I think by using ADR they are maximizing the benefits to be achieved in SETTLING IP disputes between e.DIGITAL and DIGeCOR .

Philip J. McConnaughay

Dean and Donald J. Farage Professor of Law

The Pennsylvania State University Dickinson School of Law

This paper addresses that aspect of the 2002 SOFTIC Symposium that concerns the use

of private rather than public (i.e., judicial) mechanisms of dispute resolution for the resolution of

intellectual property (“IP”) disputes. The principal private mechanism with which this paper is

concerned is arbitration. Arbitration is the private, non-judicial adjudication of a commercial

dispute, usually by a panel of one or three private arbitrators appointed by the parties, which

results in a binding outcome. The other private mechanism with which this paper is concerned is

mediation. Mediation (or conciliation) is the process by which a neutral third party attempts to

assist disputing parties in reaching a voluntary resolution of their dispute. Collectively,

arbitration and mediation (and other private mechanisms of dispute resolution, such as friendly

negotiations, executive meetings, mini-trials) are known as “alternative dispute resolution” (i.e.,

alternatives to public courts), or “ADR.” All methods of ADR, including arbitration, are

consensual in nature – the parties must have consented to the procedure before they can be

compelled to participate in the procedure and before public courts will defer to the procedure.

Arbitration and other forms of ADR typically are not imposed involuntarily.

This paper discusses two specific issues relating to the use of ADR for the resolution of IP

disputes: (i) the reasons why an owner or user of IP rights might or might not prefer to resolve

disputes concerning those rights by means of ADR, and (ii) whether or not disputes over IP

rights permissibly may be resolved by arbitration rather than by the government judiciary (i.e.,

the issue of whether IP rights are “arbitrable”). My discussion of the first issue is not specific to

any particular nation; my brief discussion of the second issue reports on the state of the law in

the United States.

I. Reasons to Consider ADR for Intellectual Property Disputes

As a general principle, intellectual property rights are territorial in scope. The United

States Patent Act, for example, provides that the grant of a patent confers a “right to exclude

others from making, using, offering for sale, or selling the invention throughout the United.” U.S. courts also hold that U.S. copyright law also does not apply beyond U.S. territorial

States

boundaries, even though the U.S. Copyright Act is not explicit on the point. The same principle

is generally true of trademarks (although infringing activity in the case of trademarks sometimes

is found to occur outside of U.S. territorial boundaries), and trade secrets.

At the same time, contracts and licenses concerning IP rights and transactions frequently

create and extend related legal rights and obligations beyond a single nation’s territorial

boundaries, and, because of international treaties and the harmonization of national laws

concerning intellectual property, the same IP rights increasingly are recognized and protected

simultaneously in many different nations.

A. Certainty as to Forum. As with any commercial transaction implicating the laws and

judicial power of several different jurisdictions, one of the primary reasons in an IP transaction

for including a contractual clause mandating the ADR rather public court adjudication of any

disputes is simply to provide the parties with the certainty that, in the event of a dispute, they will

be submitting their dispute to a simple forum for resolution rather than potentially to several

different forums in several different jurisdictions simultaneously.

Without such an arbitration

clause,2 one party or the other might file a lawsuit in each of several different jurisdictions

having power to apply its law or its judicial power to the parties or transaction. Courts of the

United States, as in most other nations, will refuse to hear a lawsuit that is within the scope of a

valid contractual arbitration clause, and will instead refer the parties to arbitration.3 Thus, such

clauses generally are viewed as indispensable by commercial parties whose transactions are

subject to the laws or judicial power of more than one nation or jurisdiction.4

B. The Relative Speed of ADR. Properly managed, arbitration and other ADR

mechanisms tend to provide speedier resolutions of disputes than public court adjudications.

