Why has arbitration become a popular method for resolving IP disputes? Here, we outline when to take that option
When negotiating intellectual property contracts, parties may spend little time considering dispute resolution mechanisms. Many assume that courts are the go-to forum. However, fighting a battle in court is not the only option. Arbitration has become an increasingly popular means to resolve IP disputes in recent years.
Beyond IP licensing agreements for hardware manufacturing and software products, which have historically been more receptive to arbitration dispute resolution clauses, there is growing discussion, including from judges, about the benefits of arbitration as a forum for resolving fair, reasonable and non-discriminatory (FRAND) disputes regarding standard-essential patents (SEPs).
That the newly established Unified Patent Court recognized the need for out-of-court resolution – it has established a dedicated Patent Mediation and Arbitration Centre seated in Lisbon, Portugal, and Ljubljana, Slovenia – further confirms that complex disputes involving intellectual property are on the rise.
Choosing an appropriate forum to resolve IP disputes is critical for minimizing the risk of unfavorable or unpredictable decisions, ensuring that the procedures cater to the needs of all parties (e.g., confidentiality and decision-maker expertise), and bringing potential cost savings.
We draw from AOS Shearman’s broad experience in negotiating cross-border IP contracts, litigating IP disputes in national courts, and acting in international IP arbitrations to summarize when arbitration is well-suited for IP disputes and strategies for managing IP arbitrations
When to arbitrate?
Where confidentiality is key
Unlike court cases, where judgments are published and hearings are listed in cause lists, arbitral awards are generally confidential.
The existence of an arbitral proceeding is usually not published. The level of confidentiality depends on the applicable rules and laws at the seat of the arbitration. In emotionally charged cases, such as trade secret disputes, arbitration’s confidential nature may help lower the temperature and create a more open environment for resolving the dispute.
Where multiple jurisdictions are involved
When a dispute is global, arbitration can provide a single forum for resolving it. This can reduce the complexity, uncertainty and costs associated with multiple parallel litigations in different national courts. Litigating before numerous national courts creates complexities, such as competing and differing laws, rules and standards of proof. Moreover, practical concerns, such as engaging different teams and burdening clients with numerous matters, favor a consolidated arbitration proceeding.
This is particularly relevant for FRAND disputes. Since 2017, when the England and Wales High Court determined and set a global FRAND royalty rate in a dispute between a large implementer and a non-practicing entity (NPE) SEP-owner in Huawei v Unwired Planet, other national courts have indicated they are willing to do the same. As a result, parties to FRAND disputes have undertaken jurisdictional battles, leading to competing courts issuing costly and prohibitive anti-suit and anti- anti-suit injunctions against parties.
Giving exclusive jurisdiction to an arbitral tribunal can avoid such jurisdictional issues and enable the parties to reach a global settlement through a single proceeding, rather than requiring the same parties to participate in multiple FRAND court proceedings, run in parallel, in different jurisdictions.
The same advantages apply to infringement disputes. If an infringing product appears in multiple markets, taking enforcement action in each jurisdiction can be costly and time-consuming. Awards made by arbitral tribunals are binding on the parties to the dispute and are recognized by the courts of New York Convention member states, which include most of the major economies that are relevant to the technology sector, except for Taiwan. By providing a single decision that is enforceable in all major markets, arbitration offers an effective and cost-efficient way to stop infringement activity.
However, as ever, it relies on the parties agreeing to arbitration; an agreement that can be difficult to obtain in infringement actions, unless a pre-existing contractual relationship underpins the dispute.
Where court neutrality is a concern
IP owners often license sensitive technologies and trade secrets to foreign partners to leverage the lower-cost manufacturing available in other countries or to facilitate their entry into a highly regulated or little-known markets. In such circumstances, there may be concerns about courts in host countries holding protectionist inclinations against foreign parties and difficulties with enforcing the judgments of home jurisdiction courts in host jurisdictions due to misconduct.
