This chapter begins by exploring the somewhat unusual backdrop against which parties to IP disputes find themselves in arbitration rather than national courts or administrative bodies for intellectual property. We then explore a wide range of strategic considerations as the arbitration unfolds and progresses. Finally, we touch on potential roles of non-party funders in IP arbitrations, given the increasing prominence of such arrangements in IP disputes more generally.
Most IP disputes are between parties not in contractual privity. The owner or licensee of IP rights – the usual petitioner – will often be a competitor of its litigation opponent, or even an entity entirely unknown to the counterparty before the dispute begins. The rights owner itself is often an entity created for the purpose of litigation relatively soon before the dispute formally ensues.
What types of IP disputes are resolved in arbitration?
IP arbitrations often concern a failed licensing arrangement, or one where the scope of permitted uses becomes disputed. The contracting parties may be collaborators in technology development. They may be sharing risk in a venture to commercialise intellectual property and products embodying the intellectual property. They may be at different vertical levels of a production and distribution chain.
Regardless of the reason for the licence, questions about breach of an IP licence often quickly entangle themselves with questions about infringement. If a licensee has exceeded the scope of its licence, or otherwise breached the licence, it may be the case that it has relatively fewer (if any) tort-law defences to infringement claims. Meanwhile, infringement damages may exceed monetary relief for contract breach.
The next section discusses strategies when litigating IP claims along with commercial issues more typically found in arbitration (e.g., contract interpretation, breach and remedy).
Preparing to bring or to defend against an IP claim in arbitration
Information exchange and discovery in an IP arbitration are likely to be substantially more limited than in IP cases litigated in a court, at least in the United States or some other common law countries. Whether bringing or defending against an IP claim in arbitration, care must be taken to understand the limitations on the extent and types of information exchange that will become available. Marshalling evidence before the proceeding begins is key.
When litigating in national courts or administrative bodies, parties to IP litigation in many jurisdictions typically participate in at least a modest degree of document exchange and perhaps other discovery. In the United States, discovery in an IP case is often extensive and, particularly in complex cases, can last for years. The types of disclosures may include things as simple and available as documents describing the IP right (a patent, a copyright registration, etc.) to items as secret as source code for software accused of infringement or trade secret product designs. A patent is a publicly available document. But a licensor would, in rare cases, have access to details about a licensee’s complex product, thus presenting the potential problem of information imbalance absent discovery. Where the IP claim in arbitration is not brought by the IP rights holder (e.g., a licensee seeking declaratory relief about the extent of permitted uses), the need for discovery from the IP rights holder may be reduced.
The methods of discovery in IP cases, particularly in US courts, often includes document exchange, written interrogatories, requests for admissions, and depositions of fact and expert witnesses regardless of whether they may testify at trial. And most federal courts in the United States now require litigants in patent cases to make a standard set of disclosures. A patent owner typically must provide detailed contentions explaining how or where each aspect of an asserted patent claim is found in an accused product or process, and do so very early in the case. Shortly thereafter, an accused infringer discloses in detail the bases for any challenge to the validity or enforceability of the patent. In trade secret cases, the claimant often must identify the trade secret with particularity early in the case. These contentions often are prepared with the assistance of technology experts and can be quite voluminous. They often guide the court and parties when disputes about the scope of discovery or trial arise. For example, they delineate which IP rights are asserted (and not asserted) and which products or services are deemed infringements.
A party interested in a particular mode and extent of discovery in arbitration must plan ahead and either secure the opponent’s agreement to the procedure or obtain the tribunal’s permission to include it. But because neither is guaranteed, it is usually prudent to:
- put your opponent on notice of evidence known to exist, that such evidence must be preserved and that specific witnesses (even if known only by function within an organisation) should be prepared to testify;
- collect and preserve evidence from relevant and cooperative third-party witnesses, of which there often are many in an IP dispute;
- canvass your client for as much relevant information as reasonably accessible, particularly about your adversary; and
- retain experts on all relevant issues including, for example, infringement, patent invalidity, trademark secondary-meaning and likelihood-of-confusion surveys, damages theories, governing IP law, governing IP practice and procedure, and marketing customs.
If the intent is to have a more traditional US-style discovery procedure for IP disputes (particularly over patents), one should determine whether to exclude applicability of the IBA Rules on the Taking of Evidence in International Arbitration. It has indeed become common practice for arbitral tribunals and parties to default to the IBA Rules with respect to evidentiary matters (whether by express reference in the arbitration clause contained in the underlying agreement or during the negotiations of the procedural ground rules for the arbitration proceedings).
