Arbitration of Intellectual Property Disputes

18 December 2007

Sophie Lamb, Alejandro Garcia

The increasing popularity of arbitration for IP disputes

In a global economy increasingly based upon conceptual products, converged technologies and international networks, intellectual property rights (IPR) continue to be the most valuable assets of many businesses. An explosion of new technologies, from innovations in the field of life sciences, to “nanotechnology” in the electronics industry, coupled with a trend towards international patenting behaviour, explains the continuous growth in the volume of patent applications filed worldwide. Trademark, brand and domain name registrations too continue to increase. Unsurprisingly perhaps, there are also clear geopolitical trends in this area: Japan now experiences the greatest volume of resident patent applications and at the international level, one quarter of the world’s PCT applications (international patent applications filed under the Patent Cooperation Treaty administered by the World Intellectual Property Organisation (WIPO)) originate from northeast Asia (Japan, the Republic of Korea and China).

The ability to exploit, protect and enforce IPR on an international basis is very often business critical. Moreover, patent litigation continues to require court proceedings in every jurisdiction in which the patent is allegedly infringed. Where the relevant product has a global market this has very considerable legal, logistical and financial consequences. Not surprisingly therefore, the use of ADR, including arbitration, to resolve IP disputes, is on the rise. Last year saw a decline in US patent litigation for first time in 15 years. At the same time, 375 IP cases were filed with the AAA. Elsewhere, the ICC estimates that 10% of its annual caseload involves an IP element. WIPO has administered over 80 complex IP arbitrations in recent years and some 25,000 domain name disputes since 2000. The purpose of this short article is to explain the increasing popularity of arbitration for a broad range of IP disputes and to identify certain special features of IP arbitration.

Intellectual property encompasses a broad spectrum of subject matter.Article 2(viii) of the Convention establishing WIPO[1] defines it as follows:

“[I]ntellectual property shall include the rights relating to:

  • literary, artistic and scientific works,

  • performance of performing artists, phonograms and broadcasts,

  • inventions in all fields of human endeavor,

  • scientific discoveries,

  • industrial designs,

  • trademarks, service marks, and commercial names and designations,

  • protection against unfair competition,

and all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.”

The range of disputes arising in connection with this subject matter is equally broad and can involve licenses and cross-licensing arrangements, international trademark or patent infringement disputes, rights and obligations arising under joint research and development initiatives, disputes over settlement agreements, disputes involving copyright or collecting societies, domain name issues and disputes of a more generic commercial nature (construction, investment, business acquisition and so on). The legal issues likely to arise in such disputes include breach of contract, infringement, enforcement, misuse of confidential information or trade secrets, industrial espionage, claim construction and ownership of or entitlement to technology whether via licences or otherwise. Remedies sought will include injunctive relief, damages (including punitive or exemplary damages), declarations of infringement or invalidity, delivery up and specific performance.

Arbitration offers a number of real benefits for certain IP disputes

Globalisation can create unwelcome dilemmas for IPR holders. Whilst there is a clear shift towards the global exploitation of IPR, those rights are by nature territorial i.e. connected to the specific jurisdiction in which the right is registered or protection is conferred. Accordingly, international patent disputes therefore involve litigation proceedings in multiple jurisdictions - and even proceedings within proceedings in bifurcated systems such as Germany[2] - which cannot be consolidated[3] and which are generally mandatorily subject to the laws of the country of registration.

The uncertainties inherent in parallel litigation are self-evident: different legal systems will involve differing procedural and substantive treatment of similar issues, in different time frames and by decision-makers with varying degrees of experience and/or relevant technical expertise. Given the risk of inconsistency in national approaches, coupled with the uncertainty and expense of enforcing foreign judgments in certain jurisdictions, arbitration can offer genuine advantages. For example, given that over 50% of patent damages awards are decided by juries in US proceedings, and that the majority of patent damages decisions are reversed on appeal or remanded back, arbitration may commend itself in such disputes on the basis of time, expense and limited “appealability” alone. Indeed for this very reason an increasing number of high profile parties now conclude post-dispute arbitration agreements.