Arbitration may be a more neutral option than litigation in court because arbitrators are selected by the parties or an independent third party, such as the appointments committee of an arbitral institution. A sole arbitrator, or the presiding arbitrator in a three-member tribunal, is often required to be of a different nationality to a party. Parties can also choose to seat the arbitration in an arbitration-friendly third country unrelated to the parties, so the arbitration will be governed by that country’s laws and supervised by its courts. These features of arbitration remove any perceived biases based on national origin and promote a more diverse outlook that is more suitable for cross-border disputes.
Where special expertise is needed
In the same vein, some jurisdictions do not have specialist IP courts or a well-developed body of IP law. Rather than leaving the decision-making to the hands of judges who are inexperienced in IP matters, or indeed a jury, arbitration allows parties to appoint arbitrators with experience in IP, a scientific background, subject matter or sector expertise, or relevant technical and legal qualifications, among other requirements. Parties can also specify desired qualities of an arbitrator in concrete and objective terms in arbitration clauses to ensure that the right person decides their case.
Several leading arbitral institutions, including the World Intellectual Property Organization (WIPO) and the Hong Kong and Singapore International Arbitration Centers, maintain panels of arbitrators specializing in IP disputes, which include retired senior IP judges and respected IP practitioners.
Having an arbitrator with IP expertise can increase the efficiency of the arbitration process and reduce the need for extensive expert evidence or technical explanations.
It is important to note that arbitration may not always be appropriate. The choice of arbitration over litigation will depend on the IP rights, jurisdictions (including local law advice), and the party dynamics and atmospherics involved.
How to do it?
For those who do include an arbitration clause in their IP contract, here are five tips for in-house counsel when managing arbitration of IP disputes.
1. Assemble counsel teams and select arbitrators with technical expertise and a thorough understanding of the arbitral process
IP disputes often involve highly technical issues that are unique to that sector. Engaging counsel and selecting arbitrators who have experience in that industry and the ability to understand complex IP concepts quickly, is critical. It is advisable to engage a multidisciplinary counsel team competent in technical, legal and arbitration procedural aspects to enhance the party’s credibility before the tribunal and avoid unnecessary inefficiency.
2. Establish robust procedural rules for the arbitration
Most mainstream commercial arbitration rules (with some exceptions, such as the WIPO Arbitration Rules) are not designed with IP disputes in mind. Therefore, they may not contain provisions regulating procedural aspects which are important for IP disputes, such as the disclosure of trade secrets and confidential information, the use of experimental evidence, and the availability of site visits. But this can be an opportunity for parties to design their own rules, either in the contract’s arbitration clause or in a Procedural Order No. 1, which sets out an arbitral tribunal’s first procedural directions after its constitution. A robust set of procedural rules can promote the fair and efficient conduct during the arbitration and bridge expectations of parties from different legal traditions towards procedures, such as discovery (or document disclosure) and the repetition of experiments.
3. Make full use of the available legal toolkit, including emergency arbitrator proceedings and court-ordered interim measures
A common misconception about arbitration is parties are required to seek all remedies for the dispute from the arbitral tribunal, compromising a party’s ability to seek urgent interim relief from a court. This is not so, as many modern arbitration laws and rules allow courts to issue interim relief, including interim injunctions and orders requiring preservation of evidence or the production of documents, to aid arbitration.
Some arbitration rules also provide emergency arbitrator procedures that allow a party to seek urgent interim relief before commencing arbitration or the full tribunal’s constitution. An emergency arbitrator will usually make a decision within around two weeks of an application.
4. Don’t lose sight of settlement strategies
The confidentiality of arbitral proceedings, and the fact that arbitral awards only bind the parties to the dispute (not third parties), allow parties to pursue settlement discussions more easily alongside ongoing arbitration. Success in strategic procedural applications (e.g., winning an order to disclose commercially sensitive source codes from an opposing party) can help a party secure a strong position when negotiating a settlement.
5. Frame legal claims carefully to mitigate the risk of jurisdictional challenges
In certain jurisdictions, where the arbitrability of IP rights is not well settled, it is important to frame legal arguments carefully to make sure that the arbitral award issued by a tribunal is enforceable where the assets are found. Arguments such as the invalidity of an IP right and antitrust allegations are particularly at risk of enforcement challenges. Presenting the IP dispute in contractual terms can mitigate this risk in some jurisdictions.
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