Arbitrating the Patent Case Part IV: Crafting the basic arbitration clause

In earlier articles in this series we examined the types of patent-related cases most suited for arbitration, whether to use administered arbitration, and the considerations for determining who to choose as an arbitrator. In the next few articles we will consider drafting the arbitration clause for a possible patent arbitration. As noted, that arbitration is most likely to arise from a patent license, employment agreement or development agreement.

Let’s begin with what not to do. The easiest approach to an arbitration clause is to simply borrow the one out of the last agreement with an arbitration clause someone in your office did and copy it. I have seen some pretty strange and even contradictory arbitration clauses. I am convinced fairly mindless copying explains how they came into being. Let me give you an example, only slightly changed from one I was once called on to deal with:

Any disputes between these parties about this contract shall be subject to binding arbitration under the Federal Arbitration Act and the Minnesota Revised Uniform Arbitration Act. Before arbitrating, the parties agree that they will try to settle the case through mediation. If they cannot so settle this matter, they will each pick an arbitrator and the arbitrators they pick will pick a third arbitrator. The prevailing party will be awarded its attorneys’ fees and costs.

Right away, you are set up to possibly have to litigate over this clause. First of all, the federal act is actually different than the state act, so you don’t have consistent requirements. Second, you don’t really have a set of rules to follow, just statutes. The Federal Arbitration Act is quite brief and does not address procedural nuts and bolts like AAA or other rule-making bodies’ rules do. Third, you don’t have anyone to administer the arbitration. Fourth, how long do the parties have to mediate? What if one party refuses to mediate? Fifth, what if one party refuses to pick an arbitrator? Do you really want to have arbitrators appointed by the parties? What if one of them is your opponent’s brother? Who will decide whether arbitrators have to be impartial or are impartial enough? And so on.

There is a better way.  Let’s begin with the basics and then go from there. To have an arbitration clause that will avoid litigation over the clause itself, begin with the standard form AAA clause. (Go to adr.org to get it.) Recognizing that a patent dispute may be involved,  you will include a reference to AAA’s supplementary patent rules as well. Then decide where the arbitration will be (your city, your opponent’s city or a neutral city) and list it. Finally, decide whether you will have a single arbitrator or a panel of three. You will end up with this:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules and the AAA Supplementary Rules for the Resolution of Patent Disputes for any patent issues submitted. Judgment on the award rendered by the arbitrator[s] may be entered in any court having jurisdiction thereof. The arbitration shall be before a [single arbitrator] [panel of three arbitrators] in [insert city].

This works because it incorporates the AAA’s commercial and patent rules, which fill in the gaps and provide a framework of rules and procedures for the entire arbitration. It also takes advantage of cases over the years that have found this type of clause is sufficient to put all controversies related to the contract into arbitration, including most contract formation issues.  Make sure that you are committed to having everything resolved in arbitration if you go this route. By incorporating AAA rules, even the question of arbitrability is for the arbitrator. But avoiding court is what you were hoping to do, and this should do that for you.

The AAA supplementary patent rules provide a useful structure for identifying and determining issues that typically arise in a patent dispute. Thus, the patent rules require consideration of confidentiality agreements, disclosures of claims claimed to be infringed and devices claimed to infringe, provision of patent file histories, an element-by-element claim chart, provision of invalidity contentions, disclosing claim constructions, scheduling a claim construction hearing if appropriate, exchange of expert reports, and the like. Note that the supplementary rules only mandate consideration of certain issues and procedures. But they are not as rigid as the local patent rules in many jurisdictions that require detailed disclosures, claim constructions and other proceedings that may or may not make sense in every case. The arbitrator(s) and parties are still able to create a balance between the expense and the value of a disclosure or procedure in ultimately determining the case.

Thus, in a fairly simple royalty dispute, there may be a question as to whether certain devices actually are covered by the licensed patent claims and therefore subject to royalty payments. But it may or may not be necessary to have a detailed claim construction hearing when, in fact, only one element or two are at issue. None of the steps often mandatory for a patent case are mandatory in arbitration, so the parties and arbitrators can craft a structure for the case to “fit the process to the problem.” This will save time and money so the parties can get the dispute decided quickly and get back to business.

In the next article, we will look at some possible “improvements” to the more standard arbitration clause. And we’ll look critically at whether such improvements are a good idea.