Arbitrability of Commercial Patent Disputes in the United States

I、Introduction
When including arbitration provisions in patent agreements, careful consideration must be given to the seat of any arising proceedings. In analyzing various seats, parties will evaluate whether the domestic courts of a proposed seat are likely to enforce both the parties’ agreement to arbitrate and any resulting arbitral award. In the United States, parties can take comfort in the fact that the current legal regime for enforcing agreements to arbitrate patent matters is strong, as is the disposition toward award enforcement.
The use of arbitration and other forms of ADR to resolve domestic and cross-border patent disputes can present a more optimal approach to dispute resolution than traditional litigation for a wide range of potential business disputes. The generally applicable advantages of arbitration over litigation include typically shorter resolution timelines, the availability of procedural flexibility and the avoidance of potentially biased foreign domestic courts. The appeal of arbitration and other forms of ADR is amplified with respect to patent disputes, especially when the underlying technology is complex. The additional advantages of arbitration in the context of patent disputes include the ability to choose decision makers with relevant technological or industry backgrounds, more flexibility in how expert evidence is presented, and potentially greater protection for confidential information.
While some U.S. domestic courts were once resistant to the resolution of patent disputes through arbitration, there is now a clear statutory framework in the United States and deep precedent under which U.S. courts must support resolution of such disputes by arbitration. Domestic courts in the United States still occasionally struggle with arbitration for public policy reasons in certain employment and consumer settings, but those challenges are unlikely to impact the courts’ treatment of business to business, commercial IP disputes. Nonetheless, U.S. law poses special considerations for the arbitration of patent disputes and the enforcement of awards in such proceedings as discussed below.
II、The New York Convention
Arbitration is also favored as a means of resolving patent disputes because of the New York Convention (the “NY Convention”). Under that Convention, awards issued by arbitral tribunals are enforceable in most jurisdictions worldwide, i.e., it calls for the enforcement of arbitral awards in any signatory state issued in another signatory state. The Convention has been widely adopted by states, including the U.S., China and most of the UN member states. Article II(1) of the NY Convention provides for recognition of an international arbitration agreement “concerning a subject matter capable of settlement by arbitration,” thus raising the threshold question of arbitrability. A party can seek to vacate an award where the national court of enforcement determines that “[t]he subject matter of the dispute is not capable of settlement by arbitration under the law of that country.”
Most commercial patent disputes involve rights or obligations derived from contracts (e.g., assignments or licenses). Federal statutory law in the United States provides that these ownership disputes are arbitrable. Some disputes, on the other hand, involve rights that are derived from government entities (e.g., infringement or validity). In the United States, these patentability disputes are arbitral, but awards are unenforceable against non-parties to the arbitration. Patent rights are an issue of public policy and require state action to be deemed invalid. Thus, an arbitral award invalidating a patent in the United States will not preclude the patent owner from asserting that same patent against non-parties.
III、Statutory Provisions Governing Agreements to Arbitrate Patent Disputes
a、The Federal Arbitration Act (“FAA”)
The FAA was enacted by the U.S. Congress in 1925 to set a national policy in favor of arbitration. Where it applies, the FAA provides for clear, uniform, and broad enforcement of arbitration agreements. Specifically, the FAA provides that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract.” The FAA provides clear direction that U.S. courts are to treat agreements to arbitrate the same as any other contract to undertake any other legally binding obligation. That is, unless a generally applicable contract defense applies to invalidate the agreement (e.g., fraud, duress or unconscionability), U.S. courts will enforce an agreement to arbitrate. The FAA applies to any dispute in the U.S. that involves interstate commerce. Interstate commerce is broadly defined as any commerce that involves transacting or transportation of products, services, or money across U.S. state or national borders and has been given an expansive interpretation by U.S. courts to include any commerce that affects such cross-border activities.
