arbitration clauses in patent licence agreements

How arbitration clauses in patent licence agreements can simplify international patent disputes

Patricia A Martone, Law Office of Patricia A Martone PC

A typical patent licence agreement between multinational corporations conveys licence rights under patents granted in countries in every part of the world. Sometimes, each party has its own patent rights, and each party is both a licensor and licensee.

As a result, an alleged material breach of any part of the agreement can open both parties up to multi-jurisdictional patent infringement litigation, as well as breach of contract litigation, even if the alleged breach concerns only the commercial terms of the agreement. Many licence agreements do not contain an arbitration clause. In this instance, the parties must resort to the courts to resolve disputes. Further, while most agreements lacking an arbitration clause do contain a choice of law clause for resolving contract disputes, many do not specify a particular venue for dispute resolution. 

This all means that disputes over a commercial term of the agreement can explode into a free-for-all of multi-jurisdictional contract and patent litigation, particularly if large amounts of money are at issue and/or if the parties are competitors. A well-crafted arbitration clause can avoid this outcome by greatly simplifying and reducing the cost of dispute resolution. 
The arbitration process can be anything the parties want it to be. Discovery, including e-discovery, can be limited. The proceeding is confidential, which is particularly helpful to parties who do not want to make the licence terms public. The finality of the decision, and the absence of post-trial motions and appeals, can be particularly attractive to parties who find it mutually beneficial to get a decision and move on.

Moreover, the award resulting from a single arbitration can be enforced in all of the many countries around the world who are parties to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the New York Convention). See www.newyorkconvention.org/countries for a list of signatory countries. 

With respect to licence agreements covering patents issued in the US, US law permits the parties to voluntarily agree to arbitrate not just the commercial terms of an agreement, but also issues of patent validity and infringement. However, some countries prohibit arbitration of the issue of patent validity, which will make it difficult to enforce an arbitration award on that issue in these countries. (See, for example, Norman Zhang, “Solving Patent Disputes via International Arbitration: A Better Alternative?”, The American Review of International Arbitration blog, 5 December 2017.) This is so because under the terms of the New York Convention, a court may refuse to enforce an award if “the recognition or enforcement of the award would be contrary to the public policy of that country”.

Zhang’s article concluded that arbitration in the international patent licence context is really “best suited for minor matters between firms who wish to resume a working relationship”. This dismissive approach, shared by other commentators, assumes that the only meaningful disputes arising out of patent licence agreements are those relating to patent validity and/or infringement. But, this approach ignores both the real-world disputes that arise in the licensing context and what can be achieved by a well-drafted arbitration clause.

I have handled a number of significant patent licence agreement disputes in both negotiation and litigation. In every case, the major issue was a commercial term, and the disputes were hardly minor. Common denominators were disputes arising out of corporate acquisitions (assignment rights and royalty obligations on acquisitions of unlicensed companies are fertile ground for disputes), and royalty disputes arising out of the agreement’s definitions of net sales and licensed products. To the extent that these disputes had a technical component, it was centered on definitions contained in the agreement and not the claims of licensed patents. The amounts at issue in these matters ranged from the millions of dollars to US$100 million dollars.

These disputes shared another common denominator: they were very expensive to litigate. In a litigation seeking unpaid royalties handled by me several years ago, the legal bills for one year were in the millions of dollars before it was even time for trial. The case involved discovery in two countries with documents in two languages, and extensive e-discovery and privilege logs.

This experience led me to consider arbitration a more efficient, faster and less expensive way to resolve such disputes. As a result, I qualified to become an arbitrator on the National Roster of Arbitrators of the American Arbitration Association (AAA). 

Recommended Provisions of an Arbitration Clause in a Patent Licence Agreement

Arbitration cannot take place absent the express agreement of the parties. Therefore, the existence and content of an arbitration clause in an agreement is the foundation of any arbitration. Providing only that “any controversy or claim arising out of or related to this contract, or the breach thereof, shall be settled by arbitration”, is sufficient to require arbitration. But it leaves the decision about many aspects of the arbitration for the period after a dispute arises, when the parties are less amenable to compromise. 

If the parties cannot agree on the ground rules when the dispute arises, they may need to resort to a court to sort these issues out. Obviously, it is preferable to have a more detailed arbitration clause covering key issues to avoid uncertainty and judicial intervention. These issues include the following.

Issues to be arbitrated

The clause recited above is meant to encompass all disputes. The AAA’s patent rules nonetheless recommend that for the avoidance of doubt, if the parties intend to include patent issues in an arbitration, the clause should include the words “including any dispute of patent validity or infringement”. Alternatively, in the international context, if the parties are concerned that an award adjudicating patent validity may not be enforceable in jurisdictions important to them, or they cannot agree on one substantive law under which to determine patent validity of patents issued by multiple countries, the parties can simply write language into the clause specifically excluding patent validity issues.

