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Is it ever good news when your client has to pay an adversary $44 million? Gary Elden certainly wasn’t happy about it. A partner at Chicago’s Grippo & Elden and the attorney who represented the loser, he said he was astounded by the decision. He called it erroneous. But even after his client had paid, he was happy with the process and said that he and his client “would consider doing something like this again.” He was talking about an unusual form of alternative dispute resolution that combined litigation in federal court with what’s known as “baseball” arbitration. One ADR expert praised it as “an outstanding example of parties’ ability to tailor a complex conflict management program to their specific needs.” The procedure is like the one used in player disputes in baseball. An arbitrator starts with two possible outcomes, one from each side, and must choose one or the other and nothing in between. It’s believed to be more common in labor disputes than commercial disputes. The arbitration ended disputes that had gone on for a decade. And it did so in less than three months, from a hearing that began in October to an award in December and the payment this month. It started as a patent dispute between Snap-on Inc., headquartered in Kenosha, Wis., and SPX Corp., the Muskegon, Mich.-based arbitration winner. Both companies are leaders in the design, manufacture and marketing of diagnostic and service equipment for cars and trucks. Both have diversified in recent years and expanded into global multibillion-dollar conglomerates. SPX claimed that Snap-on had infringed on its patents on equipment used by auto mechanics to diagnose engine problems. Over time, SPX’s claims and Snap-on’s counterclaims mushroomed. The disagreement was complicated when both companies bid to acquire another competitor, Sun Electric Corp. Snap-on won that contest, acquiring the smaller company in 1992. No sooner was the deal complete than SPX hired away Sun’s president, Ronald Ortiz, who had been negotiating to stay on after the merger. The employment imbroglio became another chapter in the annals of bad blood between the companies. In August 1993, the two sides agreed to toll the statutes of limitations while they attempted to negotiate a settlement. In late 1994 there was a brief glimmer of hope. A mediation was agreed upon and scheduled. At the last minute, the mediator couldn’t make it on the appointed day. Before the companies could reschedule, new issues emerged and the opportunity was lost. In 1996, Snap-on terminated the agreement and sued in federal court in Illinois. The company claimed it had been damaged by the improper hiring of Ortiz and another former Sun executive and by the infringement of SPX products on Snap-on patents. Snap-on also requested a judgment declaring SPX’s patents invalid and infringing. SPX counterclaimed for infringement. Discovery ground on from 1996 to 1998. But discovery on the SPX patents was stayed until 1999 because Snap-on had asked that the U.S. Patent and Trademark Office re-examine them. ENTER THE MEDIATOR By the time the patents emerged and discovery was about to begin — meaning the parties still faced years of litigation — Judge John Grady asked the companies to attempt mediation. They contacted William Hartgering in the Chicago office of JAMS, a dispute resolution company. A full-time mediator and arbitrator since 1981, Hartgering found the parties paralyzed. “They wanted to get it done,” he said, “but they were stuck. And they were stuck on more than just who is right and who is wrong. “Often if you can find out what the parties’ litigation interests are, it’s not a zero sum. You can design something that meets the process interests for both sides. Those often overlap more than their view of the case.” Snap-on had an internal system for using ADR and a corporate culture that supported it, Hartgering said. Both sides had a strong desire for finality. “It was the principal thing we were trying to accomplish with this process,” Snap-on’s Elden said. There was no give on money, but Hartgering had them talking about alternatives to litigation. Both sides had plenty of incentives. Elden ticked off a few. “Even compared to other patent and technology cases,” he said, “this one presented a high degree of complexity and uncertainty.” Litigation would have required multiple trials with the likelihood of many appeals. And the subject matter was sufficiently dense to baffle most jurors, he said. Hartgering threw out the idea of “baseball” arbitration, where each side presents its last, best offer in advance and, following the hearing, the arbitrator picks one. An advantage of this option, he said, is that each side hedges its bets, which increases the possibility that the case will settle. If it doesn’t, the result is final and binding. And the parties can choose an arbitrator who knows the subject. David Fairbairn credited Hartgering as the catalyst who put the process together. A partner at Minneapolis’ Kinney & Lange, Fairbairn had an involvement in the case dating to the 1980s, when he filed the applications for two of SPX’s three patents in dispute. Negotiations over the process continued for the better part of a year, Fairbairn said. The lawyers had to decide which issues would be adjudicated by Grady, and which would be left for arbitration. In the end, it was agreed that the court would continue to hold hearings and to rule on motions for summary judgment. Grady’s rulings would be binding. Surviving issues would be resolved by mediation with Hartgering or by arbitration. The combination of public and private processes particularly impressed Tom Stipanowich, president of CPR Institute for Dispute Resolution. “With the court addressing certain issues and outside neutrals addressing others, to some extent you have the best of both worlds,” he said. The case “illustrates the beauty of innovation to meet the particular needs of the parties.” NO POSTURING Ross Bricker, John Ward and Eric Sacks of Chicago’s Jenner & Block were brought in to lead SPX’s legal team once the structure was more or less in place. Bricker said he liked the arbitration because it eliminated the posturing. “This forces you to put up or shut up,” he said, “and it’s final and binding, so it’s over.” It also ensured that the arbitrator wouldn’t “split the baby,” a common complaint about arbitration. “It certainly made it exciting,” adds Fairbairn, who handled the patent liability case while Ward took charge of the Ortiz claims and Sacks focused on patent damages. SPX insisted that the case be concluded by the end of 2001, Fairbairn said. And the agreement the parties signed in August 2000, which was incorporated into the court record, included dates on which each part of the case was to be completed. One sticking point involved the number of final offers to be submitted. SPX wanted separate submissions for each patent; Snap-on wanted one. In Sept. 2001, SPX asked for $44 million. Snap-on asked for $3 million. Hartgering said the disparity of $47 million was the largest he’d seen in his career. And that’s probably why they couldn’t settle, he said. Fairbairn remembered that, even though each side knew the other’s number, Hartgering’s attempt to mediate went nowhere. With Hartgering’s help, they had chosen as arbitrator Jerry Cohen, chairman of the science and technology group at Boston’s Perkins, Smith & Cohen. The hearing began Oct. 22 and ended Dec. 18. Cohen issued his award Dec. 27. “At the end of 10 years, someone was going to win and someone was going to lose,” said Snap-on’s Elden. “Both sides benefited by not having this thing drag on another 10 years and sucking up huge amounts of money.”

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