ARBITRATION AND OTHER FORMS OF ALTERNATIVE DISPUTE RESOLUTION - GENERAL OVERVIEW
President, American Arbitration Association (AAA)
New York, United States of America
In recent years, many executives in the United States and elsewhere have been disenchanted by attempting to resolve disputes through court litigation. In the current legal environment, retaining an outside law firm to process a lawsuit has become a time-consuming and expensive ordeal. Many business firms have turned to less costly ways to resolve their disputes. This is particularly the case when a controversy involves intellectual property rights, which tend to be highly technical and complicated. Whether they involve licensing or the determination of property rights, the availability of an efficient, well informed system of private dispute resolution would be in the best interests of the parties involved. The World Intellectual Property Organizations initiative to create such a system will be well received.
Most executives try to avoid litigation whenever possible. Through good faith negotiations, they can usually resolve their controversies directly with the other party or using a professional negotiator. By analyzing the dispute, creating an appropriate bargaining strategy, and engaging in good faith bargaining, most monetary claims can be settled at a reasonable cost.
Alternative dispute resolution (ADR) is an extension of negotiations. Besides refining traditional bargaining techniques, ADR utilizes dispute resolution methods such as mediation and neutral evaluation, which have proven successful in helping disputing parties reach prompt, rational and mutually agreed upon settlements. Because of the success of ADR, intellectual property executives should learn how these techniques work and how they can help disputing parties reach settlements.
In the United States, the American Arbitration Association (AAA) is well known for encouraging the use of ADR. As well as being the leading arbitration agency, the AAA has played a major role in sponsoring mediation and various other private dispute resolution procedures.
In 1993, the AAA processed 139 intellectual property cases involving combined claims and counterclaims of over $250,000,000 dollars. The issues raised involved breach of licensing and distribution agreements, misappropriation of trade secrets, trademark violation, patent infringement and reassignment of patents. Many, of course, boiled down to monetary claims, but arbitrators were also asked to order a variety of other remedies. Some of the largest multinational corporations were involved, as well as universities and trade associations. The cases were filed in and processed by 25 of the AAAs 36 regional offices in large cities within the United States. While intellectual property cases are a relatively small portion of the AAAs 50,000 case workload, they have been growing steadily.
Intellectual rights disputes often involve substantial monetary claims. Rather than the parties submitting the factual and legal issues to arbitration or litigation, mediation can be used. A mediator helps the parties analyze all relevant issues.
An experienced mediator, familiar with similar cases, can facilitate a settlement. The decision that a court might have reached, may provide a target that the parties can work toward. This means that the mediator should be an experienced intellectual property professional, familiar with the contrasting philosophies of the applicable laws and regulations of the national jurisdictions involved. As this audience knows far better than I, there are stark differences between United States practices and those of most other countries.
An important advantage to mediated settlements is that they do not appear on a public court record or in the press. Confidentiality is a consideration when intellectual property is the subject of the dispute.
Mediation is a relatively unstructured dispute resolution approach. The parties willingness to bargain, combined with the mediators skill are the driving forces in reaching a successful resolution. A mediator does not hold evidentiary hearings, but conducts informal meetings with both parties to discuss the claim. The parties in substantial business mediations are usually represented by their attorneys. At the outset, the mediator describes the procedure, the order of presentation, and the confidentiality of the proceedings. After these preliminaries, each party has an opportunity to explain its position. In subsequent meetings, called caucuses, the mediator engages in a candid discussion with each of the parties and helps them consider the other partys position. The mediator helps each party better understand the other partys positions. Throughout this process, the mediator may shuttle back and forth between the parties, holding joint sessions at appropriate intervals. During each caucus, the mediator clarifies each partys position, considers alternatives and seeks possible tradeoffs.
An effective mediator knows that positions shift as they meet opposition, as different facts are considered, as perceptions change. A sophisticated mediator also recognizes that third parties and governments are not participants in the mediation. The parties at the table can structure win/win settlements that might not be possible in a public court. Mediated settlements can be structured by the parties to take advantage of insurance or tax considerations.
