Conductive Discussions: Arbitration—Customizable Dispute Resolution

Ropes & Gray’s podcast series Conductive Discussions focuses on legal issues of interest to the semiconductor industry. In this episode, IP litigation partners Mark Rowland and Peter Brody, counsel Sam Brenner, senior attorney Rachael Bacha, and associate Ryan Brunner discuss the increasing use of arbitration as an alternative to traditional commercial litigation in IP disputes, the pros and cons of arbitration, and why arbitration is a highly customizable tool that may be an attractive option for companies entering agreements such as licenses, manufacturing agreements, and joint ventures.

Transcript:

Mark Rowland: Welcome to this episode of Conductive Discussions, a Ropes & Gray podcast series focused on legal issues of interest to the semiconductor industry. My name is Mark Rowland, and I am a partner at Ropes & Gray in our IP litigation practice, based in our Silicon Valley office. I’ll be hosting this episode, which will focus on recent trends in arbitration. Arbitration has become an important alternative to traditional litigation in a variety of areas, including patent license disputes, manufacturing agreements, and trade secret misappropriation claims. As an alternative form of dispute resolution, arbitration is highly customizable, and it may be an attractive option in many contexts. Today, we’ll be hearing from an exciting group of practitioners who have guided clients through arbitration proceedings. First is Peter Brody, an IP litigation partner in Ropes & Gray’s Washington, D.C. office—welcome, Peter. Also with us is Sam Brenner, an IP litigation counsel in our Boston office—welcome, Sam. We are also joined by Rachael Bacha, a senior attorney in our New York office, and Ryan Brunner, associate in our D.C. office, both IP litigators as well—welcome, Rachael and Ryan. Rachael and Ryan will start us off with our Silicon Speak report of recent legal events.

Rachael Bacha: Thanks, Mark. As this podcast has covered before, the global semiconductor chip shortage rages on, prompting new manufacturing and development efforts, as well as higher prices.

• Taiwan Semiconductor’s revenue was $12.9 billion in the first quarter of 2021, up two percent year-over-year. But chip manufacturing in Taiwan could be interrupted by a recent surge of COVID-19 cases that could trigger a lockdown, as well as recent drought triggering power outages.
• Of course, the shortage is causing supply chain delays and interruptions for the automotive and electronics industries. To combat these effects, and protect against them in the future, U.S. Secretary of Commerce Gina Raimondo said recently that a proposed $52 billion in funding for the CHIPS for America Act could “unlock private capital” and help seven to ten new manufacturing facilities be built in the United States.
• Intel also announced plans in March to invest $20 billion in two new chip foundries in Arizona, and is looking into building a facility in Europe.
• Additionally, Senator Chuck Schumer said in a recent statement that he expected federal funding to create manufacturing and research jobs in upstate New York.

Now, these manufacturing and development efforts are likely to generate new license agreements and relatedly, license disputes, some of which may include arbitration.

Ryan Brunner: Thanks, Rachael. Recent news also reinforces the growing importance of arbitration to global industries.

• Amazon recently announced that it was changing its terms of service to no longer require customers to arbitrate claims. This announcement comes after tens of thousands of individual arbitration demands were filed on behalf of Amazon device users, triggering millions of dollars in arbitration fees that Amazon was required to pay under its previous terms of service.
• But in disputes between companies, arbitration is on the rise. For example, the London Court of International Arbitration recently announced that it saw an 18 percent increase in cases in 2020 from 2019, nearly half of which involved arbitration agreements entered into within the previous two years.
• In the United States, the Supreme Court is considering whether Title 28, Section 1782 of the U.S. Code permits federal district courts to authorize U.S.-style discovery in international arbitrations, whose rules often limit discovery. That case is Servotronics, Inc. v. Rolls-Royce PLC, and it is currently in briefing, to be argued next term.

Mark Rowland: Thanks, Rachael and Ryan. It sounds like arbitration and issues about arbitration are on the rise, and could be increasingly important in the semiconductor industry. Peter, how does a dispute end up in arbitration?

