1. Introduction- Arbitration of Intellectual Property Rights Issues: The Basics
Resolving intellectual property rights (“IPR”) issues through alternative dispute resolution (“ADR”) proceedings was a technique long-developing. What is common to intellectual property rights (IPR), information technology (IT) and maritime trade (export-import) in the sphere of law? It is that arbitration of disputes, especially "institutional arbitration," is becoming particularly important for these sectors that are growing in India in the context of liberalisation and globalization. Intellectual property rights are as strong as the means that exist to enforce them. In that context, arbitration, as a private and confidential procedure, is increasingly being used to resolve disputes involving intellectual property rights, especially when involving parties from different jurisdictions.
"Institutional arbitration" is a process of arbitration that is not "ad hoc" or decided by arbitrators chosen case-by-case by the parties to a dispute by mutual agreement or named by courts but by arbitrators on the panel of institutions (like the Indian Council of Arbitration — ICA — and many trade associations) who have been chosen for their in-depth knowledge of different fields, and have to follow norms, including in relation to fees, set by the institution. All the three sectors are increasingly characterized by international transactions, where the laws applicable vary from country to country and involve a high level of specialization in the domain concerned. Also, confidentiality is important in the case of disputes involving technology licensing and software.
Another common factor is the criticality of time, considering that patent terms are limited, and technology (including software, which under Indian copyright law has a long 60-year-term) could become obsolete fast, and hence the long duration taken by courts to settle disputes beyond the scope for appeal goes against the interests of disputants. Hence, arbitration offers these sectors advantages particularly valuable for them. Of course, these "plus factors," besides low costs of proceedings, are attractive to disputants in general, in view of which, India enacted the Arbitration and Conciliation Act 1996, replacing the Arbitration Act of 1940, to reduce the scope for court intervention in arbitral proceedings and awards and to give a statutory backing to conciliation. The main obstacle to using arbitration to resolve Intellectual Property disputes is the issue of its subject-matter ‘arbitrability’.
Intellectual Property Rights are territorial, and are primarily derived from the legal protection granted by the local sovereign power, which affords the grantee certain exclusive rights to use and exploit the right. It is argued that disputes in relation to its grant, validity, and extent of the rights granted should be determined only by the authority which granted the right or, in certain situations, by the courts of that country. This had the effect that rights and entitlements to Intellectual Property, and the legal issues which flowed from those rights, could not usefully be referred to or considered by an arbitration tribunal.
Where however, the parties enter into arrangements relating to the development, use, marketing or transfer of IP rights granted, disputes arising from such ‘commercial’ arrangements could be arbitrated without any controversy arising from the issue of its arbitrability. Such matters are generally regarded as inter parties’ commercial matters and are arbitral.
The issue of subject-matter arbitrability is one of the conditions precedents for enforcement of an arbitral award under the 1958 New York Convention. Article II of the Convention obliges countries to recognize only arbitration agreements over “subject matter capable of arbitration”. Where a subject matter is not considered to be capable of arbitration, the agreement to arbitrate may be considered invalid and thus constituting a ground to resist enforcement under Art V (1)(a) – in that the “agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.” Another basis for resisting the enforcement of an award on an IP dispute is that the arbitrability of such disputes is a "public policy" question. As such, if this class of disputes is not arbitrable, an award made on such issues would be contrary to public policy of the enforcing entitling it to refuse enforcement of the award.
2. Why Arbitration in Intellectual Property Right Conflicts- Review and Analysis
In the U.S., the United States Supreme Court has reviewed this question several times, with an answer dependent on specific circumstances.
In AT&T Technologies, Inc. v. Communication Workers of America, the Court held that the question of whether parties contractually agreed to arbitrate (formed an enforceable agreement) is to be decided by the court, not the arbitrator, unless the parties clearly and unmistakably provided otherwise. Granite Rock Co. v. International Brotherhood of Teamsters reached the same result: a court may order arbitration of a particular dispute only where the court is satisfied that the parties agreed to arbitrate the dispute and formed an agreement to arbitrate. But in Rent-A-Center West v. Jackson, the Court held that the arbitrator decides the question of whether an issue is subject to arbitration, so long as parties clearly and unmistakably provided for such a determination, and the validity of agreement to arbitrate such threshold issues is not specifically challenged. Under U.S. law, then, U.S. courts favor arbitration and view favorably—and controlling—the parties’ statements as to issues to be arbitrated.
