The advantages of using arbitration to resolve intellectual property (IP) disputes are many. The fact that it is becoming increasingly popular may be illustrative of this. However, as all those who have been involved in arbitration are aware, it is not all plain sailing. This article looks at some of the practical realities of arbitrating IP disputes, and why it is important for parties to be fully aware of the benefits and pitfalls when including an arbitration clause in an agreement or agreeing to submit an existing dispute for arbitration (often referred to as a ‘submission agreement’).
Types of IP Disputes
The types of IP disputes that may be arbitrated include patents, trade marks, copyright and design infringements; disputes relating to database rights, domain names, misuse of confidential information and trade secrets; breach of different types of contracts, including licensing, distribution, supply, and IP development agreements and settlement agreements. The remedies sought include:
- injunctive relief;
- specific performance;
- accounts of profits; and
- declaratory relief, including declarations of infringement or invalidity and delivery up or destruction.
IS arbitration in the IP field always beneficial?
These are the often touted benefits of arbitration.
One of the perceived advantages of arbitration for dispute resolution is that it is chosen consensually by contracting parties. The implication of this is that because they have already agreed to the arbitral process to resolve the dispute, they will therefore act accordingly.
While that may be the case in post-dispute or submission agreements, it may not be in the forefront of the minds of parties entering into contracts that include arbitration clauses. It is often the case that only when a dispute arises does a party find itself bound to an arbitration process that it wants to do everything to get out of.
How about the case of multi-party proceedings? Again, resolving these through arbitration may be at odds with the consensual nature of the process. For example, a third party may be joined to existing arbitral proceedings against its wishes or a claimant may find itself in an arbitration with a third party that the respondent has joined to the proceedings, when the claimant has no interest in participating in the proceedings with that third party.
One way of dealing with this is to ensure that, as far as possible, all these issues are considered and addressed at the drafting stage of the arbitration agreement(s), but of course it may not be possible to anticipate all such issues at this early stage.
Resolving multijurisdictional disputes in a single proceeding
On the face of it, this certainly looks extremely attractive. The territorial nature of IP rights means that there will often be parallel proceedings in different jurisdictions or, in the case of bifurcated patent systems in countries like Germany and China, separate proceedings in different institutions within the same country. This often leads to inconsistent decisions and duplication of work, which results in increased time and costs.
Where the dispute concerns rights such as patents and trade marks, which are registered with public administrative offices, the different national laws concerning the arbitrability of the validity of the IP rights have to be considered.
For example, in some countries, such as France and Italy, parties can only arbitrate infringement of IP rights, but not issues relating to validity. In other countries, such as the UK, issues of validity are arbitrable, but will only bind parties to the arbitration.This may be seen as a benefit to some IP rights owners as there is no danger of an unfavourable award in relation to validity affecting their registered rights in the world at large.
However, care needs to be taken. In the US, validity is arbitrable and is theoretically only effective inter partes, but the award is not enforceable unless and until it is submitted to the US Patent and Trademark Office, where it becomes public. Similarly, in Switzerland, patent validity is arbitrable and an arbitral award on validity can (but does not have to) be registered with the patent office. The potential consequences of such publicity need to be considered carefully.
Since an IP right is one that the owner can enforce against the world, one questions whether resolving it privately is advisable in any event. A party who has received a favourable award from a tribunal will not have the benefit of a reasoned and public decision by a court that could serve as a deterrent to other potential challengers and infringers. The costs savings (if any, see below) of using a confidential arbitration route (also see below) may be lost if the party then has to litigate the same issues with a third party who cannot be told about any award rendered by the arbitral tribunal.
The fact that the national rules governing the determination of disputes relating to such rights vary substantially from jurisdiction to jurisdiction means that the effect of any award will be different in different jurisdictions. As such, it is not a matter of sweeping all national disputes up in a multinational arbitration.
A further disadvantage is that it is a potential gamble to put all your eggs in one basket. If things go badly, a party may find itself whitewashed by one award that applies across the globe, with no chance of appealing because applicable arbitration rules often only allow awards to be appealed in exceptional circumstances.
Confidentiality of proceedings
One of the attractions of arbitration is its private and confidential nature, which means that parties can generally keep the fact of their dispute and the details of the dispute hidden from all but the parties to the arbitration, the tribunal and the arbitral institution. The particular relevance of confidentiality in IP disputes is that the case often involves sensitive information relating to a party’s technology, which that party is keen to protect. The other aspect of confidentiality, which applies to all cases, not just IP cases, is that parties do not like airing their spats in public and would therefore prefer to keep them under wraps.
There is no real distinction between the practice of arbitral tribunals and civil litigation when it comes to the protection of genuinely confidential information. Courts will also protect genuinely confidential technical information, and do so every day.
The law relating to confidentiality varies in different jurisdictions. The institutional rules also vary between the different institutions and are often vague. The combination of all this, together with the cultural elements that influence the parties, counsel and arbitrators in an international arbitration, may result in interim rulings on confidentiality that hinder rather than assist parties in resolving disputes.
Where a party decides not to adhere to its confidentiality obligations or interim rulings by a tribunal, the only effective way of stopping such breaches is through the courts. Once this happens, the confidentiality of the parties being at war with each other goes out of the window.
