Arbitration of International Disputes

Joel LeemanBromberg & Sunstein LLP

www.bromsun.com© 2008 Bromberg & Sunstein LLP

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Arbitration Advantages -- in any kind of case

Faster than litigation

Cheaper than litigation

Private & confidential

Single proceeding

Arbitrator expertise

Parties can define the issues for determination

Likelier to preserve business relationship

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Delay can harm both licensor and licensee

Postpones licensor’s enforcement of patent rights (painful in fast-developing fields)

Casts cloud of wrongdoing over accused’s effort to market his own products

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Arbitration Disadvantages -- in any kind of case

Less discovery Rules of evidence not followedGenerally not reviewableNot necessarily cheaper than litigationRequires cooperation between partiesCannot coerce cooperation of third partiesSets no precedentSplit-the-baby tendency may repel “total victory” seekers Lacks message-sending/public-spectacle value

Or are these actually advantages?

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Arbitration advantages in int’l disputes

Avoids int’l jurisdictional disputeAllows choice of neutral forumAllows choice of place for arbitration, and thereby the applicable procedural lawAllows choice of languageAvoids playing on adversary’s home courtAllows selection of arbitrators who are not nationals of either partyDue to NY Convention, arbitral awards are much easier to enforce than court judgments

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Arbitration basics

Arbitration occurs only by agreement, usually before dispute arisesMature parties may agree to additional terms after dispute arises Lex arbitri: Law of the venue country governs procedure, e.g., appointment & challenge of arbitrators, available remediesCourt involvement is minimal: At the start, to enforce agreement In unusual circumstances, to issue interim relief At the end, to confirm award

Decision is called “award”Int’l arbitration relies on int’l conventions for its enforceability

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Every country (almost) has joined the New York Convention

Prepared in 1958 by the U.N., and formally known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards

A foundational instrument of international arbitration, the Convention requires courts of contracting states to enforce arbitral agreements and awards to the same extent as awards made within their own borders

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Typical license disputes

Is particular item newly added to licensee’s product line covered by the licensed patents?Is licensor’s purported termination of the license justified by the agreement?Is licensee using ‘best efforts’ to market licensed products?Has licensee underpaid his royalties?Is licensor aiming to stifle competition?Are the licensed patents invalid or otherwise unenforceable?

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Patent law amendment (1982) allows arbitration

35 U.S.C. § 294. Voluntary arbitration

(a) A contract involving a patent or any right under a patent may contain a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract. . .

(b) . . . In any such arbitration proceeding, the defenses provided for under section 282 of this title shall be considered by the arbitrator if raised by any party to the proceeding.

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Section 294 (cont’d)

(c) An award by an arbitrator shall be final and binding between the parties to the arbitration but shall have no force or effect on any other person. The parties to an arbitration may agree that in the event a patent which is the subject matter of an award is subsequently determined to be invalid or unenforceable in a judgment rendered by a court of competent jurisdiction from which no appeal can or has been taken, such award may be modified by any court of competent jurisdiction upon application by any party to the arbitration. Any such modification shall govern the rights and obligations between such parties from the date of such modification.

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Can you arbitrate a patent’s validity?

In U.S. and Canada, it is explicitly allowedIn several countries, it is allowed, but result binds only the parties, not other accused infringers U.K., Australia, Germany, Netherlands

In France & Italy, it is contrary to l’ordre publiqueCountries that disallow arbitration of patent validity do allow arb’n of licensing issues

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Is “ordre publique” out of order?