Arbitration of global IP disputes yields various distinct advantages. It permits the parties to resolve multiple “national” disputes involving the same IPR in a single proceeding. There are obvious time and cost benefits to this: fewer counsel are involved; less expert evidence is required where the arbitrators are familiar with the technology at issue; disclosure exercises are not repeated and are insulated from the exacting obligations that would arise in US proceedings; and witnesses need only attend one hearing to give their evidence. Importantly. there would also be no risk of contradictory results due exclusively to inconsistent factual findings. Moreover, the finality of arbitration also avoids protracted appeals and recourse practice.

Expertise of decision-makers is often critical in IP disputes, whether that be knowledge of a particular area of science or technology or because the issues involved arise at the intersection of intellectual property, regulation and competition law. Judges in some jurisdictions will have such specialist knowledge, but not in every jurisdiction. Arbitration provides for quality control in this regard, either through party choice of arbitrator (including a technical expert, rather than a lawyer, in appropriate cases) or through panel selection by a specialist arbitral institution such as WIPO.

Confidentiality is often particularly important in IP disputes, certainly where proprietary or commercially sensitive information is involved or where the dispute involves products or processes still in the developmental phase. Although the confidentiality of arbitral proceedings does not enjoy uniform treatment even in the leading arbitral jurisdictions, the parties can by contract create far-reaching obligations of confidentiality, including by incorporating institutional arbitral rules which specifically address this issue. The WIPO Arbitration Rules, for example, contain provisions dealing explicitly with the treatment of trade secrets and other confidential information[4] and even provide for the appointment of a confidentiality advisor to determine, in lieu of the tribunal, whether the information is confidential and, if so, what special measures of protection are required within the proceedings to protect it.

Special features of IP arbitration

Certain features or consequences of arbitration have greater impact and importance in IP disputes and the most significant of these features are discussed below.

Arbitrability and public policy

The interconnected issues of arbitrability and public policy are particularly relevant in IP disputes. Many jurisdictions do not allow arbitration of disputes involving issues of public policy, although the list of such “prohibited” disputes gets ever smaller. On grounds of public policy, a small number of jurisdictions prohibit the resolution by arbitration of certain aspects of IP disputes. The rationale for this prohibition is usually based upon state involvement in the creation, recognition or protection of IPR (rights that often grant areas of exclusivity to their holders) but also rests upon the notion that a private adjudicator should not resolve a dispute that may affect society at large. Accordingly, some jurisdictions bar the arbitration of any kind of dispute involving IPR, for example South Africa[5] and, prior to 1993, Israel[6]. Other jurisdictions are at the opposite end of the spectrum.In the USA, parties can arbitrate any kind of IP dispute, even disputes as to the validity of IPR[7]. It is generally accepted that in the UK issues of validity relating to IPR are arbitrable, although the award will only bind the parties to the arbitration. The position in Germany is similar. Switzerland goes further still.In its decision of 15 December 1975, the Federal Office of Intellectual Property held not only that arbitral tribunals may decide upon the validity of patents, trademarks and designs but also that registered IPR may be struck down on the basis of an arbitral award. Other countries adopt a middle path, allowing the parties to arbitrate the infringement of IPR but not to arbitrate the validity of registrations (e.g. France, Italy, Japan and Spain).

The question of arbitrability can arise at two stages. First, one of the parties may raise the issue as a jurisdictional objection at the outset of the proceedings (either directly with the tribunal or in court proceedings). Arbitrability can also arise when enforcement is sought pursuant to the New York Convention. At the first stage, one issue will be whether any mandatory laws governing the relevant IPR apply to the issue. Many arbitral awards[8] and some leading commentators[9] soundly reject the application of mandatory law at this stage. In any event, the issue of arbitrability is subtly different from jurisdiction to jurisdiction and as ever in arbitration it is important to have an eye on not only the substantive law of the dispute, but also the law of the seat of the arbitration and the law of the likely place of enforcement.

