Arbitrating the Patent Case Part V: Crafting the 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 last article, we began looking at drafting the arbitration clause itself. I suggested it was not a good idea to simply copy the last arbitration clause someone in your office used.  Instead, I suggested that you look to the standard AAA clause (or other arbitration administrator), then incorporate the supplemental patent rules, decide on the number of arbitrators, and the location of the proceedings. This should avoid having to go to court to interpret the arbitration provision and also avoids disputes about what issues will be arbitrated.

Because arbitration is a creature of contract, the parties can contract for virtually any other procedural or other matters concerning the arbitration they can agree to. There are basically two schools of thought on how elaborate your arbitration clause should be. One is to basically rely on picking a good arbitrator or arbitrators who will be able to work with counsel to fashion a process that will fit the dispute and be as efficient yet fair as possible. After all, at the time you are drafting the clause, you won’t really know exactly what disputes will arise or how much money will be involved. A good arbitrator can take this all into account when formulating the plan for how the arbitration will proceed.

The other school of thought is that you have a chance to create an arbitration provision that will make sure the process is the way you would like, so why not use it? I suspect this school of thought is particularly prevalent among those who didn’t feel their last arbitration lived up to the promise of being efficient, fair and effective for whatever reason.

So what are the kind of additional things you can do with your clause to control the process? These range from pretty good ideas to what may be unfortunate micro-management.

One thing that is a good idea to cover, particularly if the contract documents don’t otherwise cover it, is choice of law.  Determining what law applies can be expensive and legally complicated – something you want to avoid in arbitration if you can. Thus, to the extent you can reach agreement, you will want to say that the substantive law of X state applies to the arbitration, but not conflict of law principles. Now everyone knows what law to look at without having to brief it and have the arbitrator decide. This can be fairly important in license and employee agreements because state law can vary on controlling legal principles in these areas.

Another possible addition was mentioned in an earlier article. If you think the dispute could be large enough to justify a panel of three arbitrators, but can’t be sure, you could provide that disputes involving a claim or counterclaim of, say, under $2 million will be decided by a single arbitrator and disputes over $2 million will be decided by a panel of three.  This isn’t a perfect solution. The exact amount in dispute may be not be known at the beginning of an arbitration so one party or the other might manipulate the demand to either invoke or avoid use of a panel, depending on what advantage they think that might hold for them.  But it still is the best way to balance the cost versus the benefits of a full panel.

Other possible provisions are a little more daring. One is to require a “baseball” style of arbitration.  In this type of arbitration, each party proposes a dollar amount for the Award.  (In arbitration, what lawyers would normally call the damages awarded – or not – is called an Award). The arbitrator is then required to hear the evidence and choose one or the other.  The theory of this style of arbitration is that the parties will try to put forth the most reasonable claim justified by the evidence, foreclosing overreaching and the like. It also appeals to those who think arbitrators tend to “split the baby.”  I have not observed that arbitrators do this any more than courts or juries. But requiring the arbitrator to choose one or the other makes sure he or she will not simply split the award. He has to pick one side or the other.  Those who are wary of this arrangement suspect it injects too much gamesmanship into the arbitration. Most arbitrators don’t like baseball-style arbitration. They want to reach a fair award, not choose what may merely be the least unfair.

There is another whole series of things that may be added to the arbitration clause to ensure the process is the way the parties want it – or at least thought they did at the time they drafted the arbitration clause. A common example is to require that the matter be heard and an award issued within some short time period, often 90 days or so. You will want to be careful with this one, particularly if the case might require an even modestly complex exchange of documents and information. That takes time, and 90 days or less might be pushing it.

It is not at all uncommon for parties to seek to either allow or limit discovery. Generally, arbitration rules foresee the arbitrator overseeing an exchange of documents to provide information. Depositions are not uniformly allowed by arbitrators and are usually restricted.   Some parties, therefore, write into their arbitration clause that a certain number of depositions will be allowed. Others – probably those who have seen their arbitration become as deposition laden as a federal civil case – go the other direction and restrict them to one or two per side or the like. Others are more convinced that a good arbitrator or panel will be in a better position to judge just how much discovery is necessary given the size of the dispute and issues involved after there is a live dispute than someone drafting a clause when one can only guess what issues may arise.

In the next article in the series, we will explore other possible additions to the clause. Some at first seem like a good idea, but often are not.