Animating idea: Only a gov’tal court can undo a right granted by a gov’tal agencyCritique: Parties are merely agreeing to act based on a third

party’s views A patentee is free to surrender (or not enforce) his

patent, without gov’tal approval Other rights that are worthless without the

possibility of gov’t enforcement are routinely submitted to arbitration

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Antitrust claims are arbitrable

Arbitration clause in an international contract should be enforced, even though the claims are based on antitrust laws, not on the terms of the contract. Mitsubishi Motors, 473 U.S. 614 (1985)

European Court of Justice goes further: As a matter of public policy, arbitrator must ascertain that award is compatible with EC competition laws, lest award be annulled. Eco Swiss China Time Ltd v. Benetton Int'l NV

(1999)

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London Court of International Arbitration

Based in London, established in 1891, name changed to LCIA in 1981 to reflect nature of workHandles disputes in all areas of international commerceFlexible rules to allow parties to agree on procedural matters, other administrative support varies on wishes/needs of partiesExpedited procedures availableParties can nominate arbitrator(s), but court makes final appointmentFixed registration fee, then hourly rates for LCIA administration and arbitrator fees

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High hopes for the London Court

At its inauguration, one observer wrote:

“This Chamber is to have all the virtues which the law lacks. It is to be expeditious where the law is slow, cheap where the law is costly, simple where the law is technical, a peacemaker instead of a stirrer-up of strife."

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American Arbitration Association

AAA founded in 1922International Centre for Dispute Resolution was established in 1996 as AAA’s international divisionCooperative agreements with 62 arbitral institutions in 43 countriesAAA does not itself arbitrate, but provides administrative support for arbitrationCase managers assist in selection of arbitrators and start case with conference callAdministrative fees based on amount in dispute, arbitrators set own fees

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ICC International Court of Arbitration

Based in Paris, established in 1923Procedures developed specifically for international contextNational committees identify arbitrators – no pre-established listRequires arbitrator(s) to file a Terms of Reference document within two monthsUnique ICC Court monitors cases and reviews awardsRevised rules allow for injunctive reliefPre-arbitration procedure for urgent relief available, but must be specified in arbitration agreementCourt fixes arbitrator’s fee at the end of arbitration, based on amount in dispute (Cost Calculator online)

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WIPO Arbitration and Mediation Center

Based in Geneva, Switzerland, established in 1994Procedures developed specifically for intellectual property disputesRules contain provisions for confidentiality and experimental evidenceAssists parties in selection of arbitrator from database of 100 neutralsSeparate expedited arbitration procedures availableAllows for emergency interim relief Fixed administrative and arbitrator fees based on amount in dispute

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Law applicable to arbitration clause

Arb’n clause itself is governed by main contract’s governing law But beware: Clause may be severable and may be upheld

even if main contract is called into question. Prima Paint (1967)(legal fiction: clause is separate from “container”)

Likewise, int’l arbitration embraces “competence-competence” doctrine:

― Arbitrators are presumed competent to decide their own jurisdiction

― Otherwise, obstreperous respondent could thwart arbitration by questioning existence of agreement

― Under doctrine, expiration or invalidity of main agreement does not necessarily extend to arbitration clause

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Which country’s substantive law applies?

If the parties specify a country, that country

If they don’t: The country where the arbitration is held - for

procedural issues, like arbitrability, how arb’r is appointed/challenged, what remedies he can award etc. (lex arbitri)

The country that issued the patent- for substantive issues, like patent scope/validity/infringement

If venue country disallows arb’n of validity, award may address inf’t but any invalidity determination will go unenforced

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Litigation threatens confidentiality of sensitive information

Hearings & trials are in open courtSome judges are loath to seal materials broadlyJudgments are publicAppeal poses fresh risk of disclosure of information that had been protected at trial

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If confidentiality is important, say so

If parties are silent as to confidentiality:

Some forums infer confidentiality Others do not Yet others treat only trade secret information as

confidential

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Confidentiality—not an unalloyed good

Even if parties agree to confidentiality, enforcement of the award in court may breach itPublic companies with reporting requirements may be hamstrung by a strict confidentiality requirementU.S. law bars enforcement of an award relating to a patent unless the patentee files notice with the PTO. 37 CFR §1.335Appears to be no implied exception to confidentiality to prove estoppel! Stipulate accordingly

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Interim relief an unsettled issue

As in litigation, proceeding may be useless without interim relief that will preserve status quo Examples: Orders to preserve property or to post

security; attachments; injunctions, e.g., against using disputed IP rights, or terminating an agreement, or disclosing trade secrets

Big problem: Hard to obtain as quickly as in court, because tribunal takes time to be constituted

Risky: Requests for interim relief can be abusive; issuance might apply unfair pressure to other party

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Will the courts step in to provide interim relief?