Peter Brody: Basically, arbitration has to be founded on a voluntary agreement of the parties. That can happen if the parties agree to refer an existing dispute to arbitration while they’re in the dispute, but more often the agreement takes the form of an arbitration clause in a previously negotiated contract to which the dispute relates. An arbitration clause in a contract will generally cover any claim relating to the contract (although the parties can build in exceptions, and sometimes do), and the clause will generally select a particular arbitration organization, such as the American Arbitration Association, to decide the dispute according to its rules. The arbitration clause might also dictate certain procedures, such as how many arbitrators should hear the case, how many arbitrators are to be selected, the location of the arbitral hearing, and the substantive law that the arbitrators should apply. When a dispute arises, the parties sometimes disagree about whether an arbitration clause includes that dispute. Courts in the United States have consistently held that the Federal Arbitration Act, which is codified in Title 9 of the U.S. Code, embodies a strong federal policy favoring arbitration, so attempts to keep disputes out of arbitration often fail.

Sam Brenner: That’s right. And to jump on what Peter’s saying, there have been a number of cases where there are disputes about whether arbitration should happen at all, or who should decide whether arbitration should happen or whether particular disputes are arbitrable. For example, in 2019, in Henry Schein Inc. v. Archer & White Sales Inc., the Supreme Court held that courts need to enforce arbitration clauses that delegate to the arbitrators the question of whether a dispute is arbitrable in the first place, and that’s even if the court thinks that the argument in favor of arbitration is “wholly groundless”—that was the test that was being applied in various ways. So, parties might dispute again whether the arbitration clause delegates those questions of arbitrability to arbitrators at all. A number of courts have held that the arbitration clauses delegate that question when they name specific arbitration rules that give the arbitrators the ability to decide their own jurisdictions—and many of those arbitration rules do, depending on which arbitration body you’re talking about. But there are exceptions and a lot really depends on how each arbitration clause—each specific clause—is written, which is something that I think companies should be looking at as they think about how arbitration is going to work.

Mark Rowland: Is arbitration available for patent infringement and invalidity disputes?

Ryan Brunner: Absolutely, Mark. In fact, some arbitration bodies have specific rules or guidelines for cases involving patent disputes. One example is the American Arbitration Association, which has supplemental patent rules that encourage the parties to consider patent-specific procedures, such as claim construction and infringement and invalidity contentions. The AAA also maintains a National Panel of Patent Arbitrators who have experience in patent law or special technical expertise that might be relevant in a particular dispute.

Rachael Bacha: That’s absolutely right, Ryan. And it’s also important to note that Congress has actually explicitly provided for arbitration in patent disputes, in Section 294 of Title 35 of the U.S. Code. Section 294 does specify that an arbitration award on patent issues “shall be final and binding between the parties to the arbitration, but shall have no force or effect on any other person.” But that actually doesn’t mean that an arbitration award on patent issues stays totally secret. Section 294 also provides that the award is only enforceable once it’s actually filed with the Patent Office, and this actually places the award in the prosecution record of the patent at issue. And similarly, Section 135 allows arbitration of derivation proceedings—which were formerly called “interferences”—at the PTAB. Those proceedings often involve disputes between parties that worked together, for example, on a research or manufacturing project, and might already have an agreement in place.

Peter Brody: That’s right, Rachael, and that’s exactly the kind of case where IP and related technology disputes often end up in arbitration. The essential issue in a derivation proceeding— whether it’s at the PTAB or an arbitration—is, whose invention is it, really? And that can and increasingly does arise in the context of an IP license, or a development or manufacturing contract, or an employment agreement—and many of those include arbitration clauses. We saw that dynamic in a recent case in which we represented IQE plc, a UK-based semiconductor company.

In that case, Solar Junction Corporation, a startup that was attempting to develop solar panels using a particular material, came to IQE for its expertise and experience with that type of material and with manufacturing wafers for solar panels. And the parties entered into a “Wafer Supply Agreement” that contained an arbitration clause—in that case it specified that disputes should be resolved by the London Court of International Arbitration. Some years later, IQE developed a photodetector using that material, and acquired a patent for that invention. Solar Junction accused IQE of misappropriating its trade secrets, but sued IQE’s employees—the inventors who were named on that patent—instead of suing IQE in federal district court, presumably to avoid the arbitration agreement in the contract between the two companies. So that prompted a dispute about whether the dispute should be decided in arbitration or in district court. And the court concluded that the question of arbitrability itself should be decided by the arbitrators, and the arbitrators concluded that the dispute between IQE and Solar Junction was an arbitrable dispute.

