BY ENAKSHI SARKAR
LEGAL INTERN, H.K. LAW OFFICES
INTRODUCTION
Intellectual property (IP) litigation is widely perceived to be highly complex, unpredictable, and expensive. IP litigation is also frequently international in scope, involving IP rights emanating under the laws and procedures of multiple jurisdictions. Arbitration offers many obvious advantages over national courts and administrative agencies for resolution of these disputes, including the ability to select arbitrators with specialized expertise, the ability to adjudicate IP rights on an international scale, as well as increased speed, enhanced confidentiality, and the ability to craft case-specific, tailored procedures. International arbitration is the norm in many areas of commerce. Arbitration permits parties to select procedures that they find reliable and familiar. Parties who are wary of local legal systems and foreign practices often will feel far more comfortable in submitting their disputes to an international arbitral panel.
In contrast, national courts may be reluctant to decide cases involving foreign IP rights, on grounds of comity or because they feel that they do not have subject matter jurisdiction. In the United States, for example, it has been held that a federal court does not have jurisdiction to decide patent infringement and validity of a foreign patent, even when the foreign patent dispute is ancillary to an infringement suit under a corresponding U.S. patent as observed in “Voda v. Cordis Corp”( 476 F.3d 887).
VALIDITY ISSUES: CONTEXT
IP validity issues may arise in several contexts. Most commonly, validity issues arise in connection with either an infringement claim or a licensing dispute. Validity issues may also arise in such diverse contexts as joint development or joint venture agreements, merger or acquisition agreements, or employment contracts. A frequent defence to these claims is that there can be no recovery because the underlying IP right is invalid or otherwise unenforceable.
In patent infringement disputes, even if validity is not directly challenged, it may indirectly become an issue in deciding whether there is infringement. The infringement determination requires an arbitrator to first interpret the scope of the patent claims and then compare the claims, as interpreted to the accused product or process. Where there are several plausible claim interpretations, an interpretation that would render the patent invalid is disfavoured over one that would sustain its validity.
In licensing disputes, the licensee may attack the validity or enforceability of the licensed IP to avoid royalty payments. For example, it is common for royalty obligation to be triggered by the sale of a product that would, but for the license, infringe. The licensee in that situation may argue that there would be no ‘‘but for’’ infringement because of invalidity or unenforceability.
In mergers and acquisition transactions, there may be a warranty by seller to buyer that the target IP is valid and enforceable. Allegations of breach of such a warranty would ordinarily fall within the scope of the arbitration provisions typical in such transactions.
ARBITRABILITY OF VALIDITY ISSUES
IP, including patents, trademarks, copyrights, and trade secrets, are generally considered to be a form of personal property. However, unlike most other forms of personal property, IP is often the result of a governmental grant, following application and examination by a governmental agency. The national statutes governing the grant of these rights may provide for a presumption of validity based on the presumption that the responsible governmental agency has properly examined and issued the IP grant.
Arbitration is, of course, a matter of private contract. There can be no arbitration absent an agreement among the parties to submit themselves to arbitration as a dispute resolution mechanism. Both the scope of matters to be arbitrated and the process of arbitration are issues defined by the parties’ agreement, which may incorporate rules and procedures of recognized arbitration administrators.
Article V of the New York Convention, for example, provides that a member country may refuse to enforce an arbitration award that concerns a subject not arbitral under the laws of that country or taht would be contrary to the public policy of that country. Because IP rights often stem from government grant and because IP may be viewed as involving important public rights and interests, arbitration of IP validity issues may be prohibited or of limited enforceability under the national law of many countries. Indeed, in some countries, even the courts are without jurisdiction to consider invalidity issues in infringement disputes, and this power, at least in the first instance, is relegated to the issuing administrative agency.
It has been suggested that parties who wish to arbitrate IP validity issues that touch on jurisdictions where arbitrability of validity is questionable can ‘‘contract around’’ this uncertainty by agreeing to arbitrate whether, in the panel’s view, a court or agency of competent jurisdiction would uphold the validity of the IP right.
ARBITRATION OF VALIDITY: THE MECHANICS
Since arbitration can be ‘‘customized’’ to meet the specific needs and goals of the parties, the parties, either as part of their agreement to arbitrate, or by agreement in structuring the arbitration once instituted, have significant freedom to control the way in which these questions will be answered. Further, since IP issues, in general, and validity issues, in particular, have unique needs and present unique demands, standard commercial arbitration rules may not provide the best solution.
For resolution of these potentially dispositive threshold issues at an early stage of the proceeding. Arbitrators, through the use of conferences or similar procedures, should encourage the parties to identify choice-of-law issues at the outset and should consider establishing a rigorous time line for briefing, hearing, and ruling on which law will apply. Of course, parties should not be shy in bringing these issues to the fore, as, ultimately, the parties and the process will benefit from their prompt airing.
SELECTION OF ARBITRATORS
Most international arbitrations are before a three-member panel, with one member selected by each party and the chair selected by the two-party selected arbitrators. Of course, each party has great flexibility in selecting its party appointed member. The objective background and qualifications of the members of the panel can also be specified in the arbitration agreement or clause. Where IP is at issue, parties may wish to draw the panel based on substantive legal expertise (e.g., patent law, trademark law, or the law of a particular jurisdiction), technical expertise (particularly in patent cases), industry expertise, licensing expertise, or accounting expertise (if damage calculation will be complex).
PESENTATION OF ISSUES & EVIDENCES
The flexibility of arbitration procedures provides the potential for advantages in the way in which issues and evidence relating to validity are presented. IP disputes often require the presentation of detailed and complex technical information. The use of panel appointed experts may facilitate the decision-making process. Rather than acting as ‘‘fourth panel member,’’ a panel-appointed expert can sharpen the issues for panel decision and reduce miscommunication. The parties themselves will typically retain their own experts to offer their opinions and present underlying facts. Frequently, in an effort to promote efficiency, in lieu of expert testimony, experts will submit a written report.
FORM OF AWARD
In most international arbitration, a reasoned award, setting forth in detail the evidence and analysis supporting the panel’s ultimate conclusions, is the norm. A reasoned award is believed to enhance the decision-making process and provide a safeguard against arbitrary action. It also can provide a sense of closure to both parties who can feel some level of comfort that their positions were carefully and thoughtfully considered. In addition, where enforcement in a potentially sceptical court is required, a well-reasoned award will enhance the likelihood that the public policy exception to the New York Convention will be invoked.
CONCLUSION
There are clear benefits that can be derived by arbitration of international IP validity issues. However, in many countries, there is reluctance to permit arbitration of the validity of government-issued rights. By carefully crafting the scope of the arbitration and expressly limiting it to inter partes effect, this reluctance may potentially be overcome. When validity of IP is arbitrated, in recognition of the unique attributes of the issues likely to arise, care should be taken in crafting the procedures that will be adopted for carrying out the arbitration so as to maximize its efficiency and utility.
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