New opportunities for arbitration?
There are known difficulties with litigating intellectual property and technology disputes, particularly where the disputes are global and involve rights protected in different jurisdictions. This article explores whether arbitration could offer a solution.
Difficulties of intellectual property and technology disputes
Patent litigation is notoriously complicated, expensive and slow. At the end of the 19th Century, Master of the Rolls (the senior judge in the Court of Appeal in England and Wales) Lord Esher MR eloquently bemoaned the complexity of litigating patent disputes:
“Well, then, the moment there is a patent case one can see it before the case is opened, or called in the list. How can we see it? We can see it by a pile of books as high as this [holding up the papers] invariably, one set for each Counsel, one set for each Judge, of course, and by the voluminous shorthand notes: we know ‘Here is a patent case.’ Now, what is the result of all this? Why, that a man had better have his patent infringed, or have anything happen to him in this world, short of losing all his family by influenza, than have a dispute about a patent. His patent is swallowed up, and he is ruined. Whose fault is it? It is really not the fault of the law; it is the fault of the mode of conducting the law in a patent case. That is what causes all this mischief.” (Ungar v Sugar (1892) 9 RPC 113 at 116-117)
Since that time, not much has changed. The difficulty with patent litigation is multi-faceted. Patents (as with other intellectual property rights) are territorial in nature. The nature of the patent grant relates to an invention which will have been made in the past. This requires a consideration of the “state of the art” at some point in the past. The scope of patent rights can often be illusive and abstract. The scope of protection for inventions is determined by sometimes difficult to understand canons of claim construction, based on the understanding of a person of ordinary skill in the art at the relevant time.
But these difficulties are not unique to patent disputes alone. Software litigation can be just as complicated, expensive and slow, particularly where it concerns, for example, language structures and application program interfaces. The scope of protection for copyright for software, for example, can be no less illusive than patent rights, depending on the degree of originality of the work, considered after abstracting the nonoriginal elements and set-pieces or scenes-à-faire. The tribunal must also take into account the degree to which the work is dictated by external functional requisites. Technology licenses frequently involve grants of rights to use patents, copyright or technical information and can involve the same issues of scope and validity both of the existing rights and the ownership of new developments or works arising from the original rights.
Pure intellectual property disputes (unlike contractual disputes) can arise between parties who have had no previous relationship. They can arise almost innocently seemingly out of nowhere or they can arise because of a calculated attempt to use another’s inventions or ideas. They can be justified as a legitimate attempt to compete or be seen as a sordid theft of another’s labour.
Further complicating the issue is the fact that intellectual property rights are generally national but, as most large companies trade and operate internationally, the dispute is usually international. The scope of the parties’ rights can be interpreted differently in different countries, even when dealing with the same wording in a patent or the same software code.
Such disputes can be difficult to settle. Technology contracts and intellectual property infringement claims usually involve allegations of on-going continuous infringements or breaches which occurred in the past but are continuing up to the moment of trial or hearing. This can be distinguished from much commercial litigation that deals with an historical tortious event or contractual breach that occurred in the past and is not continuing. As a result, IP disputes are frequently as much about the present behaviour of the parties as an historical evaluation of past damages or past compensation. They are not about past monetary compensation alone.
There is also the matter of whether the judges and juries adjudicating the dispute will have the requisite skills. Few countries have specialist Intellectual Property courts and so there is a risk of getting a judge who knows nothing about the law in this area and almost certainly will not have the requisite technical expertise. In the US, all these cases, patent, copyright, software or contract disputes must be heard by a jury, who will decide technical issues of fact – and lawyers for one or the other party will typically remove from the jury the most educated and knowledgeable potential jurors.
Finally, the discovery and trial process in the US, in particular, results in the costs of the average patent case exceeding US$2 million dollars and sometimes much, much more, in some cases, into the tens or hundreds of millions.
Arbitration as a solution?
Is it any wonder, given the difficulties enumerated above, that a recent Queen Mary University of London Survey on Pre-empting and Resolving Technology, Media and Telecoms Disputes (November 2016) shows that at least 75 percent of the organizations surveyed had a dispute resolution policy and that of those policies mediation followed by arbitration were the most preferred dispute resolution mechanisms.
