Strategic Considerations After a Dispute Has Arisen
The disputes that are amenable to arbitration are a small subset of all IP disputes. This is because most disputes involving intellectual property concern infringement of rights by another party with no pre-existing relationship with the rights holder.
This type of dispute has historically been adjudicated in the national court that has jurisdiction over the infringement at issue; however, substantial resources have been made available by the various arbitration centres to facilitate the arbitration of IP disputes. Nevertheless, it remains somewhat uncommon for parties to consent to arbitrate these types of disputes once they have arisen.
There are several reasons for this reluctance. The confidential nature of the typical arbitration process is sometimes a barrier. Many IP rights holders may prefer a public court decision that can serve as a warning to other potential infringers. Alleged infringers may also prefer litigating in the national courts, where they can take advantage of additional court-based and administrative-based options to challenge the validity of intellectual property, such as, in the case of patents, inter partes review in the US Patent and Trademark Office, and opposition practice before the European Patent Office.
One circumstance where arbitration may be an attractive option to resolve an infringement dispute is when an infringer is accused of infringing the same or similar intellectual property in multiple countries. The arbitration would be quite complicated in that it would need to address the differing standards for infringement, validity and damages. That said, consolidating a dispute in front of a trusted panel of arbitrators should provide the parties comfort that the dispute will be administered more efficiently than if the parties had to engage in far-flung parallel court and administrative proceedings around the globe.
Disputes concerning intellectual property that are amenable to arbitration are, therefore, typically limited to instances where there is a pre-existing contractual relationship concerning the intellectual property. Arbitration of IP disputes that are grounded in a contract with an arbitration clause are arbitrated largely in the same manner as other contract-based commercial disputes. There are, however, certain issues that arise in disputes concerning intellectual property that are more prevalent than in other commercial disputes. There are also strategic decisions unique to IP disputes that should be kept in mind and that are addressed throughout this chapter.
Strategies for preparing for arbitration
Once a dispute has begun to crystallise, perhaps through a series of communications of escalating tone and scope, there are a few issues that should be considered.
Ongoing business concerns
It is critical that the parties understand their obligations pursuant to the underlying contract. Sometimes in disputes over agreements concerning intellectual property, there is a need for the parties to continue to cooperate with each other. For example, in a joint development agreement for the development of a medical treatment, there will likely be various provisions that require the cooperation of parties with respect to ongoing obligations to third parties, or in proceedings with administrative agencies. The agreement may require continued cooperation to develop intellectual property under the agreement through filing patent applications, among other things.
Similarly, in the example of a collaboration to develop medical treatments requiring regulatory approval, the agreement may include provisions requiring cooperation by the parties in activities before government agencies in the approval process. In this case, the agreement requires continued cooperation, even as the parties dispute other parts of the agreement (e.g., royalty payments).
Part of the brewing dispute may require interim measures to maintain the status quo concerning cooperation while the parties address the dispute. There may be deadlines regarding intellectual property or regulatory applications that cannot be missed without harming the value of the collaboration. These considerations must be taken into account, even as the areas of dispute begin to emerge.
Effect of termination
When an agreement involving IP use is terminated, the termination can have a significant effect on the contract and the legal rights and remedies available. Termination may cut off the right to sell current products that use the intellectual property, transforming a prior permitted use into an infringement regarding future use. Triggering termination may, therefore, have the effect of expanding and complicating the dispute.
Infringement actions are based on national laws. Unless the scope of the arbitration agreement allows the arbitral tribunal to hear the infringement actions, the infringement disputes will need to be addressed in the relevant national courts. Parallel administrative procedures such as inter partes review or opposition practice must also be considered. These proceedings will likely be allowed to take place in parallel to an arbitration unless there is specific language in the arbitration clause prohibiting the parties from taking such actions.
Termination provisions may give rise to other forms of wind-down activities and return of confidential information that may require continued cooperation, or resort to interim measures may be made.