The mediator ensures that all discussions remain focused on helping the parties reach a solution. At the conclusion of the discussions, the mediator communicates and may offer suggestions as to settlement. If the parties reach an agreement, the settlement is confirmed in writing. If they fail to agree, they can arbitrate the remaining issues.
There are many advantages to mediation. It allows the parties to negotiate their own settlement. The mediator, acting as a neutral third party, helps the parties explore alternatives they might not otherwise have considered. Mediation often results in quicker resolution than does litigation, thereby saving the parties money through reduced legal fees. The AAAs experience with business mediations indicates that over 80% of the cases settle.
Mediators need to understand the substance of the case. Consequently, in intellectual property matters, mediators should be experienced in the general area from which the issues arose.
When parties indicate a willingness to mediate under AAA rules, the AAA administrator appoints a qualified mediator. After examining the mediators credentials, either party can object to the appointment. Another mediator will be appointed. It is essential that both parties have confidence in the mediators fairness and impartiality.
In addition to mediation, ADR procedures used in the United States include the minitrial (an elaborate settlement process where the attorney-advocates first make a presentation to a board made up of senior managers from the parties, assisted by a neutral chairperson), Med Arb (where the parties agree in advance to authorize the mediator to decide the case if they cant agree), summary jury trials (where the case is presented to a mock jury), fact finding, advisory arbitration and various other hybrids. The essential purpose of all these systems is to facilitate settlements.
The courts in the United States have also been encouraging settlements through settlement conferences with the judge and the use of masters, referees, mandatory or voluntary mediation and so-called "court annexed arbitration."
Arbitration clauses channel legal disputes into private arbitration rather than into court. In the United States, a significant number of commercial agreements contain arbitration clauses that refer to the AAA. In other parts of the world, there are a variety of arbitration institutions providing similar service.
In arbitration, the parties have agreed to submit their dispute to an impartial third party. The aim is to obtain a decision, which is usually binding upon the parties. Under both State and federal arbitration laws in the United States, arbitration clauses are enforced in accordance with their terms. If one party refuses to participate, a court will order arbitration. If the clause refers to the AAA rules, the procedure is self-executing. The AAA initiates the case without any need for a court order, placing the burden on a reluctant party. As the designated administrator, the AAA is able to accept the case and move it forward to the point where arbitrators have been appointed to take charge.
An enforceable arbitration clause ensures that contractual disputes can be resolved, requiring the parties to arbitrate, whether the contract is a license agreement or some other transactional document. Arbitration encourages good faith negotiations, exerting pressure upon the negotiators to reach a settlement. If the parties cannot reach a settlement, an arbitrator will decide the case for them.
Arbitration can provide an efficient system for obtaining a legally enforceable decision. Hearings can be relatively informal. The parties can specify the issues being submitted to arbitration, select the category of arbitrators they desire, or make any other changes in the procedure. Most arbitration awards are final and binding, but the parties can agree that an award will be advisory, or subject to review. As with mediation, arbitration allows the parties to resolve disputes without publicity or government intervention, to avoid detrimental publicity.
Arbitration hearings can be simple to conduct, taking place in a conference room, with the parties sitting on opposite sides of a table, with the arbitrator at one end. In most cases heard under AAA rules, the parties attorneys make opening statements, followed by testimony, cross-examination and documentary proof. When the evidence has been presented to the arbitrator, the hearing is closed. The arbitrator has 30 days to render an award.
Cases heard in the United States under AAA domestic rules usually follow the common law, adversarial model described above. In civil law countries, the hearing procedure is likely to follow the more inquisitorial format more familiar to European advocates. The parties and the arbitrators can mutually fashion an appropriate method of obtaining evidence. Indeed, some arbitrations are decided entirely on the basis of documents.
Arbitrators have broad authority under the law. The extensive discovery procedures found in United States litigation are not found in arbitration under AAA rules, which offers cost saving opportunities. An arbitrator can issue subpoenas, fix the date of hearings, grant postponements, or proceed with a hearing in the absence of a party who fails to appear before after being notified. Ex parte awards are enforced as long as there was an agreement to arbitrate.
