Make Sure Your Arbitration Clause Covers IP Disputes

Mandatory arbitration clauses in licensing agreements as the exclusive means of resolving licensor-licensee disputes are becoming more common. Typically such clauses are phrased in terms of requiring "any controversy or claim arising out of or relating to this contract, or breach thereof" to be settled by binding arbitration. A recent US Court of Appeals decision has revealed that this language can in certain situations be insufficient to bring into the arbitration obligation's scope intellectual property-related disputes that may arise between the parties. NCR Corporation v. Korala Associates, LTD. (6th Cir. 2008) (holding that resolution of plaintiff's copyright infringement claim was not dependent on reference to or interpretation of the license agreement, and therefore such claim is not arbitrable under an arbitration clause requiring arbitration of "any controversy or claim arising out of or related to this contract").

From the licensor's perspective, expressly capturing intellectual property disputes in the operative license agreement has some inherent advantages. First, because arbitration as a general matter only affects the immediate parties to the dispute, an arbitrator's intellectual property invalidity ruling would only apply as between the parties, and would not serve to invalidate the licensor's intellectual property generally or render it unenforceable as against all other parties. This is, at least, the rule in the US, UK and Germany. (It's worth noting however, that some jurisdictions, such as Japan, France, Italy and Spain, permit parties to arbitrate issues of infringement but not to arbitrate the validity of registrations; and Switzerland goes in the complete opposite direction and enforces arbitral rulings invalidating patents, trademarks and designs, as a general matter.) Second, arbitration enables the parties to select a subject-matter expert with relevant experience and knowledge of not only the technology at issue but also the operative rules of law of the controlling jurisdiction, thus potentially enhancing the quality of the final decision and reducing or eliminating the need to retain experts. Third, arbitration proceedings can usually be conducted under strict obligations of confidentiality. The licensor may have a strong interest in avoiding the negative publicity that could be engendered by a noisy and protracted court case with one of the licensor's customers. Trade secrets and other confidential or sensitive matters can be more readily protected from disclosure in an arbitration as opposed to a court case, where all documents and proceedings are required to be open and publicly available (absent a court-issued protective order, which requires time and resources to secure). Finally, there is the 1959 New York Convention, a treaty, ratified by over 140 countries, providing for the recognition and enforcement of foreign arbitral awards. No similar treaty or convention providing for similar recognition of foreign court judgments exists, and the US, importantly, is not a party to any such convention or treaty for foreign judgments.

In order ensure the arbitrability of intellectual property disputes and avoid the result of the Korala Associates decision, licensors should consider language along the lines of the following (with capitalized terms referring to specially defined terms in the license agreement):

"Any controversy, claim or dispute between the parties arising out of or relating to this Agreement, the Licensed Technology, Support Services, or Intellectual Property Rights, including controversies, claims or disputes involving the validity or infringement of Intellectual Property Rights, shall be resolved by binding arbitration conducted in accordance with the rules of the World Intellectual Property Organization's Arbitration Rules …."

Also, licensors should make sure they preserve the ability to pursue injunctive relief at any time in any court of competent jurisdiction, in order to have the right, notwithstanding the obligation to arbitrate disputes, to seek an emergency order preventing incipient or ongoing acts of infringement.