Arbitrating IP or know-how related disputes in the life sciences, pharma and chemical industries can be a challenge. Erik Schäfer and Natalie Kirchhofer of Cohausz & Florack ask who is up to the task of counsel or arbitrator.
Arbitration as alternative means of dispute resolution has expanded considerably during the past three decades. The main arguments leading to arbitration being preferred over national courts are: a stable and foreseeable framework for enforcing arbitral awards worldwide as provided by the New York Convention, one single instance without appeal on the merits normally resulting in a swifter resolution and less overall expenses, an equally convenient forum in which the case is argued in a language which the parties were able to determine in advance, and a greater ability and willingness of the arbitrators to deal with often complex and highly contentious issues.
In certain areas of disputes, such as corporate or engineering and construction disputes, arbitration is often the preferred choice of dispute resolution, even on a purely national level. One underlying reason is that the courts have been ill-equipped for handling these kinds of disputes and are simply unable to dedicate the time to their resolution that the parties deem to be necessary. Unfortunately, these perceived advantages do not always exist in practice, as will be discussed below.
Arbitration in contrast and as alternative to state court litigation is not regulated by procedural rules in as much detail. The often praised procedural flexibility, however, does not imply that, in comparison to court proceedings, there will be a more limited number of procedural issues, which need to be dealt with during arbitration proceedings. To make up for the lack of detailed procedural rules, parties tend to bring their national procedural concepts into arbitration proceedings. This has led to certain homogeneity on the purely national level and also to a certain convergence of procedural concepts in the international arena, notwithstanding intercultural divergences and ongoing discussions.
The result is that fact finding and the role of written submissions in international arbitration have evolved into quite unique matters. This in turn has resulted in the formation of a group of highly specialised arbitration lawyers, acting both as counsel or arbitrator, who are in certain ways a loosely knit professional community. They are specialised in arbitration procedure but essentially remain generalists insofar as the technical, and sometimes also legal subject matters of the disputes are concerned. There are only very few technical fields where, traditionally, arbitration expertise is coupled with technical specialisation. These include certain areas of maritime or construction disputes.
There are also very few lawyers that are true specialists both in arbitration procedure as well as more specialised law, in particular patent law. The reason for this may well be that there are still too few arbitration cases per technical field or legal specialisation to allow a specialist lawyers to make a living out of arbitrating in these fields only.
Using procedural arbitration experts who are technical and/or legal subject matter generalists may, however, create considerable uncertainties in disputes where the subject matter is intrinsically complex and therefore technically and intellectually challenging. The burden on the parties and the counsels to educate the arbitrators on patent law and the substance of the dispute is considerable and always fraught with risk that translates into a lesser or bigger uncertainty. This risk is increased by the fact that there is traditionally no appeal on the merits in arbitration proceedings.
It is against this background that one may ask how arbitrating disputes in the life sciences, pharma and chemical space can find its best fit. These industries are generally characterised by a highly specialised and highly nationally regulated environment, where stakes are usually high. They are also very IP-dependent and conscious and often rely on industry-specific contractual structures which are not commonly found elsewhere.
If one limits the focus to such IP-, know-how or technology-centered disputes, the following appears to be relevant from a party’s perspective (in chronological order):
Counsel selection: even before counsel is retained, an internal analysis of the nature of the disputed facts is recommendable. If the contentious facts are complicated and preponderantly of a technical or scientific nature, counsel and co-counsel should be chosen not only based on the criteria of their arbitration track record and cost considerations, but also based on whether they have a strong track record in the specific technical field that is independent of arbitration procedures. The same is true if the dispute centers on an issue that is highly specific to patent law (such as patent prosecution, invalidity, infringement, or vindication matters). If this combination is not readily found, retaining a team of counsel who in combination fulfill these requirements is advisable. The reason for these recommendations is that in our experience it is not enough that an arbitration expert has handled the type of dispute in the past. Rather, it is the established legal practice of the firm outside the arbitration field that fosters familiarity with the category of agreements and the legal peculiarities in the concerned field.
