Arbitrating disputes in the pharmaceutical, life sciences and healthcare sector in the era of the COVID-19 pandemic
Global | Publication | June 2020
A signature feature of the last several months has been the scramble for masks, shields and gowns – personal protective equipment (PPE) – for doctors, nurses and other care workers. Governments have been focused on ensuring that health authorities, both public and private, have a sufficient supply of essential medical equipment (such as PPE and ventilators) and pharmaceutical products to deal with the initial surge of COVID-19 cases. Parallel races are under way to find safe and effective therapies, tests and vaccines, all of which will involve intellectual property (IP), new and old, and many new collaborations globally.
These events are putting tremendous strain on the life sciences and healthcare sector, including the pharmaceutical, medical device and biotechnology industries, as well as on the contractual and IP infrastructure that supports them. Disputes can be more disruptive than usual during this time, not least because it adds further pressure on often already limited financial and management resources. Many parties are therefore seeking alternative ways to avoid disputes. However, some disputes are inevitable and a number are likely to be resolved through international arbitration.
Disputes involving the manufacture and supply of critical products
The stresses on international and national supply chains the entire length of the value chain in the life sciences and healthcare sector are manifold. There are the complications for manufacturing due to lockdown restrictions as well as the effect of the virus on workers, and complications for logistics due to hardened borders that are affecting all international and some national trade. The increased urgent demand for certain products has resulted in examples of inferior products entering the marketplace and being rejected by customers. There are also new entrants to the market, as businesses seek to re-tool to provide much needed equipment, as well as new collaborations and ventures. Governments are taking a keen interest in ensuring expanded and diversified supply chains and ensuring a secure supply of necessary material, both in the short term and over the long run. There have also been high profile examples of nationalism as demand for these products outstrips supply globally. In producing countries, we have seen attempts by governments to require exporters to supply new local or regional needs instead of their usual contracting parties farther away. In countries relying on imports, governments could push for moving to new, domestic sources of supply that may be perceived as more reliable in times of crisis. As tensions between the U.S. and China continue to mount, there are likely to be particular difficulties for supply chains originating in China. Developments such as these could put existing long-term contracts at risk, with pressures on both suppliers and buyers of everything from PPE to drugs to ventilators and the raw materials that go into making these products. All of this adds to the strain on existing manufacture, supply and distribution contracts and licensing agreements, potentially leading to disputes.
Particularly in the case of cross-border transactions, many of these manufacture and supply agreements will have clauses that provide for international arbitration as the dispute resolution mechanism. Arbitration is increasingly popular in this sector for a variety of reasons including privacy/confidentiality of proceedings, ability to choose an expert adjudicator, flexibility of process, that it denationalises justice (particularly important where a party is a state or state owned entity), and – often most critically – greater ease of enforcement of arbitral awards than foreign court judgments. The latter is due to the New York Convention, which provides a streamlined global framework for recognition and enforcement of foreign arbitral awards as well as respect for arbitration agreements. With a few exceptions, most countries worldwide are now a party to the convention. Disputes between companies and states over the measures implemented by states, as discussed below, may also lead to investor- state arbitration.
Disputes involving access to IP
There is a clear need for extensive and rapid innovation to respond to the pandemic. Companies and governments are working to advance as quickly as possible. This also necessarily involves some consideration around expanding access to IP. It is important, however, to remember that IP rights holders do still need protections, albeit in these challenging times many will advocate for a balancing act.
In some cases, governments will be leading the charge to expand access to IP. For example, in an effort to make critical drugs more widely and cheaply available to their populations, governments may override existing licensing arrangements and even the underlying patent protections. Assuming that governments do so through duly adopted laws and regulations, such measures may be difficult to challenge in local courts. It is possible however, that such measures could violate international law, such as investment protection standards set out in international investment agreements (IIAs).
Assuming an affected company qualifies under the IIA as a foreign investor with a protected investment, the company could have a claim for compensation against the host state. In turn, however, a host state would likely seek to rely on several defenses available to it as a result of the pandemic. Such investor-state disputes are typically resolved through international arbitration. (For more detail on investor- state arbitration in the COVID-19 context, see our separate article in this issue Investor-State Claims in the Era of the COVID-19 Pandemic.
Where the need for immediate access may not be as acute, or where the goal is promoting new innovation, governments will see the benefit of promoting cooperation rather than forcing it. In early May, the US Patent & Trademark Office launched an online platform called Patents 4 Partnership, a searchable repository of patents (and patent applications) related to the COVID-19 pandemic that are available for licensing. The new platform aims to facilitate the voluntary licensing and commercialization of innovations to help fight the disease.
Some IP owners are getting ahead of government action, embracing cooperative models over adversarial ones. Several major innovators from the tech and medical sectors (among them Amazon, Microsoft, IBM, Sandia National Laboratories, Open Ventilator System Initiative) are behind the Open COVID Pledge. Those that sign the Pledge offer an open non-exclusive, royalty-free, worldwide, fully paid-up license under the Pledgor’s patents “to make, have made, use, sell, and import any patented invention, solely for the purpose of diagnosing, preventing, containing, and treating COVID-19.” The standard license that Pledgors are asked to sign is effective as of December 1, 2019 and lasts until one year after the World Health Organization declares the COVID-19 Pandemic to have ended (but not later than January 1, 2023 unless otherwise extended). Reports of similar initiatives abound. Medtronic PLC and Smiths Group PLC released ventilator- design files and manufacturing guidance using a permissive license. Stanford University, the Massachusetts Institute of Technology and Harvard University have agreed to let their IP be used through their joint COVID-19 Technology Access Framework, which is similar in spirit to the Open COVID Pledge. They are offering non- exclusive royalty-free licenses in return for a commitment from licensees to distribute the resulting products as widely as possible and at a low cost that allows broad accessibility during the term of the license.