This typically occurs either because the arbitration/ADR proceedings, unlike public court

adjudications, are able to commence immediately (i.e., there is not an entire docket of cases

competing for the attention of the adjudicator), or because the procedural flexibility of

arbitration/ADR results in the proceeding taking less time. The speed of dispute resolution is

always an important consideration when one of the goals is to reduce the possibility of an

extended disruption of business, but this can become an especially important consideration when

the subject matter of the dispute is intellectual property. For example, if the dispute concerns

computer software, of a microelectronics patent, or a biotech product, public court adjudication

(or an improperly managed arbitration) might take longer than the life cycle of the product

involved. Successful mediation or an expedited arbitration can reduce this risk.5

Flexibility of Remedy. Private mechanisms of dispute resolution offer the possibility

of remedies and outcomes that incorporate novel and innovative features – such as revised or

imposed royalty rates, cross-licenses, and other creative business solutions – that typically are

not available as remedies in public courts. This is particularly true of mediation, where the

parties’ consent ultimately governs the outcome, but it also can be true of arbitration if the

parties agree beforehand (whether in their contractual arbitration clause or in a later agreed-upon

charge to the arbitrators) that the arbitrators shall have the power to fashion whatever remedy

they believe just and appropriate. This sort of flexibility could contribute to the satisfactory

resumption of relations between the disputing parties following the resolution of their dispute.

II. Reasons to Avoid ADR for Intellectual Property Disputes

Frequently, the ADR of IP disputes simply is not available: ADR depends on the consent

of the parties to the dispute (whether before the dispute arises, as in an arbitration clause

included in the contract governing the transaction, or after the dispute arises, as in a written

agreement to submit an existing dispute to arbitration), and many IP disputes – particularly

infringement claims – are between parties with no pre-existing relationship and who are not

inclined to agree to submit their dispute to ADR.

In other circumstances, even in the context of an existing relationship or prospective

transaction, there still may be reasons why one party or another might not want to agree to the

resolution of any IP disputes by arbitration or some other form of ADR. Some of these reasons

include the following:

A. Concern About the Need for Emergency Injunctive Relief. An IP rights holder may

believe that the complete protection and vindication of the rights depends on the availability of

immediate injunctive relief (e.g., a Temporary Restraining Order or other form of injunction

forbidding the use or disclosure of the IP), and that such relief is more likely obtained from a

public court rather than from an arbitration tribunal. This perception suggests an exception to the

usual rule that arbitration and ADR are likely to result in speedier resolutions of IP claims than

public court litigation. Of course, injunctive relief also may be available from an arbitration

tribunal in the form of a “provisional” or “interim” order authorized by the procedural rules to

which the arbitration is subject, or from a public court before the arbitral tribunal has been

constituted, pursuant to special provisions in a nation’s arbitration law authorizing such relief.

However, with respect to this latter possibility of pre-arbitration judicial relief, a small minority

of courts in the United States refuse to provide such interim relief on the grounds that judicial

involvement of any kind in an arbitration – including the issuance of injunctions before an

arbitral panel is formed – violates the provisions of the Federal Arbitration Act and the New

York Convention requiring courts to refer to arbitration any disputes that are within the scope of

a valid written arbitration agreement.7 Although this is a distinctly minority position, this issue

should be anticipated and addressed in any arbitration clause governing disputes in which one or

more of the parties believes that injunctive relief may be important.

B. The Strategic Need for Precedent or Publicity. There are times when an IP rights

holder or an alleged infringer may desire a complete and public vindication of its rights. For

example, an IP rights holder about to embark on a series of adversarial license negotiations may

believe that the benefits of a favorable public judicial vindication of its rights (and the ability to

control the court in which vindication is sought

) outweighs the risk of no vindication or an

adverse ruling. Similarly, an alleged infringer with an allegedly infringing product may desire a

complete and public vindication of non-infringement as the only effective way to remove

consumer doubt about the product in question. Similar strategic purposes also may counsel

against ADR for IP rights in other circumstances.

9

III. The Arbitrability of IP Disputes in the United States

Before 1983, there was considerable uncertainty in the United States about whether

intellectual property rights were an appropriate and permissible subject of arbitration. Because

IP rights by their very nature include the power to preclude direct competition, courts tended to

rule that IP rights so implicated the public interest that only public courts, and not private

arbitrators, were authorized to resolve disputes concerning such rights.

That view has changed,

however, and today there is little doubt that all U.S. intellectual property issues are a proper

subject of binding private arbitration in the United States.

The new general rule is reflected explicitly in the U.S. Patent Act:

A contract involving a patent or any right under a patent may contain a provision

requiring arbitration of any dispute relating to patent validity or infringement arising

under the contract. In the absence of such an agreement, the parties to any existing patent

validity or infringement suit may agree in writing to settle such dispute by arbitration.