Some U.S. courts will consider such relief only if parties have expressly contemplated it; otherwise, they’ll intervene only to compel arbitrationOther U.S. courts are more sensitive to preserving status quo; PI hearing will focus on classic injunction criteria Quagmire: Losing party in court has right of appeal, further defeating the purpose of the arbitration clause

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Interim relief: Can arbitration match litigation?

Patentees who litigate often crave a permanent injunction more than damages In U.S., arbitrator can award injunction, unless parties’ agreement bars it Submitting to arbitration implies broad authority Circuit courts have affirmed arbitrator’s injunctions

against further infringement AAA rules specifically authorize injunctions against

infringement (if arb’n clause is silent on the issue) Arbitrator’s power may exceed a court’s, e.g., he

might not have to find monetary relief inadequate

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Interim relief in arbitration: How about outside US?

Consent theory likely to allow injunctions, i.e., if parties explicitly agreeU.K. leans toward having court issue injunction as part of confirmationMany institutional forums allow for injunctions; but if forum country allows only its courts to enjoin, complexity is introducedWIPO makes arb’r available for emergency relief on short notice In any forum, arbitrator will respect clause barring injunctive relief

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How to deal with discovery ?

On one hand, each side needs some discovery to support claims and defensesOn the other, pre-trial discovery is a money sinkhole Estimated to account for 80% of total litigation

budget

For arbitration to be more efficient, creative containment is neededProblem: How to set discovery limits when the nature of your future dispute is unknowable?

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Ways to control pre-arbitration discovery

Set numerical limit on interrogatories, document requests, depositions, etc.Confine discovery to specific issuesAgree to discovery period of X monthsBifurcate discovery: liability & damagesEstablish early claim-construction hearing Authorize arbitrator to control discovery, starting at preliminary hearingAuthorize arbitrator to impose sanctions

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Special terms for $$-only disputes

High-Low arbitration. Highest and lowest amounts that arbitrator may award are agreed in advance

Baseball arbitration. Each party submits an award amount. After the hearing, arbitrator must pick one of them; cannot compromise

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Does award give rise to claim preclusion and issue preclusion?

In the U.S., yes, full preclusion among the parties, as long as the record reveals what issues and claims were actually contested and determined

This may not be possible with a “naked” award, i.e., one without finding of fact, conclusions of law, or reasons

If preclusion is important, this will affect the type of award that the parties bargain for

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Examples of preclusion

In U.S. arbitration: if patent is found invalid, owner cannot press

validity in a later action against the same or different foe

If a claim element is found to embrace a particular structure, the party who urged otherwise cannot assert the contrary in a later case

Outside U.S, however, “mutuality of estoppel” means that if winner cannot assert estoppel against stranger, stranger should not be able to assert it against the loser

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Stringent limits on appealability

FAA allows appeal to a court only for corruption or fraud on arbitrator’s part, or if he decides a matter not submitted to himSupreme Court recently interpreted this strictly: Even if parties agree that district court may set award aside if it gets the law wrong or is not supported by evidence, appeal is unavailable Hall Street Associates v. Mattel (2008)

Many other countries also bar or limit appeal

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Necessary provisions: Scope of arbitration Arbitrator selection procedure Choice of rules Reference to emergency procedures Location of arbitration Choice of law Choice of language

Detailed arbitration clauses are rare since parties cannot foresee nature of future fight

Drafting Arbitration Clauses

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Partial (but long) list of issues to consider in choosing to arbitrate

Identify administering agency, whose rules will governState if arb’n must be preceded by mediationSpecify number of arbitratorsState the language to be usedSpecify the issues submitted for determinationSpecify the governing substantive lawSpecify the place of arbitration, whose law controls procedure, remedies, enforcement