Gathering evidence and identifying witnesses
A party should begin cataloguing relevant documents and identifying witnesses as soon as a dispute appears probable. This includes identifying persons with knowledge of the dispute that the party would want to have available for the hearing: because the time between the start of a dispute and the initiation of arbitration may be lengthy, employees with knowledge of the underlying facts may leave the company during this period. If a departing employee’s cooperation in the impending dispute may be important, it would be advisable to include a cooperation clause in their departure documents that requires them to assist in any future litigation.
It is also advisable to interview potential witnesses regarding their recollections of the events in dispute and the documents underlying those events as soon as practicable. Comprehensive interviews with potential witnesses are most effective when their memories are fresh.
Documentary evidence should be preserved as soon as litigation appears reasonably foreseeable to ensure that any important documents are not accidentally destroyed. This process may include working with the client’s information technology department to ensure that any automatic deletion policies that could affect relevant documents are limited or paused. Correspondence between collaborators and electronic design documents are often essential in IP disputes, and their preservation, or lack thereof, can make or break the case.
Although these considerations are applicable to arbitration generally, they may be particularly important in arbitration involving IP rights. For example, ownership of the intellectual property in dispute may be at the forefront. In the case of a scientific invention, laboratory notebooks and email communications between scientists, as well as inventor testimony, may be necessary to prove who contributed to an invention and in which respects.
Pre-arbitration and early arbitration phases
There are also a number of strategic issues to consider just before arbitration commences and during the early stages of arbitration. Some of the major issues are discussed in this section.
As with other commercial agreements, agreements involving intellectual property sometimes contain escalation clauses requiring a series of dispute avoidance negotiations. These clauses require good faith meetings to take place between decision makers for the parties as a prerequisite for engaging in subsequent steps like filing suit or initiating arbitration proceedings.
Some agreements include a mandatory mediation requirement. Sometimes, the choice of mediator is prescribed (e.g., a person with experience in the subject matter of the agreement). The process for selecting a mediator requires some level of cooperation with the opposing party.
Even if not required in the underlying contract, mediation can be an attractive option to resolve the dispute both prior to the commencement of arbitration and while the arbitration proceedings are ongoing. Whether mediation would be useful depends on the nature of the case and the relationship of the parties. If mediation is commenced, it is advisable to seek agreement that all statements, arguments and correspondence be confidential and may only be used for the purpose of the mediation.
It is critical that parties to a dispute understand the governing laws and rules. Most arbitration clauses specify the legal seat of the arbitration, the governing law and the arbitration rules governing the dispute. Where the arbitration clause does not specify one or more of those matters, there may be room for the parties to negotiate them, guided by the law of the legal seat of arbitration. The party that best understands the advantages and disadvantages of the multitude of potential options is at a distinct advantage.
The law of the seat of the arbitration refers to the law that will apply to procedural aspects of the arbitration, including which national courts have supervisory authority over such matters as the set aside of or challenge to an award. This is separate and distinct from the hearing location, which can be agreed to in the contract or left to be decided once a dispute has arisen.
Even where a clause provides for specific rules, the legal seat and the place of arbitration, the parties are always able to deviate from those terms through a separate agreement effectively amending the arbitration clause.
Governing law can have a great influence on the outcome of IP arbitration. Licensing disputes may turn on contractual interpretation issues that involve mistakes, ambiguity, custom and parol evidence. Questions of IP law (patent law, trademark law, etc.) are decided based on the law of the jurisdiction that granted the IP right. Different jurisdictions vary on the evidence that can be presented to support a contractual interpretation and the persuasiveness of various types of evidence, so it is essential to understand the relevant law at the outset and tailor arguments during the arbitration accordingly.