In the view of these writers, the issue of arbitrability has been somewhat overstated in the past, including for the following reasons:


  1. Arbitration generally only affects the parties bound by the arbitration agreement.Even if IPR is declared invalid in an arbitral award, in most jurisdictions that declaration has inter partes effect only (and indeed most jurisdictions recognise and support the inter partes effect of such awards).As regards the rest of the world, including the state involved in the registration of the IPR, the rights remain intact. This is actually seen as a benefit by many IPR holders as it limits the risk that any single dispute will result in the loss of their rights altogether. In sum, an inter partes award does not therefore oust the jurisdiction of other competent authorities even those who view their jurisdiction over IP matters as exclusive.

  2. The issue of arbitrability usually only arises in connection with IPR subject to registration and even in that connection usually only in relation to the issue of invalidity.Invalidity of IPR subject to registration is only one aspect of an immensely vast subject.Moreover, in most arbitrations in which invalidity arises, it is invoked as a defence i.e. to claims of breach of a licence agreement. However, applicable law may prohibit a respondent from raising invalidity as a defence altogether. Moreover, even where it can be raised as a defence, it is only relevant to the determination of contractual rights and obligations – it does not require or involve a finding of invalidity of the asserted IPR per se.Finally, the defence of invalidity usually arises in patent disputes[10].In trademark disputes this defence is less common.Indeed some jurisdictions expressly permit arbitration of trademark validity.

  3. Only a handful of jurisdictions expressly prohibit the arbitration of IP disputes in any event.

  4. In practice, arbitrability issues rarely arise in IP arbitrations.According to WIPO, the issue has yet to arise in any of the cases it has administered.

  5. The issue of arbitrability and the public policy exception contemplated by Article V.2 of the New York Convention may have relevance at the enforcement stage for an award that deals with the invalidity of asserted IPR. Nonetheless, national courts usually construe this public policy exception narrowly and generally require violation of a state’s most fundamental principles of justice or morality.Accordingly, in reality very few arbitral awards are successfully challenged on public policy grounds in any event.

  6. Finally, there are practical ways to prevent challenges based on arbitrability.For example, a tribunal could be asked to make findings of non-enforceability rather than invalidity.

Applicable law

IP arbitrations will almost certainly involve a variety of applicable laws many of which are of mandatory application[11]. IPR vest in their holders a territorial exclusivity in connection with the protected subject-matter. As a consequence, a specific system of law defines the characteristics and extent of the exclusivity granted by a specific IP right. In order to assess whether an IP right has been breached in a given case, an arbitral tribunal must refer to the system of law that created the cluster of exclusivity. The tribunal will also need to determine whether certain acts fall within the exclusivity granted by the asserted IP right in the light of this mandatory law. If one party alleges the invalidity of the asserted right, again the tribunal must resolve this issue by applying the relevant laws of the country that protects the right at stake.

Because of the necessary application of multiple foreign laws in an international IP arbitration, tribunals may need to rely more on expert evidence of such law and also on translations of statutes and relevant case law. This is not perhaps unusual in international arbitrations. However, the application of mandatory laws is particularly challenging in disputes involving patents issued in several jurisdictions.Patent law around the world is the least harmonised branch of IP. In the US, to assess the infringement of a US patent, federal courts apply the “doctrine of equivalents”[12] in a way unknown to other legal systems. In many cases, the application of this doctrine will be pivotal in the determination of the dispute. Even among countries whose patent laws are more harmonised many nuances that may be determinative of a case can exist. Accordingly, it may well be the case that a tribunal would need to arrive at different results for different national patents protecting the same invention.

The strong territorial character of IP disputes can also influence procedure in an international arbitration. For example, in international arbitrations involving both US and non-US patents, some parties have requested a preliminary ruling on claim construction. Preliminary rulings on claim construction have become part of the landscape of US patent litigation but are alien to patent litigators in many other jurisdictions.