IP arbitrations are rare because, among other things, IP disputes frequently do not involve a preexisting contractual relationship. Arbitration, however, requires a contractual agreement to arbitrate. Further, some countries do not allow arbitral tribunals to rule on issues of patent validity on public policy grounds. Because patent invalidity is frequently asserted as a defense to an action brought under a license agreement, these disputes tend to be litigated in court.
A recent decision of the Paris Court of Appeals for the first time allows arbitrators to rule on a defense of patent invalidity. That decision may reflect a trend in favor of resolving IP disputes in arbitration, which can constitute an efficient and cost-effective alternative to litigation.
A threshold question that must be considered first in connection with efforts to arbitrate intellectual property disputes is that of objective arbitrability. As a matter of principle, it appears reasonable to consider that intellectual property disputes shall generally be arbitrable. This liberal approach reflects the fact that intellectual property rights and, more generally, intangible assets, have become standard and alienable corporate assets of companies. Given that the condition of objective arbitrability frequently depends on whether the object of the dispute can freely be alienated by its owner, whether such object has an economic value or whether the arbitrability of such object would violate public policy, it seems appropriate to consider that intellectual property rights and intellectual property disputes meet these conditions so that they are fully arbitrable.
The jurisdictional powers of arbitral tribunals are, however, generally considered to reach their outer limits when a dispute would require the arbitral tribunal to render an award on the validity or nullity of industrial property rights (i.e., registered intellectual property rights) with effect erga omnes.. In any case, if arbitral tribunals do not make a decision on the validity of the relevant intellectual property rights (particularly of relevant industrial property rights, such as patents, trademarks and designs) with an effect erga omnes (which could lead to the cancellation of the industrial property right from the relevant registry), but merely decide on the issue of validity as far as this is required for deciding the dispute between the parties (with an effect inter parties), this should not raise concerns of arbitrability.
In this respect, contracting parties may validly define the power of the arbitral tribunals to decide on these issues (with an effect inter parties), which might help overcome the risks which are generally associated with the arbitrability of intellectual property disputes.
Beyond this specific issue of the jurisdiction to decide on the validity of certain registered intellectual property rights, it is generally admitted that other aspects, including aspects relating to the ownership and the transfer of intellectual property rights, are fully arbitrable.
Accordingly, the use of arbitration as a mechanism to resolve such disputes is generally consistent with public policy in most jurisdictions even if certain public policy based restrictions may limit the arbitrability of intellectual property disputes in certain countries. As a result, the grounds of in arbitrability of intellectual property disputes are quite narrow and should not restrict the parties from conceptualizing and planning in advance how an intellectual property arbitration could successfully be structured and what factors should be taken into consideration in this framework.
3. Clarification to Whether an IPR Issue May be Resolved by Arbitration?
Many international contracts include an arbitration clause in order to avoid the risks of litigating in a biased or corrupt judicial forum. The risk of judicial bias or corruption is a key reason that parties select international arbitration as their dispute resolution mechanism.
Empirical studies regarding US patent infringement actions tried to a jury reflect that “domestic parties won 64 percent of the cases decided by a jury when their adversary was foreign, while foreign parties prevailed in the remaining 36 percent of such cases.”
Second, the costs of US litigation, including IP litigation, are high in the United States. A study conducted by the American Intellectual Property Law Association in 2005 reflects that a party usually incurs about $2.6 million in legal fees and costs in an average patent-infringement case. More than half of these legal fees are incurred in the discovery process. The parties to an arbitration proceeding have the ability to substantially reduce such legal fees and costs.