Where it applies, the FAA further preempts state laws and local court decisions that disfavor arbitration. Prior to the FAA, many U.S. states had enacted their own arbitration acts, and some state courts had issued decisions on various issues based on those state acts. Where state legislation and court decisions were consistent with the FAA in favoring arbitration, those laws and decisions remained in place. Where a state arbitration act or court opinion is inconsistent with the FAA, the FAA will preempt, or override, that inconsistency to the extent that “interstate commerce”, broadly defined and interpreted, is involved.
While some analysis of the FAA’s applicability might be required, parties to a commercial patent contract that is subject to an arbitration clause can be reasonably assured that their agreement to arbitrate will be upheld by U.S. courts.
b、35 United States Code § 294
In addition to the FAA, two other federal statutory provisions govern patent arbitrations: 35 U.S.C § 135 and 35 U.S.C § 294. Historically in the United States, there was some negative treatment by courts, usually relying on public policy-based arguments, regarding agreements to arbitrate patent disputes. Section 294 makes it clear that if the FAA applies parties may arbitrate any contractual dispute. Especially for disputes related to patent ownership, an issue that the U.S. Patent Office will not decide, arbitration is a well-suited disputes process.
Section 294 removed uncertainty about what an arbitrator can decide with respect to patent disputes and makes it clear that arbitrators can consider such patent defenses as:
(1) noninfringement;
(2) invalidity;
(3) unenforceability;
(4) failure to comply with 35 U.S.C. § 112 (e.g., failure to meet written description, definiteness, and enablement requirements);
(5) failure to comply with 35 U.S.C. § 251 (e.g., prohibits broadening the scope of reissued patents).
Section 294 is particularly important because it brought certainty to those seeking to arbitrate patent disputes and to arbitrators—it essentially granted permission for arbitrators to address patent issues, other than patentability, without fear of a U.S. court subsequently vacating the award.
Practitioners should, however, note that any resulting award determining patentability binds only the parties to the arbitration. The prevailing party in a patent arbitration must give the Director of the U.S. Patent Office notice of the arbitral award. That award is unenforceable until such notice is given. Yet once provided, the arbitral award becomes part of the prosecution record of the patent. Parties considering subjecting a patent contract to an arbitration provision should note this requirement both because it is a deviation from typical non-patent arbitration procedures and because it may raise confidentiality issues and undercut one rationale for arbitrating (while leaving others like speed of resolution and expertise of decision makers intact). The Director of the U.S. Patent Office reserves the right to modify an arbitral award, especially with respect to whether an invention is patentable.
c、35 United States Code § 135
Turning to Section 135, this provision relates to derivation proceedings before the U.S. Patent Office. Derivation proceedings determine whether the first-to-file inventor was the true inventor or derived the invention from another. This issue is unlikely to be relevant in a commercial patent dispute. Even so, the code provision makes it clear that parties can submit even that determination to an arbitrator.
As with Section 294, practitioners should note that if the parties elect arbitration for a derivation proceeding, they must give the Director of the U.S. Patent Office notice of the arbitration award. The award is unenforceable until such notice is given. Once provided, the award becomes part of the prosecution record of the patent. The Director of the U.S. Patent Office reserves the right to modify an arbitral award, especially with respect to whether an invention is patentable. As noted previously, the award remains binding only with respect to the parties to the arbitration.
IV、Award Enforcement
In addition to enforcing agreements to arbitrate patent disputes, U.S. courts similarly follow a liberal policy in favor of enforcing arbitral awards. Where interstate commerce is involved, arbitral awards are enforced under the FAA and pre-emption applies to erase state law inconsistencies. Where the losing party has assets located in the U.S., the prevailing party should file a petition to confirm the arbitral award in a U.S. court.