It is also important to take into account the applicable arbitral rules in a given arbitration clause. Where a clause does not specify the applicable arbitral rules, should a dispute arise, the parties can seek to agree to a set of applicable rules and the governing arbitral institution or proceed with ad hoc arbitration. Among the most commonly used arbitral rules are those of the International Chamber of Commerce, the United Nations Commission on International Trade Law, the China International Economic and Trade Arbitration Commission, the International Centre for Dispute Resolution, the American Arbitration Association (AAA) and the Swiss Arbitration Centre. Some organisations and arbitral institutions, including the AAA, the World Intellectual Property Organization and the International Institute for Conflict Prevention and Resolution provide IP-specific arbitration rules that may be employed.
Selection of arbitrators
As with all arbitration, the selection of arbitrators in IP disputes demands serious consideration. Questions that must be asked include the following:
- Is it more important that the arbitrator be steeped in knowledge of IP law or have experience in the industry in which the agreement operates?
- Is extensive general experience as an arbitrator more important than both IP and industry experience?
The answers to these questions may be informed by the extent to which IP issues will need to be addressed in detail in the dispute. In a situation concerning a termination that gives rise to patent infringement allegations and counterclaims for patent invalidity, it would be preferable to have an arbitration panel with experience dealing with those issues. If, on the other hand, the IP issues are less extensive, the need for IP specialists as arbitrators is less important of a consideration.
The selection process may also depend on choosing a sole arbitrator or a party arbitrator for a three-person panel. In either case, it is important to conduct research into the candidate’s past experience, and any awards they may have issued as an arbitrator. In the situation where one is selecting a party arbitrator, who in turn will choose a chair with the other party arbitrator, panel dynamics must be carefully considered.
Considerations for the initial procedural conference
There are a number of ground rules that parties may wish to raise with tribunals at the initial procedural conference in cases involving intellectual property. These include the use of interim measures to coordinate parallel disputes and maintain the status quo, the handling of confidential information and bifurcation of certain issues, including damages.
Interim measures may be essential to achieving a party’s goals while the arbitration process unfolds. For example, in IP infringement disputes, the rights holder will seek an injunction prohibiting the alleged infringer from selling infringing products during the pendency of the arbitration. In the context of a dispute concerning a collaboration agreement, a party may seek injunctive relief requiring the other party to participate in patent office and regulatory filings, or otherwise advance commercial goals underlying the agreement.
It is important to assess both availability of the interim measures and whether there are adequate enforcement mechanisms, including under the law of the legal seat or a jurisdiction where a party is seeking to enforce the interim measure or interim award. To the extent that a tribunal issues an interim or partial award, the New York Convention could apply, and enforcement can be sought in a jurisdiction that is a party to the Convention, subject to the specific adopting legislation of a given state.
Protection of confidential information
Disputes involving intellectual property often require attention to the protection of confidential information. In some cases, parties will seek the exchange of confidential information that is highly sensitive and that has not been previously disclosed to the other party.
In those situations, there may be occasion to use two-tiered protective orders that limit the disclosure of highly sensitive information even more tightly than ordinary confidential information. Commonly referred to as ‘attorneys’ eyes only’, this tier of protection limits disclosure to shield highly confidential information from the opposing party itself and allow use only by the opposing party’s attorneys and the retained experts working on the matter. Sometimes, there is also a carve-out in this tier of protection for the in-house counsel managing the case.
Use of an expert witness on IP issues
Parties often consider the use of expert witnesses on IP issues. The experts may be particularly helpful where national IP filings or regulatory filings are involved.
An expert on the technical subject matter of the intellectual property may be invaluable where it is important to have an understanding of the underlying technology to resolve the legal dispute. Some technical background can be presented through fact witnesses, but a technical expert can often provide the background to the technology and weave the facts into a useful opinion on the legal issues.
Sometimes, tribunals may seek appointment of a tribunal expert on complicated issues of technology. In those cases, parties should also simultaneously engage their own technical expert to focus the tribunal and its appointed expert on the key parts of the technology that are important to the parties’ theories of the case.
Determining damages in IP arbitration can be an exceedingly complex exercise. In cases involving infringement of IP rights, the rights holder typically seeks damages in the form of a reasonable royalty or lost profits. These basic damages concepts may be further complicated by subsidiary grounds for damages such as convoyed sales, where the infringement affected sales of an unpatented product that is closely related to the patented product.
