Intellectual property disputes: arbitrate or litigate?

February 2020 | SPOTLIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

February 2020 Issue

The value of intellectual property (IP) in international transactions is increasing as technological development continues to place the creation and exploitation of IP at the centre of international business. Consequently, the need to protect and defend IP rights is also on the rise.

In recent years, parties entering transactions involving IP have increasingly included arbitration clauses in their contracts. Arbitration is often considered a mechanism to resolve cross-border disputes in a cost and time efficient manner, allowing parties to maintain confidentiality over dealings and, hopefully, preserve business relationships. This can be a very appealing alternative to non-consensual court proceedings.

Despite the immediate appeal, arbitration is not always the best mechanism to determine all of the issues that arise between parties, and there is a particular risk with IP disputes. Before entering a contract, close consideration must be given to the likely nature of any potential dispute and the relationship between the parties when choosing an appropriate dispute resolution mechanism.

The rise of arbitration

Arbitration is a dispute resolution procedure in which parties agree on the manner in which their dispute will be resolved. For example, they select an arbitrator or panel of arbitrators, the seat of the arbitration, the governing law and the procedure for the arbitration.

The primary advantage of arbitration is that it can consider matters raised in many jurisdictions in one forum and an arbitral award is enforceable in most countries around the world. By contrast, court decisions are typically limited to the jurisdiction in which they were made. While it can be possible to enforce monetary awards extraterritorially through treaties or common law, injunctive relief, which is often highly valuable in IP disputes, is typically unenforceable abroad. Therefore, arbitration is appealing as it can resolve disputes in multiple jurisdictions in one hearing.

Other benefits of arbitration are that the parties can select a panel of arbitrators with technical expertise in the relevant field of dispute. This can shortcut evidence and minimise the use of expert witnesses, saving costs. Further, the procedure for an arbitration is not subject to the practice prescribed in court rules and practice notes. The tribunal can adapt the procedure to suit the proceedings. However, the requirement that parties in arbitral proceedings be afforded procedural fairness means that arbitral tribunals often require that rules of evidence be followed in any event.

Finally, an arbitration is confidential. This can be attractive to parties who want to keep their business disputes private.

Is arbitration right for you?

A matter will not be referred to arbitration unless a valid arbitration agreement is in place. If an arbitration agreement is in place and a party wishes to arbitrate the dispute, the court must refer the matter to arbitration and stay any related court proceedings. As such, consideration must be given to the best method of resolving potential disputes in advance, as once the relationship between parties has deteriorated, it can be difficult to negotiate an arbitration agreement.

Arbitration is an appealing dispute resolution mechanism for parties which: (i) are located in different jurisdictions; (ii) require industry-based expertise to determine disputes; (iii) are concerned about maintaining confidentiality over commercially sensitive information or trade secrets; and (iv) want to avoid creating legal precedent in resolution of a dispute.

However, IP disputes present arbitrability challenges which can make arbitration undesirable, depending on the jurisdiction in which the proceedings may be heard and the award may be enforced.

Arbitration has its limits

IP rights exist, pursuant to a statute in each jurisdiction, such as the Copyright Act 1968, the Patents Act 1990, the Trade Marks Act 1995 and the Designs Act 2003 in Australia, for example, and are granted by a government authority. As a result, some jurisdictions have determined that issues such as validity and ownership of IP can only be determined through the procedure set out in the relevant law, that is, by the court system or patent/trademark office. In these jurisdictions, arbitral awards pertaining to these matters will not be enforceable and can be set aside on reasons of public policy.

By contrast, other jurisdictions have held that an arbitral tribunal can consider issues such as validity and ownership. However, any decision by the arbitral tribunal on these matters will only be binding on the parties to the arbitration and will not affect third parties.

Therefore, when considering an arbitration clause in a contract, it is essential to determine, if possible, where any award may need to be enforced and the risk that the relevant jurisdiction will set it aside, thereby rendering the proceedings futile. Further, parties should consider whether it is important for the decision to be binding not just on the other party to the contract but on third parties, in which case a court decision is likely necessary.

Think carefully about confidentiality

While the prospect of a confidential proceeding can also be appealing before a dispute arises, in practice parties often want to make clear to the public that they are taking steps to protect their IP. The strict confidentiality requirements of arbitration mean this is often not possible. Therefore, a party can be using IP in breach of the contract and the enforcing party is not able to make any statement that they are taking steps to stop this.

Things to consider

Parties to an agreement should carefully consider the appropriate dispute mechanism to include in the contract before signing. This can be very difficult and involves a significant amount of ‘forecasting’ to try to ascertain the likely disputes which might arise and whether arbitration will be suitable and desirable. While this analysis is challenging, it is essential to ensuring that future disputes are appropriately and effectively resolved.

Nina Fitzgerald is a partner and Maggie Kearney is a lawyer at Ashurst. Ms Fitzgerald can be contacted on +61 2 9258 6778 or by email: nina.fitzgerald@ashurst.com. Ms Kearney can be contacted on +61 2 9258 6095 or by email: maggie.kearney@ashurst.com.

Nina Fitzgerald and Maggie Kearney

Ashurst