Conclusions

The advantages of using arbitration to resolve IP disputes are demonstrated by its rising use in recent years. Because of the particularities of IPR, however, parties wishing to benefit from arbitration must commit to thorough planning particularly where the dispute involves IPR protected in several jurisdictions.In addition, special attention must be given to the issue of arbitrability, both when selecting the seat of the arbitration and when considering the likely place of enforcement, not least because such factors may influence the particular form of relief to be requested in an award. Finally, given the special features of IP disputes, in most cases parties would be well advised to select arbitration rules designed specifically for IP disputes. The WIPO Arbitration Rules, for eample, contain detailed provisions on confidentiality, site visits and evidence by way of experiments, issues which very often arise in the context of IP disputes.







[1] Convention Establishing the World Intellectual Property Organisation, signed at Stockholm on 14 July 1967.

[2] The German patent litigation system is “bifurcated” in that the issues of infringement and invalidity cannot be tried in the same proceeding.Accordingly, a respondent cannot file a defence of invalidity before the civil court trying an infringement action.Instead, it must initiate an invalidity action before the Federal Patent Court in Munich.



[3] For a recent US example, see Voda v. Cordis Corp., Fed. Cir. App. No. 05-1238 in which the Court of Appeals for the Federal Circuit vacated an order of a district court judge that, in theory, would have allowed consolidating in the USA lawsuits relating to the infringement of non-US patents.



[4] Article 52 WIPO Arbitration Rules.



[5] Article 18(1) of the Patents Act 1978 states: “Save as is otherwise provided in this Act, no tribunal other than the commissioner shall have jurisdiction in the first instance to hear and decide any proceedings, other than criminal proceedings, relating to any matter under this Act.”



[6] Golan Work of Art Ltd. v. Bercho Gold Jewellery Ltd., Tel Aviv District Court civil case 1524/93.



[7] 35 USC Sec. 294 allows the parties to submit to arbitration “any dispute relating to patent validity or infringement […]”.The award will only bind the parties and will be unenforceable until notice of the award is filed with the USPTO.



[8] ICC Case No. 4604, in ASA Bulletin 3/1985, at 114; ICC Case No. 6162, ICCA Yearbook 1992/XVII, at 153; and ICC Case No. 6379, in ICCA Yearbook International Commercial Arbitration 1992/XVII, at 212.



[9] Marc Blessing, Arbitrability of Intellectual Property Disputes, in Arbitration International, Vol. 12, No. 2 at 205, has stated that “[…] the limit of arbitrability is, in my view, not set by the interference of foreign mandatory rules of law, but only by the limits imposed on the basis of public policy in international affairs.” See also Robert Briner, The Arbitrability of Intellectual Property Disputes with Particular Emphasis on the Situation in Switzerland, Worldwide Forum on the Arbitration of Intellectual Property Disputes, March 3 - 4, 1994, Geneva, Switzerland, at *6.



[10] Patent litigation of course remains an extremely significant aspect of IP practice.Indeed it yields some of the largest money awards in the USA.According to Bloomberg: “Juries in the U.S. awarded $1 billion in patent damages last year, almost triple the 2005 amount, as technology companies including Rambus Inc. and TiVo Inc. stepped up their use of the courts to fend off competition.” See http://www.bloomberg.com/apps/news?pid=20601103&sid=a1aMgAQK1eww&refer=us (website last visited on 22 October 2007).



[11] Under the amended proposal for a European Parliament and Council Regulation on the law applicable to non-contractual obligations (“Rome II”), it will not be possible for parties to agree on a single law of infringement to govern all acts of infringement wherever in the world they arise (See Article 8 of Rome II).

[12] By the application of this doctrine US courts seek to prevent infringers from avoiding liability by making unimportant changes to a product or process that otherwise would not fall within the literal scope of the claims of the asserted patent.