However, it is not yet clear how all of these new arrangements will work out. In the case of the Open COVID Pledge, licensors may be encouraged by the prospect of converting their free licenses into paid commercial licenses, and licensees may be incentivized to enter into these paid licences rather than finding their free licenses cut off at the end of their term. At the same time, once the dust settles, it is likely that some of the licensing arrangements could lead to disputes, including some that could be quite complex.
Parties would be wise to consider entering into arbitration agreements in connection with these licenses – or in the case of pre-existing disputes, to consider agreeing to arbitrate those – as this may offer greater certainty over where, when and how disputes would be resolved, as well as greater certainty regarding the enforceability of the outcome. Related to this are the further benefits of the disputing parties being able to choose their arbitrator (potentially selecting someone with expert technical knowledge in the relevant field), as well as having proceedings conducted privately or confidentially rather hashed out in public litigation.
Arbitrating IP disputes
As a result of social-distancing requirements, courts in many countries – including specialized tribunals that deal with IP issues – have been closed for an extended period of time. In France, for example, all civil/commercial cases were postponed in mid-March 2020 until further notice, except for litigation considered essential (criminal hearings in particular), which does not include IP litigation. The European Patent Office pushed back deadlines for in-person oral proceedings in its opposition divisions, where patents are challenged, until early June 2020. In the US, jury trials have been postponed or cancelled by most courts, although bench trials are continuing, at the discretion of the judge, and held via video conferencing. As the courts reopen, certain cases will likely be prioritized, with others facing delay. And further closures or delays cannot be ruled out, given the possibility of a “second wave” of infections from a resurgent virus.
In addition, complex cases involving technical evidence may be poorly suited for remote, virtual hearings – particularly those ordinarily conducted before a jury. Parties may prefer, or indeed be forced, to consider alternative ways of resolving disputes especially if they are unwilling or unable to wait for courts and specialized tribunals to reopen.
The lack of a pre-existing arbitration agreement is no barrier. In most jurisdictions, parties are able to subsequently agree to arbitrate their disputes – regardless of whether or not a dispute has already arisen. Even if litigation has been commenced, there are usually simple steps available to transfer proceedings to arbitration or mediation instead.
But is this a good idea? Arbitration has not always been an obvious choice for IP disputes. Litigation has tended to be the default, in large part due to a perception that IP disputes are non-arbitrable. However, that is not strictly true and much depends on the jurisdiction. It is not uncommon for there to be restrictions on arbitrating questions pertaining to fundamental IP rights. This means close attention to issues of arbitrability must be given where a dispute involves invalidation or confirmation of underlying IP rights as against the world. But commercial IP disputes are arbitrable in many jurisdictions. Parties may also default to litigation because interlocutory injunctions can be a popular and common part of IP litigation strategy. Potentially, however, injunctive relief can be available within or as an adjunct to arbitration proceedings.
Beyond the fact that arbitration is often a viable option, there can be significant benefits to resolving IP disputes in arbitration. There are known difficulties with litigating IP disputes beyond mere access to courts. This is particularly the case where the disputes are global and involve rights protected in different jurisdictions. Litigation of these disputes is, in some regions, notoriously complicated, expensive and slow. Disputes involving IP are often highly technical, and generally evidence-heavy. Yet not all countries have specialist IP courts so there is a real risk of getting a judge and/or jury who know nothing about the law in this area and almost certainly will not have the requisite technical expertise. The discovery and trial process in many jurisdictions can also result in the costs of a case reaching millions of dollars and sometimes much, much more. Add to that, IP rights are generally national yet as most large companies trade and operate internationally their disputes are often international. Further complicating things, the scope of the parties’ rights can be interpreted differently in different countries, even when dealing with, for example, the same wording in a patent. This can lead to fighting essentially the same issues in multiple regions and potentially seeking to enforce competing court judgments in multiple regions. Lastly, IP disputes are frequently as much about the present behaviour of the parties as an historical evaluation of past damages or past monetary compensation. For all the above reasons, such disputes can be difficult to settle.
This is where the potential advantages of arbitration come into play: offering a transnational forum where disputes can be resolved holistically; avoidance of litigation in a foreign court(s); confidentiality/privacy of proceedings; 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, costs (by, for example, agreeing less expansive discovery); and of course the enforceability of awards across multiple jurisdictions under the New York Convention. Confidentiality deserves a special mention given that trade secrets and know how are frequently at the heart of IP disputes including the life sciences and healthcare sector. As does the ability to resolve disputes holistically – where there are multi-jurisdictional and multi- party issues, the ability to have these addressed in one forum and before one adjudicator can provide greater opportunity for meaningful settlement as well as consistency of outcome. In the right circumstances, arbitration can also be a less adversarial process which further supports settlement and preservation of ongoing business relationships.
Litigation remains somewhat of a default method for resolution of disputes in the life sciences and healthcare sector arising out of the COVID-19 pandemic. It is of course a viable option, but it will not always be the best method for resolving disputes. There are clear benefits of arbitration and other alternative dispute resolution mechanisms in the right circumstances, and these should be borne in mind when seeking to resolve disputes, whether they be IP or contractual, as well as when choosing the dispute resolution mechanism in new contractual arrangements.