Scope of the Arbitration Clause
It is well known that “arbitration is a creature of contract”. This bedrock principle of arbitration can, however, sometimes lead to difficulties in the context of international intellectual property arbitration cases because these cases frequently raise issues which go beyond standard breach of contract claims. This situation can typically arise when the claim is made that a contracting party has misused trade secrets which have been disclosed to it (potentially in the course of a technology transfer agreement) given that trade secret misappropriation claims are not based on contract, but are frequently grounded on unfair competition law. Unless this is clearly expressed in the arbitration clause, the argument can thus be made by the opposing party that such non-contractual claims fall outside the scope of the arbitration clause and thus are beyond the power of the arbitral tribunal. This argument is of major practical significance particularly because an award which would decide on an issue which would be beyond the power of the arbitral tribunal might not be enforceable under the New York Convention precisely for this reason.
The point here is thus to make sure that the arbitration clause embraces the “universe of disputes” which can arise between the parties. Experience shows, however, that many arbitration clauses are not formulated broadly enough in order to encompass intellectual property related claims ( i.e. infringement claims or claims relating to the validity/nullity of the relevant intellectual property rights) i.e. certain clauses have been construed as limited to purely contractual claims.
It is submitted that it would be fair, as a matter of principle, to maintain that all non-contractual claims which have a certain link with the relevant contract should also fall within the jurisdiction of the arbitral tribunal (this issue being of course subject to the rules of interpretation to be defined according to the standard legal principles governing this question).This is particularly important given that practice confirms that it may be difficult in certain circumstances to distinguish whether a given conduct (for instance the non-payment of a royalty by a licensee) constitutes a breach of contract ( i.e. breach of the license agreement) and/or an infringement of the licensed intellectual property right. This confirms the need that the arbitration tribunal shall have the power to decide on all these issues instead of being limited to the contractual claims. Standard clauses provided for by recognized arbitration institutions can provide a basis for making sure that non-contractual claims are within the scope of the arbitration clause.
4. Law Governing Arbitration Proceeding and Award
Choice of Governing Law
An advantage of submitting an international intellectual property dispute to arbitration, rather than to state Court litigation, results from the broad freedom to choose a single law which shall govern the dispute. The choice of law could also cover issues regarding the validity of the relevant intellectual property rights. This issue consequently also offers room for creativity to the careful contract drafter or, if this issue has not been properly addressed in the relevant contract, to the counsel in charge of the arbitration proceedings.
It thus appears that the ability to choose the governing law constitutes another key advantage of arbitration in the sense that it helps to avoid a burdensome and costly piecemeal choice of law solution which would result from the application of multiple national intellectual property laws. But this freedom requires that the parties and their counsel be aware of this issue. In this respect, it would be worth keeping in mind that the scope of the choice of law .Usually, but not absolutely, that substantive law would also control in any arbitration proceeding arising out of the license. The procedural framework of the arbitration would need, for best practices, to also be recited in the license agreement.
Where a post-dispute agreement is entered into, there is usually no practice or presumption as to applicable substantive law or the procedural rule/framework of arbitration, and both would need to be recited. Application of any choice-of-law rules would, of course, need to be considered, and those effects specifically negated if they would defeat the recited substantive law or procedural rule/framework intended to apply in and control the arbitration. Always follow the rule of “better safe than sorry” regarding the arbitration: include a clear statement of governing substantive law and the intended procedural rule/framework in the agreement, and address conflict of laws as well.
5. Procedural Practices: Ad Hoc vs. Administered Arbitrations
Specific IPR Arbitration Rules - In the realm of intellectual property-specific issues, WIPO, ICC, AAA, and the CPR rules/procedures may be applied. WIPO has an arbitration mechanism comprised of two sets of rules: the arbitration rules and the expedited arbitration rules. These rules are not IP specific. But WIPO maintains an updated directory of arbitrators who are experts in intellectual property law, as well as having an understanding of technology. The ICC also does not have specific rules for IPR. The AAA, on the other hand, has specific rules for intellectual property matters, particularly patent cases. They are used most often in conjunction with the commercial arbitration rules/mediation procedures comprising supplementary rules for the resolution of patent disputes. The AAA also maintains a national panel of patent arbitrators who are either lawyers specializing in IPR, or who are “gearheads.” The AAA provides a very detailed preliminary hearing procedure, as well as an enforceability procedure. The CPR also has a set of patent-specific rules, but they are ad hoc. The CPR does not take on nor provide any administrative functions or capabilities.