The methodology for determining a reasonable royalty or lost profits may depend on the governing law of the arbitration. For example, US courts determine reasonable royalties in patent cases by considering a hypothetical licence to the patents-in-suit at the time of first infringement. In certain cases where a patent holder can demonstrate a capacity to supply replacements for the infringing sales, US courts can award lost profits. In some cases, the courts can also issue a permanent injunction on sales of infringing goods.
Patent damages that are measured based on a reasonable royalty, lost profit damages or a mix of both are available in many jurisdictions, and the tests for determining damages are jurisdiction-specific. Permanent injunctions may also be available, depending on the jurisdiction.
Where the dispute centres on the ownership of IP rights, the calculation of damages will likely involve IP valuation, which is a different exercise than calculating infringement damages. There are three main methods for calculating the value of an IP asset:
- The income method attempts to determine the income stream the intellectual property at-issue is expected to generate over the course of its useful life. A discount rate is used to determine the present value of the income stream.
- The market method values the IP asset by looking at transactional market data to determine the price paid for similar assets.
- The cost method values the IP asset through calculating the cost of developing the asset.
There are advantages and disadvantages to each of those damages approaches. It is important to give careful thought to which method to employ. For example, a claimant seeking damages based on a trademark valuation will likely opt to use the income or market methods because the cost of developing a trademark is usually low and it is difficult to incorporate the value of novelty into the cost method.
Given the complexities of calculating IP damages, expert economic testimony is very important. Some economic experts have more experience with infringement damages calculations than IP valuations, and vice versa, so it is important for parties to understand the basic damages theories applicable to their case when interviewing potential experts.
It is also important to be attuned to confidentiality considerations when settling on a damages strategy. If a party is seeking infringement damages, it will likely have to produce sensitive product and sales data, potentially to a competitor. Depending on the valuation method employed, the party may have to disclose documents and financial figures concerning product development. Confidentiality issues in the damages phase can be avoided by agreeing on a robust confidentiality order in the early stages of arbitration.
It is often prudent to keep a channel of communication open with opposing parties concerning the ultimate resolution of IP disputes. Because these disputes are often complicated by many of the issues already mentioned in this chapter, settling these matters themselves are often complicated affairs. Parties can avail themselves of an arbitration channel and a mediation channel during the arbitration so that there is opportunity in the run-up to a hearing to resolve the matter through a negotiated resolution.
Litigation finance is an option for a claimant to help prosecute a claim. There are also litigation finance products available for defendants in certain circumstances to hedge the cost of litigation against an expected outcome. In both cases, funding depends on the funder’s assessment of the case, and sufficient time must be accounted for in the schedule to allow for the process if litigation funding is an option. It is also important to be attuned to jurisdiction-specific privilege issues that may arise when working with litigation funders.
IP disputes involve unique considerations that must be weighed against each other. The benefits and detriments of litigating IP infringement disputes in national courts versus an arbitral forum demands careful consideration with regard to the factors discussed in this chapter. In a significant number of cases, abitration can provide the most cost effective and efficient way to resolve complex IP disputes.
 Peter A Sullivan is a partner, and Richard Maidman is an associate at Foley Hoag LLP.
 American Arbitration Association, Resolution of Patent Disputes Supplementary Rules, 1 January 2006.
 World Intellectual Property Organization (WIPO), WIPO Arbitration Rules, 1 July 2021. See also WIPO Arbitration and Mediation Center, 'Commentary on WIPO Arbitration Rules', 2017.
 International Institute for Conflict Prevention and Resolution, Patent & Trade Secret Arbitration Rules, 2005.
 Under US law, an issue of patent validity is arbitrable, and the award is final and binding between the parties. 35 USC Section 294. The patentee must provide notice of the award to the US Patent and Trademark Office, which is then entered into the prosecution record of the patent.