Court of Chancery, however, is accustomed to complex issues, business facts and accounting and business structures, so disputes over technology-related agreements covering multiple products or complex technologies are a natural extension of our usual cases. The technology dispute legislation seeks to provide Delaware companies with expanded access to the Court of Chancery. To achieve that goal, Chancery can provide mediation or arbitration for parties seeking to, for instance, resolve a patent infringement or licensing dispute and evaluate the dispute in a business sense. If the parties want to litigate an intellectual property claim that falls outside the exclusive jurisdiction of the federal courts, such as certain licensing, non-competition, non-disclosure or other breach of contract claims, then the parties may file such a case under the technology dispute statute, provided that the previously mentioned statutory requirements are met. A key requirement for parties desiring to litigate a technology dispute in Chancery (as opposed to engaging in ADR) is that the dispute must arise out of an agreement.
IPT: What are the potential benefits to being in the Court of Chancery?
Vice Chancellor Parsons: The Court of Chancery deservedly has a world-class reputation for promptly and effectively handling complex commercial litigation. Each of its five judges has extensive experience with complicated business disputes. Nevertheless, a typical case litigated the traditional way can mean a two-week trial, massive document production and a lengthy wait for the court’s decision.
Mediation is much more expedient and less expensive than litigation. Importantly, mediation also helps parties maintain business relationships by encouraging them to engage in a more consensual, non-public forum to resolve their dispute. Arbitration, likewise, is less formal and costly than litigation.
IPT: What would you like potential litigants (both attorneys and their clients) to know about technology disputes in the Court of Chancery?
Vice Chancellor Parsons: Collectively, the Court of Chancery has a great deal of experience in business litigation as well as respect for the lawyers who come before us. For those who take advantage of our expanded jurisdiction for mediation or arbitration of technology and business disputes, it is a great opportunity to cut through the procedural formalities, cost and time associated with litigation and focus more quickly on the key issues. For example, they can get to a resolution without obstacles such as motions to dismiss or motions for summary judgment. Also, if parties decide to use mediation or arbitration, they may choose their mediator, including the Chancellor or one of the four Vice Chancellors. They can avoid unwanted publicity because there is no public record. One of the exciting things about the mediation, arbitration and technology dispute statutes is that if businesses have a dispute or realize that disputes may arise, and at least one of them is a Delaware company, they can fashion a dispute resolution mechanism that will include the involvement of an experienced business court judge in the manner they deem likely to be most effective.
IPT: The Court of Chancery is a state court. Do other state courts have similar technology dispute jurisdiction statutes or is Delaware unique?
Vice Chancellor Parsons: The recently established Complex Commercial Litigation Division of the Delaware Superior Court has very similar capabilities. As a court of law, the Superior Court handles, among other things, commercial disputes that relate solely to money damages.
As the immediate past president of the American College of Business Court Judges, I have seen other states emphasize mediation in technology disputes in their business courts. Beyond that, however, I do not know of another state that has a mediation or arbitration only statute similar to Delaware’s.
IPT: Do any of your four colleagues on the court have any background in technology disputes?
Vice Chancellor Parsons: Yes, several of my colleagues and I have adjudicated or mediated technology disputes and related intellectual property cases. Additionally, Vice Chancellor John W. Noble has a scientific background, holding a B.S. in chemistry from Bucknell University.
IPT: How many technology dispute cases have been litigated, arbitrated or mediated since the inception of the jurisdiction?
Vice Chancellor Parsons: Only a few technology dispute cases have been litigated under 10 Del. C. § 346. In terms of mediations generally, the court has conducted more than145 Rule 174 mediations, of which 60 percent have been business disputes of some kind. The court has mediated 16 disputes under the Section 347 Mediation Only Program. Of those 16 mediations, 6 involved disputes that had no suit pending anywhere and 9 have involved patent issues.
IPT: Are there any particular decisions of note or interesting cases that you would like to mention here?
Vice Chancellor Parsons: I have been involved in several interesting mediation cases with disputed damages well into the hundreds of millions of dollars. I would love to discuss some of those cases because of the interesting issues they presented. But the parties to those matters chose mediation for the exact purpose that I mentioned earlier – they wanted a non-public forum to resolve a sensitive technology or business dispute in an expedient, cost-effective manner, and that is what they received.
In addition, as part of my normal caseload, I have decided several trade secret misappropriation and intellectual property licensing disputes. The most recent of those decisions, Pharmathene v. SIGA, provides an example of an intellectual property case that falls within the traditional equitable jurisdiction of the Court of Chancery. In Pharmathene, the product was an antiviral drug to treat smallpox, which could be used in case of a biological attack. SIGA paid to acquire the technology of the drug. After an 11-day trial, I ruled in September 2011 that SIGA had breached its obligation to negotiate in good faith regarding a license to that technology, and I fashioned an equitable remedy to address that breach. SIGA has moved for reargument.
Furthermore, this week I was assigned to a case that Microsoft just filed in the Court of Chancery against patent-holder St. Clair Intellectual Property Consultants Inc. and technology holding company Vadem Ltd. alleging self-dealing, theft of corporate opportunity and breach of contract arising out of the transfer of certain patents previously owned by Vadem.
IPT: Is there a right of appeal to the Delaware Supreme Court and, if so, what is the standard of review?
Vice Chancellor Parsons: If the parties litigate the case, then there is an automatic right to appeal. The standard of review for legal issues is de novo and for factual issues it is abuse of discretion. In the case of arbitrations under Section 349, a party may apply to vacate, stay or enforce an arbitration order of this court in the Delaware Supreme Court in accordance with the Federal Arbitration Act. Furthermore, under 10 Del. C. § 351, parties may stipulate that a decision of the Court of Chancery shall be final and binding and not subject to appeal.
IPT: What is your favorite technology invention and why?
Vice Chancellor Parsons: The transistor comes to mind, in that it is simple, adaptable and a basic building block of modern microelectronics. Then again, the iPad runs a close second (big smile).
i ASTAR, a “Leadership Consortium Dedicated to Enhancement of Capacities of the Courts Via Science and Technology Knowledge Tools,” identifies, recruits, trains and deploys science and technology resource judges. Information on ASTAR may be found here.
ii On October 25, 2011, an open government group filed a federal suit alleging that the Delaware Court of Chancery's arbitration jurisdiction violates the Constitution and principles of open government. On October 26, 2011, Chancellor Leo Strine of the Delaware Court of Chancery commented, "The courts of this state regularly mediate disputes among citizens, including businesses, and can only do so effectively if the confidentiality of the process is respected,” and Delaware Governor Jack Markell’s office commented, “The bill in question passed unanimously in both chambers and had broad, bipartisan support.“