By

Austin Robinson

Intellectual property disputes present a unique challenge for arbitrators and litigators due to the intangibility of these property rights. These rights’ scope varies by jurisdiction.¹ This leads to unpredictability in resolving any disputes. To combat this, many parties add carve-outs for IP disputes when entering into arbitration agreements.² Despite this common practice, the negative policy implications of utilizing IP carveouts far outweigh the benefits. Instead of IP carveouts, submitting these disputes to arbitration will result in increased efficiency and decreased monetary burden.

Generally, carve-outs within an arbitration clause/agreement reserve a specific subject matter or type of relief for litigation in a specified jurisdiction.³ A typical carve-out clause reads as follows:

“Any dispute arising out of or related to this Agreement shall be submitted to binding arbitration under the [specified rules (the ‘Rules’)] to be heard by a sole arbitrator appointed in accordance with the Rules, except for those causes of action brought in connection with the ownership or right to use [specified intellectual property] which shall be submitted to the exclusive jurisdiction of the courts of [specified jurisdiction].”⁴

Parties elect to use carve-outs because IP protection varies by jurisdiction.⁵ Even in jurisdictions that allow IP litigation, some limit the binding effect of the award.⁶ People tend to opt to litigate these disputes because it offers greater discovery and a formal appellate review process.⁷ The fear of the unknown, likely lengthy appellate proceedings alongside unfamiliar, jurisdiction-specific legal actions, like, for example, the U.S.’s claim construction hearings, may prompt the parties to include such carve-out language for security reasons.⁸

Despite these valid concerns, these clauses have backfired in recent court decisions.⁹ For example, in LAVVAN v. Amyris a similar carve-out formed the core of the dispute.¹⁰ The Second Circuit upheld the IP carve-out, but supervening contractual deficiencies forced the parties into two separate proceedings: one litigated, one arbitrated.¹¹ Concurrently litigating the patent infringement claim and arbitrating the breach of contract claim likely imposed greater costs and delays on than litigating both disputes, let alone arbitrating them.¹² Even if drafted meticulously, these carve-outs can create additional burdens for the parties to the arbitration agreement.¹³

The aforementioned burdens are reinforced by the benefits that arbitrating IP disputes offers. Unlike litigation, arbitration offers parties control over who adjudicates their dispute, allowing them to select those with relevant training, education, and expertise.¹⁴ Decision-makers with some degree of knowledge and/or background in the area of the dispute are more equipped to handle arguments centering on patent validity and infringement. Specifically in patent disputes, relevant expertise in the invention’s field eliminates the need for extensive (and often expensive) expert testimony and background information – a common feature of litigation – and may allow the arbitrator(s) to reach a decision faster. Finally, an arbitrator who understands how an invention works and its monetary value is more likely to reach a just decision and enforceable arbitral award.

Cost is a critical consideration parties must make when deciding whether to arbitrate or litigate IP disputes.¹⁵ Parties using carve-outs run the risk of concurrent litigation and arbitration, as seen in LAVVAN v. Amyris, something more time-consuming and costly than a single proceeding.¹⁶ Prosecuting a patent is a time and cost-intensive process with filing fees, attorney costs, and an average of one-to-two years spent prosecuting.¹⁷ Arbitrating subsequent disputes could save the holder money by limiting their exposure to litigation expenses and locking in a speedier resolution method. Further, patent litigation usually has a multi-jurisdictional impact, forcing patent holders to litigate in each respective court.¹⁸ Arbitration, on the other hand, allows for a single proceeding, saving the parties time and money.¹⁹

In arbitration, IP carve-outs carry significant risks. Generally, they hinge on perfect interpretation and when they go wrong they can force parties into a bifurcated dispute. The reasoning behind this trend of including IP carve outs stems from the desire for a predictable judicial process, from the discovery stage to appellate review. But the effect of these carve outs is far from predictable and tend to result in side-by-side litigation and arbitration in addition to an increased amount of time and money spent on the dispute(s). Rather than take the risk and miss out on the benefits of arbitrating their IP disputes, patent holders should focus on choosing a favorable governing law and seat of arbitration when concerned about potential IP-related disputes. Carve-outs should be avoided in IP arbitration to ensure efficiency and lower costs for the parties to the dispute.