Now, as this dispute was ongoing and it did proceed to arbitration, Solar Junction also filed a derivation proceeding at the PTAB, claiming that IQE derived the invention in IQE’s patents from Solar Junction—so it was proceeding in two forums in parallel. Ultimately, after discovery in the arbitration, along with witness statements and expert reports, and an eight-day evidentiary hearing, the arbitrators concluded that IQE did not misappropriate any Solar Junction trade secrets and did not breach the Wafer Supply Agreement, and that the patent was not a patent that belonged to Solar Junction. The award required Solar Junction to pay over $4 million in IQE’s arbitration costs and legal fees. IQE moved to confirm the award in district court, and Solar Junction moved to vacate it. After briefing, but before those motions were decided, the parties reached a settlement favorable to IQE, and the district court and the derivation proceedings were both dismissed.

Mark Rowland: It sounds like you navigated quite a few issues relating to arbitration in that IQE case. Let’s talk for a few minutes about the pros and cons of arbitration. Why would a party prefer arbitration over litigation in court?

Peter Brody: One potential benefit is that most arbitration rules, including the American Arbitration Association’s rules, leave the specific procedures open to be shaped to some extent by the parties and the arbitrators. The parties are effectively forced to collaborate on setting up procedures early in the case, and that can be beneficial in a context where the parties have an ongoing contractual or other relationship that requires them to continue working together amicably, such as a license, manufacturing or development agreement, or a joint venture.

Ryan Brunner: That collaboration also allows the parties to tailor the procedures of the arbitration to the needs of that particular case. For example, depending on the arbitration body used, the default procedure might be to minimize discovery, particularly for arbitration bodies that are not based in the United States. The parties might wish to minimize or even eliminate document discovery or depositions depending on the circumstances of the case as well. Parties can decide how much discovery they need, and they can decide how long they need before the final evidentiary hearing and how long that hearing needs to be.

Rachael Bacha: That’s absolutely right, Ryan. And one procedure that we have found to be very helpful in the context of arbitration is the use of fact witness statements and expert reports as direct testimony, and this has several benefits. First, those witness statements and expert reports provide the Tribunal and the parties with notice in advance of the evidentiary hearing, which facilitates effective cross-examination while reducing the need for depositions. And also, if those written witness statements and expert reports are used as direct testimony, then this of course saves a lot of time at the hearing, where live direct testimony can be skipped over—like at the ITC—or at least done in a more abbreviated form.

Sam Brenner: The make up of the arbitration panel itself can also be a huge benefit that might lead various companies to prefer arbitration over more traditional district court litigation. The parties generally have wide latitude to select arbitrators—often either one arbitrator or a panel of three, with three being more common in large, complex disputes. The parties can also request arbitrators whoa re experienced in specific areas of law or specific technologies. In many cases involving complex technology, it’s much easier to get experienced arbitrators up to speed than it would be to educate a jury or even a judge at a bench trial about the same technology. Again, exactly how arbitrators are selected differs depending on which arbitration body you’re talking about and what the arbitration rules for that body or the arbitration rules cited in a particular agreement say, or what a particular arbitration provision that’s in a contract says. This is yet another reason why in thinking about whether to use arbitration as opposed to district court litigation or other sort of litigation, companies should be thinking about exactly what they’ve said in those arbitration provisions.

Mark Rowland: I’m hearing that arbitration can streamline dispute resolution in many ways, but does that mean it’s cheaper than litigation?

Peter Brody: It certainly can be, but that doesn’t necessarily mean it’s cheap. Often in large, complex disputes, there can be very large sums of money at issue. And one or both parties might be willing to spend just as much as they would in a district court litigation. On top of that, unlike a court proceeding, the parties are on the hook for paying the arbitrators’ time as well, and that can really mount up.

