Arbitration: a Quick and Effective Means for Patent Dispute Resolution

• Publication year: 2010

Anne Louise St. Martin⁰ & J. Derek Mason¹

Entering into a contract containing a carefully crafted arbitration clause provides a level of predictability with respect to the investment and liability associated with patent license and/or research agreements, thereby providing the respective companies a better estimation of the risk factors associated therewith. Specifically, when parties enter into an agreement to arbitrate they have the opportunity to obtain assurance through the careful drafting of the arbitration clause that any dispute arising out of the contract will be decided by a technologically knowledgeable neutral arbitrator in a manner that will be relatively inexpensive. Having this assurance can provide stability of the business relationship which is further strengthened by the knowledge that the proceedings will be confidential and the awards rendered will be final and non-appealable, so that the companies can quickly resume with their business transactions without concern for negative publicity or the uncertainty of appeals. Accordingly, using arbitration as a means to quickly and effectively settle patent disputes, not only can be beneficial for both parties should a dispute arise, but can also provide pre-emptive benefits that remain even if the agreement to arbitrate is never enforced.

I. Introduction

Arbitration is a process of dispute resolution wherein parties submit their dispute to at least one impartial "judge" who will render a binding decision. This process differs from mediation or conciliation, where the impartial authority is authorized only to facilitate the discussion of the parties in dispute, but will not render any decision on the matter.² In arbitration, the parties agree that by submitting themselves to arbitration, the decision rendered by the arbitrator will be binding and is "non-appealable" absent any defense of invalidity of the arbitration clause.³ Although this sounds like a dangerous approach for patent disputes, which often last for several years from Markman hearings⁴ through appeals, there are many positive aspects to this type of agreement that may prove worthwhile for both parties.

Voluntary arbitration as a remedy for patent infringement is authorized by 35 U.S.C. § 294.⁵ Specifically, section 294 authorizes either submission to arbitration by execution of a contract, comprising an "arbitration clause" whereby parties preemptively attest their intent to arbitrate, or by a written agreement to arbitrate, which may be executed independently of the contract either before or after the dispute arises.⁶ Section 294 has also been extended to include interference claims⁷ and questions of inventorship.⁸

As can be expected, it is uncommon for an agreement to arbitrate to be executed post-dispute, as it will inevitably become much more difficult for competing or disputing parties at that stage to reach a written agreement on the logistics of the arbitration. Accordingly, most arbitrations find their authority in arbitration clauses that are executed pre-dispute, which are often added to patent license agreements and research and development contracts.⁹ As will be discussed below, there are many potential benefits associated with arbitration that may prove advantageous for both sides of a patent dispute. Likewise, there are concerns that both sides should take into consideration before entering into an arbitration agreement or otherwise submitting a patent dispute to arbitration. Overall, however, arbitration warrants serious consideration as an effective alternative means of patent dispute resolution when a properly drafted arbitration clause is used to preserve a party's best interests.

For example, the costs of arbitration, while not insignificant, are not nearly as high as the costs that parties may incur during years of patent litigation.¹⁰ In addition, since the decision of the arbitrator is binding, the time for resolution of a patent dispute via arbitration can be as short as a matter of months. In contrast to litigation, which can involve multiple layers of appeal, following the issuance of an award in arbitration the parties may continue with their business activities with the assurance that the dispute is finally settled and will no longer affect or impede their business plans. Moreover, since the parties to the arbitration pick the arbitrators, they have a better opportunity to ensure that the decision maker is knowledgeable in both the field of patent law and the technology at issue, avoiding some of the uncertainty associated with Markman hearings and jury decisions on validity and infringement.¹¹ Finally, as arbitration is private, the parties do not need to be concerned that challenges to their business practices and/or the validity of their patents will be broadcast throughout the industry, to their clients, or to their competitors.

There are, however, some negative aspects to arbitration. For example, since discovery is limited by the discretion of the arbitrator, parties on either side may have difficulty making their case, as they may not have access to the huge sum of documents normally acquired during pre-trial procedures in litigation.¹² In addition, although section 294 states that the award granted "shall be final and binding between the parties to the arbitration,"¹³ the courts have not yet determined whether any finding of invalidity of the patent shall be binding on the patent holder for future disputes or will hold any weight in future court or in United States Patent and Trademark Office ("USPTO") proceedings.¹⁴

This paper explores the general principals of patent arbitration under U.S. law and weighs the benefits of using arbitration as a means of resolving patent disputes against the potential disadvantages that may be associated therewith but have yet to be decided by the courts. Specifically, Part II of this paper addresses the establishment of the Federal Arbitration Act and the general principles of arbitration. Part III addresses the specific application of arbitration to patent disputes. In Part IV, the authors discuss the pros and cons associated with arbitration of patent disputes, as compared to litigation, and Part V presents a framework for establishing agreements to arbitrate patent disputes.

II. Arbitration in the United States

The Federal Arbitration Act ("FAA")¹⁵ was enacted to codify a "national policy favoring arbitration and [to place] arbitration agreements on equal footing with . . . contracts."¹⁶ The FAA ensures that agreements to arbitrate are "valid, irrevocable, and enforceable," provided their subject involves "commerce."¹⁷ An agreement to arbitrate under the FAA must be present, either as part of a written commercial contract or as a written agreement separate from the contract itself, stating that the parties will submit to arbitration for an existing controversy.¹⁸ This "right" to contractually agree to arbitrate disputes extends to matters of both state and federal jurisdiction.¹⁹

A. Determining the Validity of an Agreement to Arbitrate

As is standard with arbitration agreements, any such clause or agreement is valid, irrevocable, and enforceable absent any ground that exists at law or in equity for revocation of a contract.²⁰ "Challenges to the validity of [an] arbitration agreement upon such grounds as exist at law or in equity for the revocation of a contract" can be divided into two types."²¹ The first type challenges the validity of the arbitration clause itself.²² The second type "challenges the validity of the contract as a whole."²³ Challenges to the validity of the contract as a whole may involve a challenge to the entire agreement; for example, a claim of fraud in the inducement, or a challenge to the illegality of a single provision that would thus render the entire contract invalid.²⁴

B. Severability of Arbitration Agreements

As a matter of substantive federal law, an arbitration agreement is severable from the remainder of the contract.²⁵ In other words, the validity of the arbitration clause is to be determined independently of the validity of the contract with each type of challenge being decided separately.²⁶ This principal is internationally recognized as the "doctrine of separability."²⁷ If the challenge is to the validity of the arbitration agreement itself, for example a question pertaining to the formation of the agreement to arbitrate, the federal courts may adjudicate it.²⁸ However, the statutory language of the FAA does not permit federal courts to consider challenges to the validity of the contract as a whole, including, for example, fraud in the inducement.²⁹ The issue of a contract's validity is to be considered by the arbitrator in the first instance.³⁰ Accordingly, the FAA provides that if any issue that is subject to an arbitration clause is brought in a proceeding before any court of the United States, the court shall, upon application by one of the parties, stay the trial of the action until the arbitration has been conducted in accordance with the terms of the agreement.³¹

C. Competence-competence?

There is a principal applied in International Commercial Arbitration recognized as "competence-competence," which stands for the notion that the arbitrators themselves are granted authority by the parties to determine the validity of the arbitration agreement.³² However, this international principal has not been generally recognized by the United States federal and state courts in its strict sense.³³ Instead, the United States Supreme Court has relied on section 4 of the FAA for jurisdiction to review the validity of arbitration agreements.³⁴ Specifically, section 4 states:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court [with jurisdiction] . . . for an order directing that such arbitration proceed in a manner provided for in such agreement . . . upon...