The advantages and disadvantages of arbitration versus litigation have been long debated. Because arbitration is a matter of contract, parties are free to adopt existing procedural and substantive rules or invent their own. This freedom can complicate comparisons. For example, the parties can include or exclude discovery, permit or prohibit direct testimony, and require prompt and detailed rulings – or not. Arbitrations have one advantage that is unquestioned – treaties make the international enforcement of arbitration awards easier and more likely than the informant of state judgments.
Arbitration has become a favored provision in certain industry contracts, including construction, securities, and labor. Arbitration is, on the other hand, rarely used in relation to patent disputes. While arbitration provisions are a part of many patent licensing agreements, most patent disputes are not between licensees and licensors. Even though the U.S. Supreme Court changed a pre-existing Federal Circuit rule to permit patent licensees to file declaratory judgments seeking invalidity against licensed patents in Medimmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007), this rule cannot prevent a stay for any dispute falling within the provisions of an arbitration clause.
If parties to a license or industry dispute resolution agreement devote appropriate time and effort to preparing an arbitration provision to meet their specific objectives, arbitration can be a valuable tool in resolving patent disputes. Trial lawyers will tell you that the number of documents introduced at trials is a minuscule subset of those that are categorized, reviewed, and considered. This search has become more massive and only marginally more productive with the vast eDiscovery now accessible. The search for smoking gun documents can drift far afield at great expense to the combatants. Similarly, both the number of witnesses questioned and the length of the questioning contributes to the skyrocketing costs of patent litigation. Arbitration, on the other hand, allows the parties involved to negotiate provisions that can balance the competing objectives of thoroughness with cost and speed. Significant items to consider when negotiating arbitration provisions are:
- limits to representative claims and prior art
- specify the number and qualifications of arbitrators (take care not to over-specify qualifications)
- limits on discovery or exclusion
- the convenience and expense of the arbitration venue
- that the “loser” pays (limits can also be placed on the amount of payment)
- the parties can waive a written decision or require the arbitrator provide an analysis of her reasoning
The parties can also approve a specific arbitration (or series of arbitrators) in the agreement, enabling patent owners to gain some confidence in allowing their patents to be subject to an invalidity determination. However, the provision must be clear on what procedures are employed if the selected arbitrator(s) fails to accept the appointment for whatever reason. Invalidity determinations can also be controlled by the contract. For example, the parties might agree that an invalidity determination by the arbitrator would not become final for thirty days after the issuance of the ruling and only if the patent holder failed to grant a covenant not to sue on the patent at issue to the prevailing party prior to the expiration of the thirty days. The parties could provide that obviation of the covenant not to sue would not affect other rulings of the arbitrator.
Use of arbitration is not limited to pre-existing contractual provisions. Because of its contractual nature, parties can agree to arbitration after a dispute arises. Furthermore, parties often agree to modify existing arbitration provisions to optimize an arbitration after the details of the dispute are known.
With the soaring costs of litigation, patent holders have become more reluctant to enforce patent rights. Evaluation of whether or not to pursue an infringer is a business decision that in many instances may turn on factors other than the strength of the case. Artful and careful use of arbitration provisions can provide a company with a before-the-fact or even after-the-fact opportunity to design a potential solution that fits within the company’s objectives and budget. Whether or not this tool is appropriate for a particular contract or other situation, it should always been carefully examined.
Arbitration clauses are often one of the last clauses negotiated in contracts. This late treatment may lead to failure to cover essential elements for enforceability or mere adoption of a form provision without careful tailoring to the parties’ needs and objectives. The decision to arbitrate or not should only be determined in the context of the specific provision being chosen and the ability of that provision to meet all of the objectives of the parties.