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Issues list (cont’d)

Set out process for interim reliefConsider authorizing arbitrator: to control discovery to exclude evidence if irrelevant or redundant

State expectations for confidentialityRecite expectation that process will conclude in X months, and award delivered within Y days thereafterSpecify: Naked or reasoned awardState whether, and under what circumstances, fees can be awarded

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Sample Arbitration Clause - WIPO

Any dispute, controversy or claim arising under, out of or relating to this contract and any subsequent amendments of this contract, including, without limitation, its formation, validity, binding effect, interpretation, performance, breach or termination, as well as non-contractual claims, shall be referred to and finally determined by arbitration in accordance with the WIPO Arbitration Rules. The arbitral tribunal shall consist of [three arbitrators][a sole arbitrator]. The place of arbitration shall be [specify place]. The language to be used in the arbitral proceedings shall be [specify language]. The dispute, controversy or claim shall be decided in accordance with the law of [specify jurisdiction].

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Sample Arbitration Clause - ICDR

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules. The parties should consider adding: The number of arbitrators shall be (one or three) The place of arbitration shall be (city and/or

country) The language(s) of the arbitration shall be ___.

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All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. Parties may also stipulate: the law governing the contract; the number of arbitrators; the place of arbitration; and the language of the arbitration.

Sample Arbitration Clause - ICC

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Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the Rules of the LCIA, which Rules are deemed to be incorporated by reference into this clause.The number of arbitrators shall be [one/three].The seat, or legal place, of arbitration shall be [City and/or Country].The language to be used in the arbitration shall be [         ].The governing law of the contract shall be the substantive law of [         ].

Sample Arbitration Clause - LCIA

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Sample Arbitration Clause - UNCITRAL

Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.Parties may wish to consider adding: The appointing authority shall be ... (name of institution or

person); The number of arbitrators shall be ... (one or three); The place of arbitration shall be ... (town or country); The language(s) to be used in the arbitral proceedings shall

be ...

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Ad hoc or Institutional?

Ad hoc pros: Extreme autonomy and flexibility Parties can tailor the rules; UNCITRAL’s often used No administrative costs

Ad hoc cons: No oversight Added complexity requires elaborate negotiation of

arbitration clause Recalcitrant party can obstruct process; parties

may end up in court

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Ad hoc or Institutional?

Institutional pros: Established, familiar process Predictable structure; reputations for reliability Oversight and management (procedural and

jurisdictional issues are governed by body of rules)

Institutional cons: Bureaucracy Administrative costs

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Ad hoc Arbitration

Must have balance between set rules and arbitrator flexibility Custom set of procedural rules (parties define

procedures) Reference to UNCITRAL Rules (broad discretion given to

arbitrator)

Sticking point is usually selection of arbitrator UNCITRAL rules address arbitrator selection, challenge,

replacement

Intellectual property concerns UNCITRAL rules are not specific to IP; Do not contain provisions on confidentiality; Provide for interim relief, but no emergency protocol

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ICDR Arbitration Timeline

30 days Timeline to be determined by arbitrator

File Request for Arbitration; pay registration fee

Respondent files answer; parties

propose arbitrator First Hearing; case service fees due

Render Final Award

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Fee Comparison - ICDR

Amount in dispute

Administrative fees

Arbitrator fees

$100,000 $2,550

Arbitrator determines own

fee

$1 million $11,250

$10 million $14,000

$100 million$12,500 + .01%

amount above $10 million + $6000

$1 billion$12,500 + .01%

amount above $10 million + $6000

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ICC Arbitration Timeline

30 days 2 months 6 months

File Request for Arbitration; pay registration fee

Respondent files answer; select

arbitrator

Arbitrator files Terms of Reference

Court fixes costs; only paid claims proceed

Render Final Award

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Fee Comparison - ICC

Amount in dispute

Administrative fees

Arbitrator fees (average)

