Should I litigate or arbitrate my IP/IT disputes?

Technology, media and telecommunications (TMT) transactions are ever increasing in number and complexity. The associated TMT and IP/IT disputes are often brought before the national courts. However, litigation is not always well-equipped to take account of the distinctive elements of these disputes. Arbitration could be advantageous in resolving such disputes, particularly where the parties come from different jurisdictions or the disputes relate to different national IP rights.

Therefore, parties should carefully consider when to litigate or arbitrate IP/IT disputes.

1.     (When) can I arbitrate IP/IT disputes?

Contracts, and in particular TMT contracts, frequently explicitly specify whether any IP and IT issues will be subject to the jurisdiction of the courts or arbitral tribunals. However, it is not uncommon that issues related to data protection and data security may be left outside the contractual arrangements. In addition, pure IP disputes can sometimes arise between parties who have no contractual relationship.

In the absence of an express agreement between the parties, litigation is the default mechanism for resolving the disputes arising out of the underlying contract. In theory it is possible for the parties to agree to arbitrate, rather than litigate, a dispute, once one has arisen. In practice, however, when the parties are in disagreement about their contractual arrangements, it would be rare for them to agree to arbitrate. Therefore, parties should consider whether to litigate or arbitrate any potential IP/IT disputes at the time of negotiation of their contracts.

Disputes in the field of IP ownership and licencing are as a rule capable of being resolved by arbitration. However, there is great diversity in the approach to the arbitrability of IP disputes between the national legal systems. Therefore, parties should be extremely cautious when drafting arbitration clauses involving IP rights, particularly in respect of patents and trademarks, which require the involvement of the state.

2.    What are the disadvantages of litigation?

• Costs, delays, overly-intrusive disclosure and inflexible process

Litigation is a notoriously lengthy and expensive process. The formality of the proceedings does not leave much scope for the parties and their legal representatives to tailor the process, while their adversarial style often has a negative effect on the business relationships. Depending on the applicable jurisdiction, parties can get entrenched in costly and time-consuming disclosure and countless requests for further information or documentation. The distractions, uncertainties and costs associated with lengthy legal battles can disrupt any business but they are particularly burdensome to tech firms and start-ups. Data theft or IP infringement could affect the whole viability of a business, so it is of the utmost importance to resolve the dispute in an efficient manner.

• Inexperienced judges

Disputes that arise in high-tech fields require the attention of expert decision makers that are experienced in TMT and IP contracts and have had previous exposure to the laws and regulations that apply to them. It is often claimed that the lack of experienced judges in the technology field in litigation is the principal reason why arbitration is better suited to resolving complex technical or scientific disputes. That said there are jurisdictions where high-tech disputes are referred to specialist courts. Thus in England and Wales the Technology and Construction Court deals primarily with litigation of disputes arising in the field of technology and construction, while the Intellectual Property Enterprise Court (IPEC) handle cases relating to intellectual property disputes.

3.      What are the advantages of arbitration?

• Party's right to appoint an arbitrator

Irrespective of the type of dispute arbitrated, arbitration provides some well-known advantages. One of the most important features of arbitration is the parties' freedom to choose their arbitrators. Indeed many parties opt for arbitration because they want their disputes to be decided by the experts in a particular field.

• Deciding multi-jurisdictional disputes in a single arbitral forum

Another major benefit of international arbitration is that it is a forum which allows for disputes related to different rights, for example different national IP rights, to be resolved in a single set of proceedings rather than in multiple domestic proceedings before the courts of the respective countries. Thus parties avoid the risk of having to deal with contradictory decisions due to inconsistent findings of national courts.

• Cost and time efficiency

There are also considerable practical and financial advantages associated with resolving all disputes in a single forum, such as the involvement of fewer local counsel, avoiding multiple production of evidence, avoiding calling witnesses and experts in multiple proceedings, etc.

• Flexibility of the arbitration proceedings

In addition parties are free to select the language of the proceedings and agree to hold the hearings at any location they consider appropriate. The arbitration proceedings can also be tailored to accommodate the specifics of IP/IT disputes, so that they tend to be faster and better suited to address the parties' needs.

• Confidentiality

Furthermore, arbitration is by nature confidential, so where parties are concerned about preserving the confidentiality of the proceedings and where the cases are particularly sensitive because they relate to important know-how, trade secrets, financial data, or new product or market information, arbitration might be a more appropriate forum than litigation.