Sam Brenner: Another thing to keep in mind about arbitration costs, on the other hand, is the possibility that those costs will be allocated as part of the award. Even in U.S.-based arbitrations, arbitrators will often allocate legal fees and other arbitration costs in ways they deem fair and equitable, and that can result in losing parties paying some or all of the winning party’s legal fees and some or all of the cost of the arbitrators’ time. Again, that’s what happened in the IQE case that Peter was talking about, where the arbitrators awarded our clients millions of dollars in legal fees as well. Of course, this is not something you’re going to know up front—you’d have to prevail in the substantive issues in order to get those legal fees, but it can be part of the swing that helps you decide whether you want arbitration vs. some other form of litigation.

Mark Rowland: What about confidentiality as an aspect of arbitration? 

Peter Brody: Confidentiality can definitely be a benefit of arbitration, particularly for cases that involve sensitive research, or manufacturing processes, or other proprietary know-how. Many arbitration rules default to keeping the proceeding confidential, so depending on whether the parties’ have any other disclosure obligations under any other laws, the public may not be aware that the arbitration is even taking place.

Rachael Bacha: That’s right, Peter. But that doesn’t necessarily mean that the arbitration will actually never be made public. For example, as I mentioned earlier, arbitration awards regarding U.S. patent validity or infringement are not enforceable until they are filed with the Patent Office. And even in non-patent contexts, it might be necessary to go to district court to either confirm or try to vacate the arbitration award, and that generally requires at least some portion of the award to be filed publicly. So even though the arbitration itself may be held confidential, the fact that it took place or the result of it may actually not be confidential in the end.

Ryan Brunner: That’s right, Rachel. And arbitration clauses will generally state that any award may be entered as a judgment in any court with jurisdiction. If everyone abides by the arbitration award without protest, that might not be necessary. But if there is any question about the enforceability of the award, the prevailing party may need to move to confirm the award under Section 9 of the Federal Arbitration Act, or the losing party may move to vacate the arbitration award under Section 10 of the Federal Arbitration Act—we saw this in the IQE case that Peter was discussing. The grounds for vacating an arbitration award are extremely limited—under Section 10, there must be some kind of corruption, partiality, or other misconduct, or fundamental error with the arbitration. It is not enough to simply argue that the arbitrators reached the wrong conclusion.

Sam Brenner: To jump in on that—in other words, it’s not an appeal, and I think that’s important. There is no appeal from an arbitration award unless the parties agree that there should be. For example, the AAA has optional appellate arbitration rules, but parties would have to select those. This can be a double-edged sword—it can save costs and get you to finality earlier, but if the arbitrators reached the wrong conclusion, you’re stuck with it, even if you’re convinced that they’ve made an error in fact or an error of law.

Peter Brody: By the way, in addition to the AAA’s optional appellate arbitration rules, some arbitration agreements will allow for judicial review of certain aspects of an arbitration, such as findings as fact, or conclusions of law, or both, under a specified standard of review. So, again, parties can build in that sort of appellate review into the arbitration agreement if they want, but that’s unusual and it’s not the default rule. So, ultimately, arbitration can be a very powerful tool for parties to streamline the resolution of their disputes. It’s not a panacea, but it can reduce costs and help the parties move on more quickly. It’s an important option for parties to keep in mind when they enter into agreements like licenses, manufacturing agreements, and joint ventures. And of course, when a dispute arises, particularly under an existing agreement, it’s important to determine whether an arbitration clause may govern that dispute.

Mark Rowland: All of this is fascinating and it’s obvious that arbitration is a very interesting topic. That concludes another interesting session. Thanks to Peter, Sam, Rachael, and Ryan for joining us today and for sharing their insights. Subscribe to Conductive Discussions and other RopesTalk podcasts in the newsroom page of ropesgray.com. If you have any questions or comments, just drop us a line. For more information about our semiconductor practice, just type “semiconductors Ropes Gray” to get our semiconductors page. Thank you for listening, and we hope that you join us next time. Goodbye.