The arbitrators authority is derived from the agreement of the parties. The arbitrator must also conform to the arbitration law which require arbitrators to attend all hearings, listen to all material evidence, and disclose any prior relationship with the parties. The parties attorneys may argue among themselves and object to certain evidence, but the arbitrator has the discretion to make the ultimate decisions in regard to evidence. There is no appeal from such rulings.
Arbitrators are inclined to accept some evidence that would not be allowed by judges. This does not mean that all evidence is given equal weight or that the arbitrator will not reject repetitious evidence.
Arbitrators are given broad remedial powers, at least in the United States. They can order specific performance, create escrow funds, appoint receivers, and award both compensatory and, in most States, punitive damages. Where statutory rights are involved that call for double or treble damages, the arbitrator, where authorized, can give the same remedy as a judge. The national law applicable to an arbitration should be scrutinized to determine whether remedial powers are as extensive as they are in the United States. It is worth noting that arbitration awards are often easier to enforce than the judgement of a foreign court.
When the conflict involves a dispute over monetary value, as if often the case, the parties can protect themselves in a variety of ways. For example, last offer arbitration can be utilized, limiting the arbitrator to selecting between the last demand of the claimant or the last offer of the defendant. This encourages the parties to negotiate towards the realistic value of the claim. Since neither party wants the others last offer to be selected by the arbitrator, these cases are often settled.
Last offer arbitration can be combined with mediation in a process called MEDALOA. First, the parties attempt to mediate. If they are unable to close the gap, they authorize the mediator to act as a last offer arbitrator.
A somewhat similar result can be achieved by using a control contract, or high-low arbitration. In this procedure, the parties agree to restrict the arbitrator to an award that falls within a specified monetary frame. For example, the parties can agree that the award must fall somewhere between $20,000 and $60,000. The terms of the stipulation are not divulged to the arbitrator, but are binding upon the parties. This protects the parties from any award outside the negotiated limits. The last offer and high-low methods are effective because they guard both parties against the occasional award that might fall outside the range of their expectations.
An arbitrator must give both parties an opportunity to present their cases. Whether the evidence is primarily documentary or, as is customary in the United States, through oral testimony, subject to cross examination, is for the advocates and the tribunal to decide.
It seems to me that experienced intellectual property experts are uniquely qualified to serve as arbitrators. Many of those who are participating in this seminar probably have that competence.
In the United States, parties often ask the AAA to provide them with lists of experienced arbitrators, with biographical information. Each arbitrator before being appointed to a case, must disclose any relationship with the parties or their attorneys. Then, under AAA rules, a party can challenge the appointment, with the AAA empowered to replace the arbitrator in appropriate situations.
Arbitrators in the United States serve under a Code of Ethics established by the AAA and the American Bar Association, which describes the applicable standards of performance.
In addition to private ADR techniques, courts in the United States offer ADR procedures. Many federal and State courts require parties to participate in mediation or neutral evaluation procedures before having the right to a trial. These court-administered evaluations, while not legally binding, often result in settlements. Some of the programs are called "court annexed arbitration," but since they are mandatory and non-binding they are unlike private arbitration.
In all of the ADR processes that I have described above, the parties attorneys play an active role. They not only represent their clients as advocates, but serve from time to time as mediators and arbitrators. Thus, ADR has become an important part of the practice of law in the United States.
My assignment has been to describe the primary methods of arbitration and other forms of ADR that might be used to resolve intellectual property disputes. Others will describe the unique aspects of intellectual property cases that lend themselves to those procedures, and will describe the system being created by the World Intellectual Property Organization to provide impartial services. I have no doubt that more and more patent, trademark, trade dress and copyright issues will be handled through mediation and arbitration, particularly where complex multi-disciplinary international issues must be considered and decided by the tribunal.
On behalf of the American Arbitration Association, I salute WIPOs efforts to facilitate dispute resolution in this area, and pledge the AAAs future support.