• Arbitrator's power to decide a case by reference to what is fair and just

Another unique feature of arbitration is that parties can authorise arbitrators to decide a case by reference to general notions of fairness and equity, rather than in accordance with a strict application of legal rules. Parties should carefully consider whether to grant arbitrators such power. On the upside, arbitrators deciding a dispute as amiable compositeurs might be able to overcome certain shortcomings of the legal rules. For example, it would not be an overstatement to say that often law makers struggle to keep up with the developments in the IT sector. Authorising arbitrators to decide a dispute as amiable compositeurs, however, has its disadvantages. Among other things, it could lead to a surprising outcome and increases the unpredictability of the decision.

• Universal enforceability of arbitral awards

Finally, probably the greatest advantage of arbitration is that, in contrast to court judgments, arbitration awards benefit from almost universal enforceability. Arbitration awards are enforced under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the 1958 New York Convention), to which most countries worldwide adhere.

4.    Are there any disadvantages of arbitration?

Although arbitration has considerable advantages, it should not be perceived as a one-size-fits-all method for resolving IP/IT disputes. Whether arbitration is the right forum for deciding a tech dispute would depend on a number of factors, such as the complexity of the dispute, whether the parties' priority is to preserve their business relationship, whether they want to have the right to appeal the decision, the ability, cost and speed of obtaining interim injunctive relief, the importance of preserving the confidentiality of the proceedings, etc. In light of this, parties should be aware of the downsides of arbitration.

• No pre-action protocols and/or disclosure of information

Most arbitrations involve only the request for, and exchange of, documents and usually there is no extensive disclosure (which is considered to be an advantage in cases with commercially sensitive information). However, without considerable pre-hearing disclosure, parties can find themselves unprepared about what witnesses will say, what documents exist or what information the other side holds. In complex matters or matters where a party relies on information exclusively in the hands of the opposing or third parties, arbitration may not necessarily be the preferred method of dispute resolution.

• Difficulties obtaining emergency / interim injunctive relief

Probably the single biggest disadvantage of arbitration when dealing with IP/IT disputes is considered to be the ability to obtain provisional or interim measures quickly or at all. In tech matters, especially when dealing with IP infringement, data theft and data security issues, it is of utmost importance that interim injunctive relief is obtained without delay (to learn what remedies are available if your company data has been stolen click here). Often following the grant or denial of interim injunctive relief technology disputes are settled or otherwise resolved. The arbitration rules of some arbitration institutions now allow the parties to seek emergency measures even before the constitution of the arbitral tribunal. While emergency arbitrators have the authority to grant orders for interim injunctive relief, they lack the coercive powers, which courts have, in order to compel recalcitrant parties to comply with a decision. Whether interim measures ordered by an arbitral tribunal or an emergency arbitrator are enforceable depends largely on the national laws of the jurisdiction in which enforcement is sought. When negotiating an arbitration clause, parties should carefully select the seat of arbitration and the institutional arbitration rules to ensure they have the option to turn to an emergency arbitrator whose decision will be enforceable.

• No appeal mechanism

Parties often chose arbitration because it is binding and the arbitral awards are usually not subject to appeal. That said, there are few jurisdictions or institutional arbitration rules that allow for appeal of arbitral awards. Thus the English Arbitration Act 1996 permits an award to be challenged on the basis that it was made without jurisdiction (section 67) or where there has been a serious irregularity that has caused or will cause substantial injustice to the party (section 68). Furthermore, a party can appeal on a point of law (section 69) if this right has not been carved out by the arbitration agreement. With the above exception in mind, if parties want to have the right to appeal, they should opt for litigation rather than arbitration.

• No third-party effect

Due to the contractual nature of arbitration, the arbitral award and any declarations made therein are binding only upon the parties in the arbitration proceedings and have no effect in respect of third parties. Thus, in a dispute where, for example, a party wants to seek a declaration of an erga omnes (“towards all”) invalidity of an IP right, arbitration would not be the right forum as such a remedy would not be available to it.

 

To conclude, there is no straightforward answer to the question whether an IP/IT disputes should be resolved by litigation or arbitration. Each forum has its advantages and disadvantages. Therefore, careful consideration should be given to the suitability of each of these dispute-resolution methods when parties negotiate their contracts.

 

Our team would be delighted to discuss the benefits and risks associated with litigating or arbitrating in the context of your own business and contract requirements. We assist clients with contractual drafting, interpretation, enforcement, termination, renegotiation and amendment, ongoing contract management and risk avoidance. We also advise clients on the remedies available to them in the event of breach of contract, misuse of confidential information, data theft and infringement of copyright and database rights. For further information please do not hesitate to contact James Gorman or Petya Koycheva.