There are also potential drawbacks to maintaining the confidentiality of proceedings. Privacy means an absence of scrutiny. This could result in parties pursuing claims and strategies that could be potentially embarrassing to them if they were ever scrutinised in public. This could make for bad dispute resolution from the point of view of quality of case management, and general time and expense.
An appointed specialist tribunal
A party’s right to select at least one of the arbitrators on a tribunal that will hear and determine its dispute is an important feature and is seen as an advantage over the court system. The obvious attributes of an arbitrator are that they have the knowledge of the legal system(s) involved, language abilities, business experience and outlook, reputation, technical expertise, arbitration and drafting expertise, and neutrality or impartiality. Other considerations are nationality, background, bias, attitude and any politics with a co-arbitrator.
Beyond all the qualities listed above, an arbitrator has to have courage, decisiveness and case management ability. If there is a panel, rather than a single arbitrator, these three qualities are particularly important in the chairperson who takes on the main role in directing the proceedings, particularly the procedural aspects of the proceedings.
In multi-party arbitrations, or where parties are added after the commencement of the arbitration, the ability to accommodate this right of selection can be challenging. This could result in a party being aggrieved at being deprived of the right to assist in the choice of tribunal that will determine its case.
Once a tribunal is established, it is independent, and has a duty to act fairly and impartially. Yet the fact that the panel members are selected by the parties may sometimes (whether rightly or wrongly) give rise to comments of bias by parties who are on the receiving end of unfavourable rulings. This will not come into question in jurisdictions where the judiciary is clearly independent.
To maintain the confidence of both sides, there is sometimes a tendency on the part of a less robust tribunal to be reluctant to rule in one side’s favour on procedural matters. This may be to avoid the appearance of favouring a particular side. As such, interim procedural matters may sometimes not be dealt with as firmly as they should be. This may be used to its advantage by a rich corporation with a large budget, or an impoverished litigant in person, and can increase time and costs.
In jurisdictions with specialist IP judges and courts, the technical expertise of an arbitrator is not an obvious advantage in choosing the arbitration route. Further, in countries where the IP judges are selected because they are viewed as the ‘best in the business’, it is questionable as to whether the quality of decisions from anyone else matches up.
Finally, as there is no centralised listing procedure, the individual diaries of the panel can often dictate when a dispute is resolved. This could cause delay and further escalation of costs.
Parties have the autonomy to select the type of arbitration, institutional rules, seat of arbitration, governing law, the number of arbitrators and who the arbitrator(s) will be. Compared to litigation, the rules surrounding the conduct of an international arbitration are much less clear cut. For those used to litigating within the formal structure of a court system, this lack of a clear system of precedent and guidance may be frustrating. For those who are familiar with and enjoy this flexibility the lack of certainty can be used to a party’s advantage.
The perceived cost advantage of a single multijurisdictional arbitration is that one set of proceedings is cheaper than a dozen. However, some of the practices referred to above can result in a massive increase in costs.
There is also much anecdotal evidence that arbitrations may often turn out to be at least as costly. There have been arbitrations that have taken such a long time that arbitrators have passed away or retired during the course of the proceedings.
Making the decision to arbitrate
A decision to arbitrate can be made long before any dispute arises and the likelihood of later disputes may not be at the forefront of the parties’ minds when they are negotiating their contract. They may be reluctant to think that disputes will arise at all, let alone spend time negotiating how they will deal with them. This can lead to poorly drafted dispute resolution clauses, with inadequate consideration given to how a dispute will be resolved in practice.
Yet a little foresight may save considerable pain later. For example, in addition to deciding between the courts and litigation, and how any arbitration will be dealt with, the contract could provide an escalation clause, requiring the parties to go through different steps before embarking on arbitration, such as business-to-business discussions and mediation. Early interventions of this type can be highly effective.
When a reference to arbitration becomes necessary, it is very prudent to identify and thoroughly research likely arbitrators, and the tribunal chairpersons they might pick, before starting the arbitration.
Once actually embarked on arbitration, providing regular costs estimates and risk assessments to the client at different stages of the arbitration (especially with unexpected procedural wrangles) will reduce the chance of nasty surprises. Arbitration has some procedural rules that can be advantageous, for example, the more limited nature of disclosure and the possibility of using experts to advise the panel directly, rather than the panel having to decide between the parties’ experts.
Arbitration is definitely a viable method of dispute resolution and has, in principle, clear advantages, but it is important that parties do not go into this with their eyes shut. All aspects of the dispute resolution process should be considered carefully before entering into an arbitration agreement. Relying on a boiler plate arbitration clause is highly inadvisable. The same applies to post-dispute arbitration agreements.
That said, some of the potential drawbacks outlined in this article may be a symptom of those arbitral forums that are commonly used at present and do not necessarily apply to all arbitrations. One centre worth considering for IP disputes is the World Intellectual Property Organization Arbitration and Mediation Center. Its rules are specifically drafted with IP disputes in mind and it has an expedited procedure available for suitable cases. Those potentially involved in IP arbitrations might wish to look at their rules before deciding which arbitral body should administer their dispute and under which rules.
By Karen Fong, managing partner, Rouse.