China - IP Disputes: To Arbitrate, Or Not To Arbitrate.
Legal Analysis & News - Asia Pacific - China - Intellectual Property - Dispute Resolution
2 November 2021
To arbitrate or not
Many IP related contracts now include arbitration clauses, or parties sometimes agree to submit IP infringement disputes to arbitration. There are a number of issues to consider before agreeing to arbitrate. They will need to be considered in light of the potential disputes the parties foresee or whether to enter into a submission agreement at all.
Why arbitrate an IP dispute?
There are a number of reasons why parties choose to arbitrate an IP dispute. These include:
Expertise – One of the key perceived advantages of arbitration is that parties can choose to appoint an arbitrator or arbitrators with expertise in the subject matter of the dispute. This can significantly reduce both the time taken to resolve a dispute as well as reduce the risk of an outlying decision from non-specialist courts.
Single forum - The territorial nature of IP rights means that most complex IP disputes have to proceed in multiple jurisdictions. Parties can very often be involved in litigation in multiple countries at the same time. Unlike commercial litigation, courts will not stay IP actions for foreign non conveniens, for the simple reason that the most convenient forum to determine validity or infringement of an IP right is the national court where that right is registered. Through arbitration, parties can resolve their disputes in a single forum and avoid expensive multi-jurisdictional litigations.
Procedural flexibility – The parties can agree to flexible procedures that are suited to the dispute. This could involve requesting the Tribunal to decide different issues serially or bifurcation of validity and infringement.
Time and cost - Having disputes decided by a specialist panel and in a single forum, along with procedural flexibility can save time and costs.
Confidentiality and secrecy - Arbitral proceedings and arbitral awards in Hong Kong are confidential unless the parties otherwise agree (subject to some exceptions). This can mean the fact that the parties are in a dispute does not become public. In patent cases, this can be advantageous to the patentee because any challenge to the validity of the patent can remain confidential. Further, in trade secret disputes, the rules of confidentiality make it much easier for the parties to present their case before an arbitral tribunal than in an open court. The whole proceedings can be closed rather than a cumbersome approach of opening and closing proceedings when issues involving trade secrets are to be dealt with.
Nature of award - Depending on the agreement between the parties, the parties can have flexibility by tailoring the award that is given by an arbitrator. The parties in dispute over how much is owed under a license could request the arbitrator simply make a finding as to amount owed (if any) rather than finding if patents are valid and infringed. This can be an advantage to both the patentee and the licensee. If the dispute was in court and the defence of non-infringement and/or invalidity are successful, this could be disadvantageous to both parties. If a patent is declared invalid, all third party competitors will be able make products falling in the claims of the patent. If the patent is found non-infringed, this will provide clear guidance as to how to manufacture work-arounds.
Enforcement – Court judgments are only enforceable on a patchwork basis around the world and, even where enforceable as to damages, injunctions granted by foreign courts are not enforceable in most countries. However, arbitral awards (including injunctions) are enforceable in most countries around the world under the New York Convention.
Why not arbitrate?
There are a number of reasons why a party may also chose not to arbitrate. These include:
Limited publicity – Sometimes a party wants to publicise a dispute. An IP right holder may want others to know it is enforcing its rights. An accused infringer may want to use the leverage of a public attack on validity of the IP rights holders as a bargaining tool. Once a defence challenging validity is filed it is often public and the grounds can be used by others.
Non-specialist judge – A party with a weak case may prefer to have the dispute decided by non-specialist judges. It also can be possible to drag out court proceedings through various interlocutory applications. Non-specialist judges also have a tendency to decide a case on their view of the perceived merits rather than technical arguments. These factors can both be strong incentives for defendants to prefer court proceedings. Some plaintiffs with weak cases on infringement or validity can also prefer non-specialist judges.
Multi-jurisdictional litigation cases can create “leverage” – For a well-funded party, suing in multiple jurisdictions and forcing the other side to defend multiple actions can make it financially impossible for a defendant to defend itself properly. This can force a party to an early settlement, or in some cases, bankruptcy.
Interim Injunctive relief. - Similarly, if a party can obtain an interim injunction from a court – such as in interim injunction against infringement or, as has occurred recently, an anti-suit injunction. These can be powerful tools to force a negotiated settlement that many parties are not willing to give up.
Other litigation advantages – Litigation in many jurisdictions can also have advantages over arbitration, such as in most common law jurisdictions, being able obtain full discovery of documents from the other side. In most arbitrations only limited document production is ordered. It is also generally difficult to obtain documents from third parties or to compel witnesses to attend.
Costs of arbitration can be high – Depending on the type of case, arbitration can be very costly, especially when the matter involves multiple parties. It is necessary to pay for the arbitrators and for the venues. For certain claims, for example, for unpaid royalties or franchise fees, a simple debt collection action in court, often where summary judgment would be available, might be much quicker and less expensive.
The issues are considered in more detail in Doug’s publication Intellectual Property in Hong Kong (available in loose-leaf and on LexisNexis Red) where Doug has from October 2021 included a Chapter on the Arbitration of IP disputes in Hong Kong.