Arbitrator selection: it is important for any party to stay directly involved in the selection of arbitrators, which as basic requirement must be independent and impartial at any time. This task should not be fully delegated to counsel. Ideally, a qualification matrix should be developed against which prospective arbitrators are measured and prioritised. In the case of a sole arbitrator, candidates with arbitration-unrelated experience in the subject matter technical, scientific, or legal field, who have had some exposure to arbitration, may be the better choice. If the sole-arbitrator will be appointed by a third party, such as an arbitration institution, the third party should be informed about the requirements of the party with sufficient detail, because at this early stage, the third party may only have insufficient information about the nature of the dispute.
The choice is more complex when co-arbitrators are selected, but also offers the possibility to combine arbitrators with different qualifications. Since the chairperson will take the lead in managing procedural aspects, their arbitration experience should play a more predominant role. In turn this leaves more freedom for the parties to focus on the subject matter qualifications and experience of the co-arbitrator they appoint. Notwithstanding, the future dynamics within the tribunal can be factored in, wherefore another relevant factor is the expected weight the selected person will have within the tribunal. Weighing all these factors against each other may be difficult. However, considering the importance of the predictability and quality of the award on the merits, we suggest that knowledge and experience in the subject matter technical, scientific or legal field (especially patent matters) acquired outside of individual arbitration cases should be given preponderant weight.
Provided that the above recommendations were taken heed of, a party should be set for participating in efficient proceedings.
Appropriate counsel selection will normally assure that prayers for relief are appropriately worded and the factual and legal arguments are to the point. Counsel who are well versed in the technical or scientific field will also be better placed when experts need to be selected, briefed, and examined. Moreover, parties and experts will require less time to explain the underlying facts to counsel.
Appropriate (technology-centric) arbitrator selection is likely to reduce the efforts required for ‘educating’ them about the factual substance of the dispute and – even more importantly – have them put the right questions for cutting through the contentious facts. They are more likely to identify and directly understand the relevance of documentary and other evidence. This potentially also increases the chances of containing attempts of unnecessary document production, which leads to reduced costs for all.
The following case scenarios, which we have taken from our own experience, exemplify why the above is particularly relevant for arbitration cases involving life sciences, pharma or chemical companies:
Misappropriation of secret know-how, especially processes. This type of setting is frequently coupled with a vindication claim because the claimant contends that a patent application or patent filed by the defendant (partially) is based on or contains claimants’ secret know-how. This kind of dispute typically arises out of R&D agreements and other co-operations, which are increasingly common in these industries. The challenge is to describe and separate the respective secret know-how of the parties from the publicly known state of the art and, if applicable, any jointly generated IP. The reason is, that unlike a patent with its claims, secret know-how is often more diffuse and intermingled with elements in the public domain and not well-documented as an independent IP-asset within each party’s internal systems. Correctly establishing these facts requires some expertise in the technical field and in similar cases of IP or know-how misappropriation.
Technical dependency of licensed or purchased technology on previously allegedly unknown third-party rights. This can become an issue in mergers and acquisitions (M&A) transactions or disputes relating to the performance of technical IP licenses. In many cases it may not be easy to ascertain whether a third-party patent is being infringed, unless this was already finally decided in court, and even in such an event, a third-party patent may be materially invalid in whole or part. Dealing with these aspects requires experience and qualification in patent law, preferentially in the technical subject matter field.
Contracts for plant or process engineering, may also require expertise in the traditionally specialised field of engineering arbitration disputes, but there may be specific scientific or technical, sometimes even regulatory, aspects, which are special to the chemical or pharmaceutical industries.
Whenever disputes arise out of agreements that are sector-specific (for example, material transfer agreements, certain types of R&D agreements, marketing approval and licensing), first-hand experience in the industry sector concerning usual formats, typical processes of implementation, etc. may have a positive impact on the quality of the result.
To conclude, whilst we readily concede that arbitration as a dispute resolution procedure has matured to a point where it requires a certain degree of expert procedural knowledge, we argue that this requirement should not take preponderance over requirements resulting from the concerned legal (for example, patent law) as well as technical or scientific specialisation, and experience in the relevant industry. In the end, arbitration is and remains a procedure that may not outweigh the substance of the matter. Interestingly, this view takes arbitration a step back into the direction from which it originated: A decision made by peers from the industry.
This article first appeared in CDR.