The survey also stated that 92 percent of respondents viewed international arbitration as well suited for Technology, Media and Telecoms (TMT) disputes, and in fact, when assessed at an all-respondents level (i.e. including private practitioners and other dispute resolution practitioners), arbitration is the most preferred dispute resolution mechanism for TMT disputes. Court litigation was the least desirable method.
However, there does not appear to be sectoral uniformity in these views. Information Technology (IT) and Telecoms suppliers were less in favour of arbitration, preferring litigation and expert determination respectively. By contrast, customers of these suppliers from the Energy, Construction and Manufacturing industries all rated arbitration as the most encouraged dispute resolution mechanism.
Despite the preferences of IT and Telecoms suppliers for other types of dispute resolution mechanisms, both indicated that TMT disputes are well suited to the use of international arbitration (73 percent and 80 percent respectively).
All respondents recognized the potential advantages of arbitration: the enforceability of awards across multiple jurisdictions under the New York Convention; the avoidance of litigation in a foreign court; confidentiality/privacy; the ability to select an expert arbitrator; neutrality of the forum; speed and finality (limited appeal/judicial review rights); flexibility of procedure; and, in many cases, cost. Confidentiality deserves a further mention given that trade secrets and knowhow are frequently at the heart of technology disputes. Arbitration can also be perceived as a less adversarial process, providing greater opportunity for settlement and potentially preserving an ongoing business relationship.
So why the reluctance of IT and Telecoms supplier companies? The QMUL survey does not provide ready answers.
The most common type of disputes in the Telecoms sector are intellectual property followed by competition disputes, but joint-venture/partnership collaboration and regulatory disputes were also relatively common. The QMUL study suggests that because Telecoms disputes tend to relate to the regulated market and business environment, rather than service, this may make suppliers less likely to deal with the matter by arbitration. For Telecoms sector respondents, expert determination/adjudication was the most encouraged method, which may be reflective of the highly regulated nature of the market in which matters crucial to the operation of the company are controlled by regulation and in which there is a need for specialized arbitrators familiar with the regulatory environment.
In the IT sector, the most common disputes are in IT systems development, implementation or integration, followed by intellectual property disputes, but licensing and outsourcing disputes, including contracting disputes concerning business process requirements, timing and change management were also common. These disputes are not regulatory and are normally contractual so that it is not clear why, given the sector’s favourable view of arbitration, more are not arbitrated.
Arbitration in theory but not in practice?
The QMUL survey found that although survey respondents said that arbitration was their preferred mechanism, in practice the mechanism that was most often used over the last five years was litigation.
The survey offers some possible reasons. Firstly, many disputes today involve older long term contracts which may not have arbitration provisions.
Secondly, IT and Telecom suppliers are more pro-litigation and may be refusing to accept arbitration. However, this seems more a conclusion than a reason. Space does not permit extensive discussion about this, except that it is not immediately obvious why arbitration would not be preferred for the typical IT service contract which deals with an ongoing supply of services.
Thirdly, most patent infringement and other intellectual property infringement disputes do not arise between contracting parties and it may be difficult to obtain post-dispute agreement to arbitrate, notwithstanding the many advantages of arbitration, particularly where there are multiple related disputes in multiple jurisdictions.
Fourthly, it is still the case that when the terms and conditions are being negotiated, the parties may give little or no time to the dispute resolution provisions. Put simply, the pros and cons of litigation versus arbitration may not have been considered until too late.
But the QMUL survey suggests that perhaps the real reason for the dominance of litigation is that parties require greater assurance of and confidence in the international arbitration process. This means ensuring that arbitration is seen as preferable to litigation in reality, not just in theory.
The survey touches on some suggestions for improvement, including the choice of arbitration institutions, use of knowledgeable specialist arbitrators (in particular with TMT expertise), and a need for greater confidence in the capabilities of arbitrators. Other suggestions include more efficient e-disclosure and document review and e-case management/resolution software. The survey also suggested a possible move to virtual arbitral hearings and an opportunity for innovation in arbitration to create more efficient procedures.
However, notwithstanding the criticisms of and opportunities for improvements in arbitration, 82 percent of survey respondents believe there will be an increase in the use of international arbitration.
Litigation will not always be the best method for resolving technology disputes. Given the benefits of arbitration, there is an opportunity for arbitration to play a greater role in resolving technology disputes.