Constructing a tribunal
In IP licences or transfer agreements (e.g., an asset-purchase agreement) between unrelated parties, the arbitration clause often specifies attributes the tribunal must possess. Such attributes may include the number of members of the tribunal, certain subject-matter expertise or a panel from which the tribunal must be selected. Besides the World Intellectual Property Organization, more and more arbitral institutions have dedicated panels of IP arbitrators – for example, JAMS and the Hong Kong International Arbitration Centre. In such cases, there are fewer strategic considerations when constructing a tribunal.
When the agreement presents more flexibility, the parties should carefully consider a fundamental question: is the IP dispute sufficiently different from other complex disputes to require, for example, technologically experienced, industry-specific or IP-law trained arbitrators?
Biotechnology, genetics, semiconductor fabrication, chemistry for energy, optical networks, human disease treatment and many other technologies that are the subject of today’s IP agreements may not immediately seem subjects accessible to a broad range of neutrals – whether arbitrators or not. Similarly, the nuances, customs, practices, judicial decisions and ever-changing statutes that define a particular body of IP laws often requires time and context before a neutral fully understands the rules of practice.
All this said, material risks may come with a tribunal having one or more specialised members. For example, will one specialised member among a tribunal of others without similar expertise be forced to play a different role than the others? Will the specialised member have the expertise on the subject matter or legal issue presented by the IP dispute, or will incomplete or irrelevant expertise be brought to bear? Will a specialised member be sufficiently versed in matters unique to international arbitration to participate fully within a tribunal that includes arbitration specialists who generally are not as tied to a particular technology, industry or body of IP law? And which party (if any) benefits? Care should be taken not to overlook the great many strategic considerations that come with tribunal selection, or to conclude reflexively that one or more specialists are required.
Litigating in multiple jurisdictions
IP disputes, particularly concerning patents or brands, may be litigated in multiple jurisdictions. For example, patents on the same invention may be issued in several countries with mature markets for a covered product. Trademarks on the same logo, word or phrase can be registered in most countries where the brand is used. It is not uncommon for an IP rights owner to seek to enforce assets against a particular counterparty in multiple important jurisdictions. And IP disputes can often be brought, properly, against a variety of counterparties (entities or individuals who may not be in privity with the parties to the contract electing arbitration).
When defending against an IP claim, potential infringers challenging the validity or enforceability of an IP asset have recourse to post-grant proceedings in many IP offices worldwide. The validity of patents can be challenged in administrative proceedings and the enforceability of trademarks can also be litigated in national IP offices. Some of these proceedings permit discovery. Rarely do arbitration clauses expressly forbid such administrative challenges.
These example scenarios present an opportunity for parallel litigation that may: (1) impact the arbitration; (2) end before the arbitration, giving rise to arguments that IP rights at issue in an arbitration have been terminated or solidified; and (3) involve information exchange that is different from the arbitration. There is also the potential for proliferation of procedural issues in the arbitration itself if there is disagreement as to the scope of the consent to arbitrate (e.g., whether the arbitration clause in a licence agreement binds entities related to or in privity with the licensee).
The differences in disclosure and timing raise a host of strategic considerations and typically the need for centralised or coordinated decision-making by each counterparty to the dispute in addition to the need for venue-specific expertise.
The initial procedural conference with the tribunal
If the arbitration clause does not require IP-trained arbitrators (see below), which frequently is the case, then a reasonable portion of the initial conference should be devoted to educating the tribunal about how the particular IP claim would be litigated if pending in the relevant national court or administrative body. Of course, the tribunal is not required to apply or accept this context. But if the parties are aligned about particular nuances of local IP litigation practices, now may be the time to determine and memorialise this. The initial conference should be a relatively safe vehicle in which to hold these conversations even if they have not been discussed between the parties beforehand. For example, in most jurisdictions, the words of a patent’s ‘claims’ – numbered paragraphs found at the end of the legal document – define the metes and bounds of the invention and, thus, the scope of the patent owner’s right to exclude. Like contracts, the words of those patent claims often require interpretation. In the United States, where juries often decide the question of infringement when an IP dispute is pending in a district court, it is the judge, not jury, who issues an order binding the parties and jury to apply a specific interpretation of the words of a patent’s claim. It may be that the parties prefer the tribunal to issue interim guidance on this issue at a relatively early stage of the arbitration.
It is also common in IP litigation to bifurcate individual issues such as liability and remedy, wilful or intentional infringement, invalidity or inoperability of the intellectual property, and so on. Staging an IP dispute with ordered and incremental pre-award guidance from the tribunal is often perceived to favour an accused infringer because of (1) the potential for termination of the proceedings before evidence on all issues is presented, (2) the possible need for the IP rights holder to prevail on all or most interim issues to maintain its IP claim and (3) the risk of delay. But staging of some sort is worth serious consideration by both sides of the dispute before the initial conference. The benefits of staging do not all favour the accused infringer.
