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With companies watching the bottom line more now than ever, the high litigation costs associated with the enforcement of intellectual property rights are an attractive target. One way to reduce the financial burden is to use arbitration for resolution of conflicts. Prior to 1925, agreements to arbitrate future controversies were not enforceable, and agreements to arbitrate existing controversies could be revoked by either party before the award. In 1925, following various states’ lead, Congress passed the Federal Arbitration Act. This new act had little effect in the arena of intellectual property disputes, though, for shortly after passage of the Arbitration Act various courts agreed that the question of validity and infringement of patents could not be arbitrated, although related issues, such as breach of a license agreement, could be. The courts believed that a patent is a special governmental grant of exclusive rights, so its validity is a matter of public interest and any challenge should be in open court rather than in private proceedings. Over time patent owners recognized that arbitration might be a better way to resolve disputes rather than litigation, which was slow, expensive, and had to be tailored for an audience of non-specialist judges and juries. Finally, in 1983, the Patent Act was amended to specifically allow for arbitration of patent infringement and validity. PUBLIC INTEREST The law was drafted to recognize the public interest in patents, incorporating some special conditions for their arbitration. The statute specifically states that the arbitration will have no effect on any other person, meaning that a decision either for or against the patentee cannot be used in later proceedings A particularly interesting twist in patent arbitration is that the arbitration award can be modified later if future litigation on the validity of the patent contradicts assumptions or findings that the patent was valid in the arbitration proceeding. This means that the patent owner indefinitely risks the loss of future income if there is a possibility that its patent will be invalidated in a later court proceeding. The same is not be true if the patent was held invalid in the arbitration but valid in the later court case; in that case, the patentee will not be allowed to go back and recover damages from the infringer accused in the arbitration. This lopsided arrangement is so that the infringer who loses in arbitration will be on the same footing as voluntary licensees, who, as a general rule, may challenge the validity of a patent even as they are paying for the right to use it. COPYRIGHT Although arbitration of patents is now specifically authorized by law, arbitration of copyrights is a different matter. Copyrights are quite similar to patents — both a governmental grant of rights — but Congress has not passed a companion provision for copyrights. Like patents, copyright claims were originally thought nonarbitrable. More recently courts have held that an arbitrator may decide questions of copyright validity and infringement when it is part of a contract, similar to the early interpretation of patent arbitration. The courts have not decided, though, whether an arbitration decision on copyright validity or infringement is enforceable in the absence of an explicit law from Congress. TRADEMARK Trademark, on a different footing from patent and trademark because it is not a federal grant of rights (trademark registration is a recognition of existing rights, not a grant of rights), has generally been amenable to arbitration. All arbitrations, whether over intellectual property rights or for other kinds of disputes, are given special treatment by courts. If there is an existing agreement to arbitrate but one party files a lawsuit rather than arbitrating, the court will stay the legal proceeding and order the arbitration to proceed. A party unhappy with the outcome of an arbitration will probably have very little success in reversing the arbitration award; courts are allowed to reverse an arbitration award only where the arbitrator’s decision was outside the scope of his or her authority, it was a manifest disregard of the law, or there was some kind of misconduct by the arbitrator or fraud in the process. How do parties end up arbitrating a dispute? Quite often arbitration provisions are written into all kinds of contracts. Many contracts, including shrink-wrap and click-wrap licenses and Internet user agreements, include arbitration clauses, so you may find that you are obligated to arbitrate when you did not deliberately choose to do so. If the contract is a negotiated one, the scope of the arbitration can be specifically fashioned to suit the parties’ needs. Arbitration clauses are often written broadly to apply to any controversy “arising out of or relating to” the contract, generally interpreted by courts to cover almost any future dispute having any relationship to the agreement whatsoever. The parties may instead elect to write a very narrow scope for the arbitration, for example, solely to decide whether claims made in future advertising are truthful. Parties can specify how many arbitrators will hear a dispute, whether it will be binding or nonbinding, or add any other provision they believe helpful in the circumstances. Of course, there does not have to be a pre-existing agreement to arbitrate. Parties who find themselves in conflict can also agree to arbitrate their dispute rather than going to court. ADVANTAGES There are many advantages to arbitration. Arbitration is generally must faster than court proceedings where civil cases take a back seat to criminal cases, and the parties can even specify in their arbitration agreement how quickly it must be done. Arbitrations are generally less expensive than court cases, given their shorter time frame and the fact that there is usually less discovery allowed in arbitrations. In most intellectual property cases the parties will specify that the arbitrators must be specialists in the field, adding some assurance that the decision maker will have some familiarity with the technology involved. Court cases are never confidential, but arbitrations can be if the parties so desire. Arbitrators are also generally more flexible in scheduling than courts. Arbitration might be especially advantageous in international disputes, allowing the parties to agree on terms and conditions for resolving the dispute rather than relying on uncertain and unfamiliar foreign law principles. DISADVANTAGES There is a big disadvantage to arbitration, too. There is virtually no appeal process for a binding arbitration decision. Courts must confirm an arbitration award if they can find any rational basis for the award, and may not vacate it even if there are errors in interpretation of the law or mistakes in fact finding. It is therefore quite unlikely that clear errors in the decision can be rectified. In some instances you may prefer the public court proceeding that carries with it the court’s imprimatur. A court judgment of patent validity is a strong endorsement of your patent’s strength that can probably be used to your advantage in future court challenges, something that you cannot do with an arbitration award. Arbitration is a fact of modern day commercial business. Make sure you appreciate all of the advantages and disadvantages to arbitration before deciding whether you want to incorporate an arbitration clause into you intellectual property contracts. Michael Cantor is a partner and Pamela Chestek is an associate at Cantor Colburn ( www.cantorcolburn.com), a Connecticut intellectual property law firm with offices in Bloomfield and Norwalk. If you are interested in submitting an article to law.com, please click herefor our submission guidelines.

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