a、Where to Confirm an Arbitral Award
For cross-border commercial disputes, there are nuances, but arbitral awards are generally enforced in the federal court in the district where the arbitration hearing was held (e.g., the place of the arbitration), if it was in the U.S., or where the losing party resides. The FAA does not confer special jurisdiction to confirm arbitral awards to federal courts. The confirming party needs to establish an independent basis for jurisdiction to avail itself of the benefit of a federal U.S. court. There are two paths for federal jurisdiction: (1) diversity; or (2) federal question. Diversity jurisdiction exists when both the amount in controversy between the parties exceeds USD$75,000 and the parties reside in different states of the United States or different countries (with, in the case of the latter, at least one party being domiciled in the United States). Federal question jurisdiction exits where the cause of action arises under federal law. Much post-arbitration award patent litigation lands in federal court under federal questions jurisdiction because United State Code § 1338 grants district courts original jurisdiction over “of any civil action arising under any Act of Congress relating to patents.” Careful analysis is required, but most cross-border commercial patent disputes satisfy federal court jurisdiction requirements under one of these two paths.
Where there is no basis for U.S. federal court jurisdiction, the petition to confirm the arbitration award should be filed in the relevant state court under that state's arbitration act, but again, so long as interstate commerce is involved, pre-emption is likely to erase any inconsistencies between that state's arbitration act and the FAA with respect to enforceability of the arbitration award.
Outside of electing the correct U.S. court, the process for confirming an award is straightforward. Local counsel should be consulted, but there is generally no particular form required for the pleading, though the award and the agreement to arbitrate should be attached. The winning party has one year from the date of issuance of the arbitral award to file the petition for confirmation. Note that you may need to seek to permission to file the award under seal to protect confidential information. US courts range in their willingness to accommodate such requests. Once an arbitral award is confirmed, the judgment is docketed, which means that it has the same force and effect as any other civil judgment issued by a U.S. Court.
b、Petition to Vacate
Where the losing party objects to an arbitral award, that party can file a petition with a U.S. court with jurisdiction to vacate an award. The requisite showing to vacate an award is high—higher even than the standard for reversing a court or jury’s decision on appeal. The reasons for vacating an arbitral award are limited to those enumerated in the FAA and U.S. courts have repeatedly made clear that those reasons are to be narrowly construed. Further, a party wishing to file a petition to vacate an award has only three months from date of issuance of the arbitral award to file such a petition.
While the FAA enumerates several grounds for vacating an award, the most common are as follows:
(1) Corruption, Fraud or Undue Means (e.g., an arbitrator accepted a bribe);
(2) Evident Partiality (e.g., an arbitrator gave one party material advantages over another like access to certain discovery or disclosures);
(3) Refusal to Hear Evidence (e.g., an arbitrator refused to hear evidence that is pertinent and material to the dispute);
(4) Exceeding Authority (e.g., an arbitrator decided an issue outside of his or her authority under the agreement to arbitrate or that is precluded by mandatory law; this grounds for vacating an award can also apply where an arbitrator bases a decision on evidence or law that was raised by neither party).
Additional reasons outside of those identified in the FAA pop up here and there in case law, including manifest disregard for the law, complete irrationality, and violation of public policy. Petitions based on those reasons, however, are unlikely to succeed in U.S. courts at this point and are particularly unlikely to succeed where the dispute related to patent ownership.
V、Take-Aways
Outside of globally enforceable patentability decisions, the statutory framework and precedent in the U.S. are supportive of agreements to arbitrate patent disputes and of enforcing resulting awards. Baring arguments that there was not a valid contract in the first place, U.S. courts uphold agreements to arbitrate. Arbitrators have wide discretion and authority to decide patent disputes. Grounds for vacating an arbitral award are limited and narrowly construed. U.S. courts are reluctant to second guess arbitrators. U.S. courts have repeatedly demonstrated that arbitration is to provide final resolution to disputes, and not to be a prelude to a court battle. Frivolous petitions to vacate arbitral awards can lead to sanctions. For best results, parties should always consult U.S. counsel to confirm that local court and U.S. Patent Office procedure is followed.