The initial conference also affords an opportunity to learn an opponent’s general strategy for case presentation. IP litigation typically requires expert testimony on a broad range of issues, related to both liability and remedy. A patent infringement trial may include testimony from a technology expert to opine about infringement vel non, a source-code expert to explain how the accused product works, a survey expert to explain what drives demand for the product, an economist to explain the damages theory, and so on. Arbitration of IP claims raises the additional possibility of expert testimony on the scope and application of IP laws. It is common in many jurisdictions not to permit expert testimony on the scope and application of local law. But in arbitration, the parties or tribunal may invite the opportunity to involve experts on this topic.
Finally, the initial conference is a time to begin educating the tribunal about non-monetary relief that often is the primary remedy pursued in certain types of IP litigation outside of arbitration. A remedy for infringement of most types of IP in most developed legal systems is an injunction or a cessation order. This is not the typical remedy in arbitrations, of course, even though the IP owner may pursue injunctive relief through interim measures under most, if not all, institutional rules. But whether non-monetary relief is awarded or not, a patent owner should consider whether to present it as an alternative when also quantifying a proper damages or other monetary remedy. Put simply, if non-monetary relief is compelled by the governing law, but cannot practically be awarded, a theory for monetary relief perhaps more comprehensive than otherwise likely may be put into reach.
IP disputes tend to offer a great many points during the case at which the parties can reassess risk and consider settlement. In a patent litigation, for example, the judge’s interpretation of the words of the patent’s claim often causes settlement soon thereafter. In a trademark dispute, the IP owner’s disclosure of a survey expert’s opinions about the validity of the trademark right typically signals strengths or weaknesses in the claim. Summary determination before trial, on some or all issues, is common in IP cases. And one category of IP cases (lower exposure) may settle very early in the formal proceedings once the parties have exchanged the initial round of contentions so that both the IP right at issue and the accused item are better understood.
To open opportunities to settle, and potentially minimise costs, one or more parties to the arbitration may suggest staging the proceedings. It is indeed common in traditional commercial arbitration to bifurcate or even trifurcate the proceedings by distinguishing jurisdictional issues, the merits of the case and an evaluation of monetary relief. IP arbitration may be structured with these points of risk reassessment in mind (e.g., a claim construction phase) followed by a phase where patent infringement and invalidity claims are heard, followed by a damage assessment phase. The parties are likely to have less flexibility to settle once an award exists. But careful consideration of whether and how to stage interim guidance from a tribunal can support a parallel settlement process.
It is common for litigation funders to support an IP owner’s programme to monetise the asset pool via litigation in national courts. Patent infringement litigation, particularly in US district courts, is a prime example. Enforcing copyrights on music libraries is another.
There are a great many ways in which a funding arrangement may be structured. A simple example contemplates the following: a funder offers monetary support to the IP owner (or perhaps its counsel) for some or all litigation expenses in exchange for a return of that capital and an investor’s premium if the campaign succeeds in producing revenue from accused infringers. Two criteria often impact the funding arrangement. First, the flexibility, size and internal interdependence of the pool of asserted IP claims. Second, the number and scale of potential infringers.
With regard to the first criterion, funded IP monetisation programmes often involve the assertion of a relatively flexible portfolio of IP with numerous assets that can succeed or fail independently of one another. A large portfolio of patents may cover various but materially different aspects of a product line. Each patent may cover a different component of the product. If litigation reveals that a subset of the patent portfolio is unenforceable or does not cover the accused product, the remaining subsets of the portfolio would be unaffected and a request for a substantial monetary award could persist. The fact that such a dispute is decided via arbitration rather than a national court should not, in most cases, look unattractive to potential funders. That said, some national courts may present more flexibility to assert additional or different IP assets as the proceedings unfold. In an IP arbitration, the accused infringer would presumably try to include procedural safeguards (in the terms of reference, if applicable, or other initial procedural orders) to minimise this type of IP asset substitution as the arbitration progresses.
With regard to the second criterion, funded IP monetisation programmes that implicate multiple unrelated companies as respondents are potentially more attractive to funders than a single-respondent model. An IP monetisation programme in a national court may present more opportunity to pursue multiple unrelated counterparties than in an arbitration, where the disputes are typically between two parties in contractual privity before the IP dispute arose. The structural reality of arbitration – a bilateral dispute between parties known to one another and in contractual privity with one another beforehand – is unlike many funded IP disputes in national courts. Query, however, whether the pre-existing relationship between the IP rights holder and alleged infringer in an IP arbitration might be an attractive feature for litigation funders, particularly where an established revenue stream or valuable asset already exists and substantial licensing fees or other bases for large monetary awards present themselves.
