Building upon our earlier guide to arbitration agreements for IP, this post provides an overview of the advantages and disadvantages of arbitrating IP disputes, addresses two main concerns (Arbitrability of the IPR and Effect of the award), and provides further practical tips on drafting arbitration agreements involving IPRs.
General advantages of arbitrating IP disputes
Some of the key advantages of arbitrating IP disputes include:
- enforcement: as is the case with arbitrating any dispute, one advantage of choosing arbitration is the ease of enforcement of an arbitral award. Hong Kong (through China) is a party to the New York Convention (Convention), which provides for the reciprocal recognition and enforcement of arbitral awards in 159 contracting states;
- expertise: parties have the option to select an arbitrator with expertise in a particular industry and sector, including intellectual property and familiarity with licensing agreements;
- confidentiality: the confidentiality of arbitral proceedings and arbitral awards is particularly attractive for IP disputes, as the nature of an IPR usually means that proprietary or commercially sensitive information or trade secrets are involved;
- finality: arbitral awards are final and binding on the parties. They are typically not subject to appeal or review on the merits;
- flexibility: parties have greater influence over procedural rules and are generally allowed more freedom to tailor suitable procedures for the dispute; and
- exclusive jurisdiction and governing law: patent litigation requires instigation of court proceedings in every jurisdiction in which the patent is allegedly infringed. By contrast, parties can avoid parallel litigation by opting for arbitration (which requires the disputes to be settled in a single forum), thus reducing costs and delay in enforcing IPRs. Some arbitral institutions, like the Hong Kong International Arbitration Centre (HKIAC) and Singapore International Arbitration Centre (SIAC), allow for the filing of a single arbitration under multiple contracts, which further enhances procedural efficiency. Arbitration can also unify applicable law in contracts with licensees from different jurisdictions, rather than being subjected to different laws from different courts that have jurisdiction in multiple courts.
General disadvantages of arbitrating IP disputes
On the other hand, arbitration is not always appropriate for IP disputes, some of its drawbacks include:
- lack of precedent: as arbitration is a private and confidential process, arbitral awards are not made available to the public; and
- cost and delay: arbitration can be expensive if not managed properly, with frequent delays often caused by excessive requests for document disclosure or spending time on peripheral issues. This can however, be offset by expedited procedures which are now commonplace in most institutional rules. Some institutions, such as the Stockholm Chamber of Commerce (SCC) and SIAC, expressly provide for procedures to determine an issue of fact or law in a preliminary fashion, similar to summary judgments rendered by national courts.
Two main concerns when arbitrating IP disputes
There are two main concerns that users encounter when considering providing for arbitration of IPR:
Arbitrability of IPR
A special consideration for arbitrating IP disputes is whether or not the subject matter is capable of settlement by arbitration (arbitrability or being arbitrable), or an arbitral award is contrary to public policy. Articles V(2)(a) and (b) of the Convention state that an award may be refused enforcement on these grounds respectively, both of which are determined by the laws of the place of enforcement.
Hong Kong is the first Asian jurisdiction to clarify both the arbitrability of IP disputes and the public policy implications of enforcing an IP award. The introduction of the Arbitration (Amendment) Ordinance 2017 (Ordinance), which confirmed that all IPR disputes can be arbitrated and that the enforcement of IP awards in Hong Kong is not contrary to its public policy, was a significant development to encourage parties to resolve IP disputes by arbitration. The situation in other Asian jurisdictions, however, is not as rosy:
- The Singapore Court of Appeal has held that matters with public interest elements, such as citizenship or the validity of registration of patents, may not be arbitrable (Larsen Oil and Gas Pte Ltd. v. Petroprod Ltd  SGCA 21).
- In Mainland China, Article 3(2) of the PRC Arbitration Law states that administrative disputes that shall be handled by administrative organs as prescribed by law are not arbitrable. In light of this, disputes concerning the validity of trademark and patent rights are not arbitrable in China, as they are determined by the Trade Mark Adjudication Board and Patent Review Board, both of which are administrative bodies.
Typically, arbitrability becomes an issue when IPRs that are subject to registration are involved.
One way to circumvent this is to seek either a declaration that the IPR is unenforceable or an award granting a monetary sum or declaring the effect of invalidity. For example, a party may seek an entitlement to payment of royalty for the life of the patent.
Effect of the award
An arbitral award generally only binds the parties to the arbitration agreement. Even if an IPR is declared invalid in an award, in most jurisdictions such declaration only has inter partes effect (and, as such, does not oust the jurisdiction of other competent authorities). This means that such IPR will remain intact as against the rest of the world, including the state involved in the registration of the IPR. This benefits IPR holders as the risk that a single dispute will result in the loss of their IPR altogether is minimized. Arbitral tribunals also have no power to invalidate an IPR save for in certain jurisdictions.
Drafting arbitration agreements concerning IPRs
Where a contract concerns IPRs, the following points should be taken into consideration when drafting arbitration agreements:
- scope of the arbitration agreement: as a matter of effective dispute resolution, parties can exclude from the scope of the arbitration agreement disputes relating to infringement of IPRs (due to possible arbitrability issues), and leave other arbitrable disputes to be settled through arbitration. The risk of doing this, however, is that there may be an argument as to the proper forum to resolve a dispute once it arises. For example, if a licensee alleges a breach of contract by the licensor in an arbitration, it is possible for the licensor to counterclaim an IPR infringement, thus giving rise to the issue of the proper forum to resolve such claims. Careful drafting is therefore required and legal advice should be sought in this regard;
- dealing with validity of IPRs: on the other hand, while the litigation of IPR disputes in breach of an arbitration agreement can be stopped either by a stay of proceedings in favour of arbitration or an anti-suit injunction (before the courts of the seat of arbitration, an emergency arbitrator, or an arbitral tribunal once constituted), parties could add wording to their arbitration agreement clarifying that all disputes, including IPR disputes, shall be resolved by arbitration (e.g. including with respect to the validity of intellectual property rights) to put beyond doubt that such issues are within the scope of the arbitration agreement;
- qualifications of arbitrators: Parties may also specify the necessary or desired qualifications of the arbitrator to resolve their IPR disputes (e.g. an intellectual property lawyer in the field of life sciences with no less than 15 years of experience), but to the extent that such qualifications are expressed in mandatory terms, parties should ensure that these specifications are not overly restrictive as it may unnecessarily restrict the pool of suitable arbitrators who can act;
- applicable law: apart from the governing law of the arbitration agreement and the underlying contract, parties should also consider whether it is necessary to specify the law under which specific issues are to be determined. For example, if there are issues of infringement to be determined and infringement occurs in different jurisdictions, it would be useful to specify whether these issues should be determined under the laws of one particular jurisdiction. Otherwise, determining these issues in different jurisdictions according to their respective laws will not only be costly (as parties will need to seek local law advice), but might even lead to different outcomes in different jurisdictions.
Arbitrating IP disputes is no longer a novelty. Arbitration clauses are now more prevalent in licensing agreements; joint research and development agreements; and distributor agreements, and will continue to play an important role in contracts with IPRs. Even for contracts without a predominant IP element, an arbitration clause can still safeguard a party’s IPR interest. Given the rise in popularity of international arbitration and the efforts of jurisdictions such as Hong Kong, it is expected that arbitrations involving IPRs are here to stay and will increase in future.
Authored by James Kwan and Eugene Low