$100,000 $4,650 $9,325

$1 million $19,500 $36,985

$10 million $51,400 $106,235

$100 million $88,800 $202,485

$1 billion $88,800 $499,485

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LCIA Arbitration Timeline

30 days Timeline to be determined by arbitrator

File Request for Arbitration;

advance fees may be due

Respondent files answer; court

selects arbitrator

Respondent submits Statement

of DefenseRender Final

Award

Claimant submits Statement of Case

30 days 30 days

Court may request advance costs

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Fee Comparison - LCIA

Administrative fees Arbitrator fees

£1,500 registration fee +Hourly rates for

administrative support (£100-200 per hour) +

5% for overhead +Expenses

Arbitrator determines own fee, within range of £150-350 per hour, fixed

prior to appointment

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WIPO Arbitration Timeline

30 days

File Request for Arbitration;

registration fee due

Respondent files answer; parties select arbitrator

Arbitrator closes proceeding

Render Final Award

Center assesses costs; parties must

pay deposit

9 months from commencement

20 days 3 months from commencement

3 months

1 month

Traditional

Expedited

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Fee Comparison – WIPO Regular

Amount in dispute

Administrative fees

Arbitrator fees

$100,000 $2,000

By agreement, within range of $300-600 per

hour

$1 million $2,000

$10 million $10,000

$100 million $10,000 + .05% amount in dispute

$1 billion $10,000 + .05% amount in dispute

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Fee Comparison – WIPO Expedited

Amount in dispute

Administrative fees

Arbitrator fees

$100,000 $1,000 $20,000

$1 million $1,000 $20,000

$10 million $5,000 $40,000

$100 million $5,000 + .05% amount over $10 mil. By agreement

$1 billion $5,000 + .05% amount over $10 mil. By agreement

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Selected Bibliography (in reverse chronological order)

Lamb, Sophia, and Garcia, Alejandro., Arbitration of Intellectual Property Disputes, 10 No. 1 E-Commerce L. Rep. 5 (January, 2008)Berry, David C., Harnessing the “Sport of Kings:” Using Pre-Dispute Arbitration Agreements to Control Discovery in Patent Disputes, 9 T.M. Cooley J. Prac. & Clinical L. 1 (2006)Connor, Terry W. and Richards, Bradley J., International Considerations in Licensing, 762 PLI/Pat 681 (September 2003 – January 2004)Wang, William, International Arbitration: The Need for Uniform Interim Measures of Relief, 28 Brook. J. Int’l L. 1059 (2003)Janicke, Paul M., “Maybe We Shouldn’t Arbitrate”: Some Aspects of the Risk/Benefit Calculus of Agreeing to Binding Arbitration of Patent Disputes, 39 Hous. L. Rev. 693 (2002)Arnold, Tom, Booby Traps in Arbitration Practice and How to Avoid Them, ALI-ABA Course of Study Materials (1998)Cousté, M.; Shaughnessy, A.; Branch, J., Arbitration of Patent Infringement and Validity Issues Worldwide, 19 Harv. J.L. & Tech. 299 (Spring 1996)

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Bibliography (cont’d)

Laturno, Camille A., International Arbitration of the Creative: A Look At the World Intellectual Property Organization’s New Arbitration Rules, 9 Transnat’l Law. 357 (Spring 1996)Mills, Jennifer, Alternative Dispute Resolution in International Intellectual Property, 11 Ohio St .J. on Disp. Resol. 227 (1996)Park, William, Illusion and Reality in International Forum Selection, 30 Tex. Int’l 135 (Winter 1995)Blessing, Marc, Drafting Arbitration Clauses, Worldwide Forum on the Arbitration of Intellectual Property Disputes, http://www.wipo.int/amc/en/events/conferences/1994/blessing.htmlButler, Cynthia Jeanne, The Propriety of Judicially Granted Provisional Relief in Pending Arbitration Cases, 9 Ohio St. J. on Disp. Resol. 145 (1993)Stein, Steven J. and Wotman, Daniel R., International Commercial Arbitration in the 1980s: A Comparison of the Major Arbitral Systems and Rules, The Business Lawyer; Vol. 38, August 1983