If funding before or during an arbitration is not the right fit, a very different calculus and opportunity presents itself after a successful arbitration. Once an award exists, challenges to enforceability may persist for months or years. During this time, funders present the award winner a means to de-risk potential losses and provide access to a percentage of the award more quickly. Award winners with nascent product lines (e.g., clinical-stage pharmaceuticals or biotechnology companies) may be particularly interested in mechanisms to extract themselves from award-enforcement litigation and to enjoy an amount of cash soon after the award issues.
The funding requirements and offerings for IP disputes have developed quickly during the past decade and continue to evolve rapidly. In addition to the monetary implications of such arrangements, parties in arbitration about IP considering funding should consider how much influence (if any) a funder may wish to exert in the proceedings, as many such funders have by now become subject-matter experts in the types of assets in which they invest.
This chapter highlights a small number of the great many opportunities for strategic decision-making presented before, during and after an arbitration of IP disputes. Strategies bespoke to the specific type of IP at issue – patents, trade secrets, copyrights, trademarks, data rights, a combination of the foregoing, etc. – are beyond the scope of this chapter, but present an equally rich body of opportunity for each side of a dispute. Parties to an IP arbitration also must take into account the many nuances of IP law provided by the applicable law and practice governing the arbitration. That said, arbitration presents an excellent means for resolving IP disputes and, in important ways, affords the parties opportunities not traditionally available in national courts or administrative proceedings.
1 Michael Nolan and Christopher J Gaspar are partners, Nathaniel T Browand is a senior counsel and Kamel Aitelaj is a senior associate at Milbank LLP.
3 cf. Fed.R.Civ.P. 26-37.
4 See, e.g., https://www.nysd.uscourts.gov/sites/default/files/pdf/Standing_Order_In_re_Local_Patent_Rules.pdf (Local Patent Rules for the US District Court for the Southern District of New York).
5 As noted above, IP arbitrations – unlike most IP disputes – often concern parties that know quite a lot about one another, and about the subject matter of the dispute.
6 Although it may be impractical to seek a subpoena in aid of arbitration, it is possible under most arbitral rules to request the tribunal’s intervention in inviting a particular party-controlled witness to appear, failing which adverse inferences might be drawn.
7 Relevant third parties may include, e.g., a company that sold a product similar to a patented product, except earlier in time; a former employee of a company who designed a product accused of infringement; a former employee of a company who worked with the inventions but whose name does not appear on the patent.
9 e.g., Albanesius, Chloe (September 14, 2011), ‘Every Place Samsung and Apple Are Suing Each Other’ (https://www.pc mag.com/article2/0,2817,2392920,00.asp). PC Magazine. Ziff Davis. Retrieved August 11, 2012.
10 e.g., 35 U.S.C. § 284 (‘whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent’). Many levels of a distributions chain, including end users and consumers, may fall within this statutory definition.
11 e.g., 35 U.S.C. § 311 (inter partes review); 35 U.S.C. § 324 (post-grant review); 35 U.S.C. § 302 (ex parte reexamination).
12 e.g., 15 U.S.C. § 1064 (trademark cancellation).
13 Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996) (judges, rather than juries, are responsible for determining the meaning of the words in patent claims).
14 For parties used to litigating in US courts and administrative bodies, arbitration presents an often material additional risk: legal fees awarded to the prevailing party.
15 Monetary relief for patent infringement is often linked to sales revenues of the infringing product, with some attention paid to the relative importance of the infringed technology to the product’s sales or expected success in the marketplace. cf. 35 U.S.C. § 284 (‘Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.’).
16 Non-enforcement is the very unusual exception to the rule that arbitration awards are enforced by national courts. See, e.g., Bayer Cropscience AG v. Dow Agrosciences LLC, 680 Fed.Appx. 985, 992 (Fed. Cir. 2017) (‘Judicial review of the arbitral award at issue here is very limited even if, as we assume for present purposes, the standards governing both international and domestic arbitration apply. In numerous ways, the relevant federal statutes and precedents make clear that ordinary legal or factual error is not a ground for disturbing an arbitral award like the one at issue here.’). Indeed, post-award proceedings in IP arbitration are rare. id., at 991 (‘We are unaware of any instance in which the regional circuits have decided an appeal involving the confirmation or vacatur of an arbitral award for patent infringement.’).