Excluding patent validity issues from an arbitration clause will undoubtedly give patent litigators pause. But, as a practical matter, before an agreement is signed, the licensee has likely examined the licensed patents and would not have taken a licence if it thought those patents were invalid. In general, patent validity only becomes important if a circumstance arises where the licensor can claim a material breach has occurred and then sues for infringement.

Location of the arbitration

Where the parties are headquartered in different countries, they frequently chose a neutral country in which to conduct the arbitration. Popular venues for arbitration between companies located in different countries include London, New York, Hong Kong and Singapore.

Governing law

In choosing the governing law, the parties should provide for the governing law for both substantive and procedural issues. In terms of substantive law, common choices for international agreements include New York law and English law. Frequently, this choice is related to the location of the arbitration. If one party is located in the US and the second party is located in France, they may compromise by providing for arbitration to take place in London under US law. While New York law tends to be the most common US law choice, in part because of its robust well-settled precedents, many technology companies located in California prefer California law. 

The choice of procedural law tends to follow the location of the arbitration. For an arbitration located in the US, the parties should consider specifying the Federal Arbitration Act to preempt any arbitration law of the state where the arbitration is held.

Language of the arbitration

This is an important point for international arbitrations. The determination is closely allied to the location of the arbitration and the choice of arbitrators. For example, if the location of the arbitration is London, that is a good reason for specifying that the arbitration will be conducted in English.

Number, selection and qualifications of arbitrators

Arbitration clauses provide for either one arbitrator or three arbitrators. Three arbitrators are typically provided for where the parties expect disputes to be complex or of high value. The clause can provide that the arbitrators are chosen by the parties or, if the arbitration is to be administered by an organisation specialising in dispute resolution, by the organisation. Even where the parties have provided for an administered arbitration (see below), the parties can select arbitrators who are not on the panel of arbitrators of the administering organisation. Typically, each arbitrator is required to be “neutral” – free of conflicts as to all parties. However, an arbitration clause may also provide that each party will appoint a non-neutral arbitrator, with a third neutral arbitrator chosen by the two arbitrators appointed by the parties. The appointment of non-neutral arbitrators is appropriate only for ad hoc arbitrations (see below). Organisations administering arbitrations disfavour or explicitly prohibit arbitrators who are not neutral. 

Finally, the agreement may provide that the arbitrators have specific qualifications. An example might be arbitrators familiar with a particular technical or business subject matter expertise. However, an excessive level of detail about arbitrator expertise in the arbitration clause may make it difficult to find qualified arbitrators.

Ad hoc or administered arbitration/applicable rules

An ad hoc arbitration is conducted solely by the parties. An administered arbitration is one administered by an organisation specialising in dispute resolution. Examples of such organisations are the AAA, or for international disputes, its international division, the International Centre for Dispute Resolution (ICDR). These and other organisations, such as the International Chamber of Commerce and the World Intellectual Property Organization, have their own sets of rules governing arbitration, including, in some cases, procedural rules for determining patent validity and infringement disputes. It is important to specify the applicable rules in an arbitration clause. Otherwise, the parties will have to go through the difficult process of agreeing to applicable rules after the dispute arises.

An arbitration clause can provide for an ad hoc arbitration conducted under the rules of a dispute resolution organisation. Ad hoc arbitrations save the cost of administration and have the benefit of flexibility. But, administered arbitrations have important benefits as well, particularly for larger disputes. These include an experienced staff that not only keeps the arbitration on track and on schedule but also acts as a buffer between the parties and the arbitrator dealing with potentially sensitive issues such as billing and arbitrator performance. Further, the parties still retain considerable flexibility over the proceeding.

The AAA and the ICDR provide online resources for the creation of an arbitration clause to ensure that the clause accurately reflects the parties’ agreement to an arbitration administered by the organisation in accordance with its rules. 

For example, the basic recommended ICDR clause is:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules. 

The website for the AAA and the ICDR includes a clause builder tool that enables the user to draft additional provisions, including some discussed here as well as those governing subjects such as confidentiality requirements for parties and other participants in an arbitration, permissible discovery and time frame for the proceedings. (See www.clausebuilder.org.)

Pre-arbitration dispute resolution

When a dispute arises, it makes a great deal of sense for the parties to discuss the dispute first, whether informally or in mediation, before beginning any contested proceeding including arbitration. For that reason, a well-crafted arbitration clause should require that the parties engage in discussion or mediation before beginning arbitration. The clause can provide that the period for discussion or mediation be limited in time, to three months for example.

During the patent licence agreement negotiation process, adding a well-crafted arbitration clause will enable the parties to efficiently resolve any future disputes, particularly those over commercial terms. 

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