Advantages of Arbitration for IPR Disputes
There are many advantages to arbitrating IPR disputes, including:
1. Party Autonomy.
2. Certainty as to Forum. Disputes are submitted to a single forum, not several different forums in several different jurisdictions simultaneously.
3. Relative Speed of Arbitration-Arbitration is designed to allow for set decision-making time periods.
4. Availability of Expert Arbitrators-The greatest advantage of arbitration may be that parties are allowed to pick arbitrators who are specialists in the area of dispute.
5. Confidentiality. Parties are not forced to wash their dirty linen in public. This is a significant reason parties elect to arbitrate.
6. Neutrality Regarding National Interests.
7. Avoidance of U.S.-Style Discovery-In an arbitration agreement, parties may agree not to have any discovery at all. Alternatively, they can specify what each side will do. This option is unavailable in court.
8. Minimal Damage to the Party/Commercial Relationship.
9. Flexibility of Remedy.
10. Enforceability of Awards-The New York Convention has 120 countries as signatories: there is only one result, with one place to go to have the result enforced.
11. Single Procedure.
12. Binding Effect (if the parties so choose).
Disadvantages of Arbitration Regarding IPR Disputes- There are disadvantages to arbitrating IPR disputes. For one, it may prove extremely difficult to get injunctive relief quickly. It can be very hard to get punitive damages. Under trademark, copyright or patent law in the United States, if you willfully infringe upon somebody else’s rights, you may be forced to pay triple the damages awarded as well as attorney’s fees. It is very difficult to find a court that will say you can do that in an arbitration agreement, even if you have agreed to it. Additionally, some parties want the precedential value of a court-rendered judgment or they want their victories publicly broadcast. Frequently, the ADR of IP disputes simply is not available: ADR depends on the consent of the parties to the dispute (whether before the dispute arises, as in an arbitration clause included in the contract governing the transaction, or after the dispute arises, as in a written agreement to submit an existing dispute to arbitration), and many IP disputes – particularly infringement claims – are between parties with no pre-existing relationship and who are not inclined to agree to submit their dispute to ADR.In other circumstances, even in the context of an existing relationship or prospective transaction, there still may be reasons why one party or another might not want to agree to the resolution of any IP disputes by arbitration or some other form of ADR. Some of these reasons include the following:
Concern about the Need for Emergency Injunctive Relief: An IP rights holder may believe that the complete protection and vindication of the rights depends on the availability of immediate injunctive relief (e.g., a Temporary Restraining Order or other form of injunction forbidding the use or disclosure of the IP), and that such relief is more likely obtained from a public court rather than from an arbitration tribunal.
The Strategic Need for Precedent or Publicity: There are times when an IP rights holder or an alleged infringer may desire a complete and public vindication of its rights. For example, an IP rights holder about to embark on a series of adversarial license negotiations may believe that the benefits of a favorable public judicial vindication of its rights (and the ability to control the court in which vindication is sought outweighs the risk of no vindication or an adverse ruling.) Similarly, an alleged infringer with an allegedly infringing product may desire a complete and public vindication of non-infringement as the only effective way to remove consumer doubt about the product in question. Similar strategic purposes also may counsel against ADR for IP rights in other circumstances.
6. Conclusion and Recommendations for the Arbitration in IPR issues.
Under the background of globalization, utilization of intellectual property has also become more internationalized and commercialized. This can be seen through variety of cross-boarder cooperation arrangements, such as through licensing, technology transfer and co-operative research and exploitation arrangements. This has raised the demands of the rights holders for dealing with IPR disputes at an international level. When seeking mechanisms for dispute settlement, more and more parties take their commercial interests as the priority concern, i.e. they require the dispute procedure to be personal, highly flexible and efficient, so that the cross-border disputes can be solved and without ruining the commercial relationships. As an alternative way for disputes resolution, arbitration can avoid parallel litigations and has its inherent advantages in dealing with commercial disputes in respect of flexibility, confidentiality, finality.
The legislative and judicial practices of other countries and that of the WIPO show the following trend. On one hand, in the process of international economic globalization, most countries are inclined to acknowledge the IPR as private property rights. On the other hand, courts are overburdened by a large amount of commercial disputes. This has resulted increasing debate and researches both academically and practically on alternative dispute resolution methods, and many countries are inclined to adopt a pro-arbitration policy and further enlarge the scope of arbitrability. With the world more and more dependent upon technology of all types, the continued and growing importance of intellectual property cannot be understated. There has been, and will continue to be, an accompanying explosion in the number and complexity of transactions in which intellectual property is a critical, if not the critical, element. Many of these transactions cross national boundaries; as do the disputes which inevitably arise from them. But international intellectual property disputes present complexities not encountered in either intellectual property disputes which are confined to one country or other international commercial disputes.
In view of these developments, it is important that all the stakeholders, and particularly the parties and their counsel, shall become aware of the adequacy of arbitration for solving international intellectual property disputes and shall take time to assess in advance the implications of using arbitration effectively for solving such disputes. This requires moving beyond the threshold issue of arbitrability of intellectual property disputes in order to address the issues which can significantly affect the success of arbitration in terms of cost, speed and efficiency, particularly the scope of the arbitration clause and the definition of the governing law.
7. References
See Arpad Bogsch, Opening Address, WORLDWIDE FORUM ON THE ARBITRATION OF INTELLECTUAL PROPERTY DISPUTES, WIPO PUBLICATION NO. 728 (E), 14 (1994), available http://www.wipo.int/amc/en/events/conferences/1994/opening.html [hereinafter WORLDWIDE FORUM].
See Intellectual Property: Arbitration vs. Litigation, AMERICAN ARBITRATION ASSOCIATION 2, available at http://www.adr.org/si.asp?id=5004 (last visited Oct. 12, 2011).
See The ABCs of ADR: A Dispute Resolution Glossary, CPR INSTITUTE FORDISPUTE RESOLUTION (2000), http://www.ilr.cornell.edu/alliance/resources/basics/ABCs.html.
See Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, art. I(1), 21 U.S.T. 2517, 330 U.N.T.S. 38 [hereinafter New York Convention].
See generally Arbitration, INTERNATIONAL CHAMBER OF COMMERCE, http://www.iccwbo.org/policy/arbitration/id2882/index.html (last visited Oct. 12, 2011) [hereinafter ICC]. The World Intellectual Property Organization and the American Arbitration Association also provide administered arbitration mechanisms and rules applicable to IPR. See generally WIPO Arbitration and Mediation Center, WORLD INTELLECTUAL PROPERTY ORGANIZATION, http://www.wipo.int/amc/en/ (last visited Oct. 12, 2011) [hereinafter WIPO]; Arbitration, AMERICAN ARBITRATION ASSOCIATION, http://www.adr.org/ (last visited Oct. 12, 2011) [hereinafter AAA].
See Rules of Arbitration, Scrutiny of the Award by the Court, art. 27, ICC (1998), http://www.iccwbo.org /uploadedFiles/Court/Arbitration/other/rules_arb_english.pdf
See generally WIPO, AAA, or ICC, supra note 19.
See generally CPR Rules for Non-Administered Arbitration of Patent & Trade Secret Disputes, THE INTERNATIONAL INSTITUTE FOR CONFLICT PREVENTION & RESOLUTION, http://cpradr.org/Resources/ALLCPRArticles/tabid/265/ID/615/CPR Rules-for-Non-Administered-Arbitration-of-Patent-Trade-Secret-Disputes.aspx [hereinafter CPR Rules].
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