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Drafting the Right Provisions for Your Business

In our increasingly innovative and global marketplace, arbitration has become an attractive alternative to public court resolution of cross-border disputes. International arbitration has historically been dominated by industries like energy and construction, but a wider range of business sectors are using arbitration forums more and more. The global life sciences industry and the intellectual property assets at its core progressively use arbitration as a method of dispute resolution. The World Intellectual Property Organization reports that fifteen percent of its arbitration and mediation cases are based in the life sciences industry, with a focus on disputes related to intellectual property and licensing. Likewise, the International Chamber of Commerce and the London Court of International Arbitration have reported increased filings in the life sciences sector.

As the use of arbitration grows, negotiators need to draft clear and effective arbitration clauses. And parties agreeing to arbitration for dispute resolution should understand the issues that can arise and impact the intended benefits of arbitration. Parties do not want to waste money and time disputing the interpretation and enforceability of arbitration clauses, so drafting clear and effective dispute resolution provisions is imperative.

Cornell v. Illumina Case Study

Cornell University and its patent licensee Life Technologies Corporation recently found themselves litigating the enforceability of two arbitration clauses. The case, Cornell University v. Illumina, Inc., 1:10-cv-00443 (D. Del.), involved protracted litigation alleging infringement of biologic patents. Initially, Cornell brought the suit with co-plaintiffs Life Tech and its subsidiary, Applied Biosystems, LLC. The plaintiffs alleged that Illumina’s genetic analytic products infringed eight patents governed by an exclusive license agreement between Cornell and Life Tech. After years of litigation, the parties settled the underlying dispute in April 2017 and the case was dismissed.

Within months, however, Cornell moved to vacate the stipulation of dismissal and rescind the settlement documents based on fraud. Cornell maintained that Life Tech

“made misrepresentations to Cornell and concealed a broader settlement agreement with Illumina to fraudulently induce Cornell to execute the settlement agreement.”

Life Tech cross-moved to stay Cornell’s motion and compel arbitration. Life Tech’s argument to enforce arbitration was based on clauses contained in two agreements—the exclusive license agreement between Cornell and Life Tech and the global settlement agreement. First, Life Tech contended that the license agreement contained an arbitration clause providing that Cornell could only proceed with direct judicial remedies against Life Tech for royalty disputes (thus leaving all other disputes for resolution through arbitration). Second, Life Tech argued that the settlement agreement requires arbitration of any dispute arising under the agreement, including those relating to enforceability, validity, interpretation or breach of the agreement.

Much of the court’s determination focused on the language of the two arbitration clauses. Cornell alleged that the clause in the license agreement was too vague to be enforceable because it referenced arbitration procedures in an appendix that did not exist in the final agreement. The clause in the settlement agreement was problematic because it called for arbitration “between Life Tech and Cornell, on the one hand, and Illumina on the other hand,” calling into question whether arbitration was contemplated in the case of a dispute between only Life Tech and Cornell.

Ultimately, U.S. Magistrate Judge Mary Pat Thynge filed a report and recommendation that Life Tech’s motion should be granted, determining that the arbitration clauses in both the license agreement and the settlement agreement mandated arbitration. Cornell objected, arguing that the lack of any protocol or guidance on how the arbitration should proceed by the court demands a different result.

Deciding on Arbitration and Drafting the Right Provision

The Cornell case highlights the dangers of poorly drafted arbitration provisions. Although it is often challenging to plan for disputes as a new business relationship blossoms, well-drafted dispute resolution clauses are critical. Oftentimes international license agreements or other commercial agreements contain boilerplate arbitration language that is either unclear, fails to consider the various types of disputes that could arise and potential repercussions, or both.

We examine a number of factors that must be scrutinized before agreeing to arbitration as a method for dispute resolution. Some factors relate to classically touted benefits of the arbitration system, but these benefits can be illusory or become burdens without careful, forward-thinking drafting.

Control and Privacy

A properly constructed arbitration provision can allow parties to take control over potential dispute resolution in the future. Variances in global court systems foster uncertainty and increase risk. In drafting an arbitration clause, parties can craft a resolution protocol that manages risk. For example, negotiations can cover the type of dispute subject to arbitration, the arbitration forum, the number of arbitrators, the type of arbitrators, the applicable rules, the language, and the parameters of discovery and motion practice.

In addition to the structure of the arbitration proceeding itself, arbitrations can be made confidential, thus affording parties control over public exposure and the extent to which matters may be disclosed. Parties can also gain control by avoiding jurisdictions that one or more may view as problematic.

Expertise and Neutrality

Life-sciences companies can be understandably dubious of judges and juries that have little or no experience in the complex and scientific disputes that may arise in their business. They may also be concerned about the level of bias in the judicial system in many countries. International arbitration institutions offer a variety of neutral arbitrators with the specialized skills and expertise that help them understand the intricacies of the life-sciences industry. Of course, those arbitrators carry their own partialities and ingrained views and must be properly vetted. Parties can negotiate parameters for the arbitrators’ expertise and experience.

Finality and Enforceability

Arbitration awards are generally final, with no opportunity to appeal, and awards are enforceable in most jurisdictions. While courts may be involved in confirming an arbitration award or executing on the award, those laws generally preclude a court from undoing the work of an arbitrator absent extreme circumstances. Of course, finality can be a clear and tangible benefit. Oftentimes, however, both sides may end up with a less than desirable result and no recourse to appeal or change the award.

Many arbitration systems now have appellate options, although such an allowance adds delay and cost to the final disposition of a dispute. Arbitration clauses can be drafted to include or preclude appeals and may specify that appeals run through the arbitration institution and only in limited instances to guard against prolonging the process.

Cost and Speed

Arbitration is promoted as an efficient and cost-effective alternative to court-based litigation given the streamlined process and lack of appeal. While this can be true, many factors (e.g., the cost of arbitrators and hefty filing fees) can contribute to sky-rocketing costs in the arbitration system. Parties should also consider placing deadlines and time limits on discovery, hearings, deliberations and resolution.

As with so many business decisions, the choice to arbitrate is a series of risk/benefit analyses. For example, while parties may control costs by selecting a single arbitrator and limited discovery, they may sacrifice their ability to fully develop case theories and defenses. The use of the international arbitration system to resolve disputes in the life-sciences sector can be a valuable insurance policy to guard against the pitfalls of court-based litigation. But well-crafted arbitration agreements are key to avoiding litigation and taking advantage of the benefits of arbitration. ●
T. J. Dammrich
T. J. Dammrich
As a former management consultant and now litigator, T.J. combines business experience with strategic legal thinking when handling disputes for clients. He enjoys discussing business strategies and analyzing how the law can be used to protect, advance and defend client interests. T.J. has served as lead litigation counsel in several matters and has litigated across the country in federal and state court as well as arbitration. His work covers diverse subject matter, including contract, class action, fraud, insurance coverage, and intellectual property disputes.
Erin L. Leffler
Erin L. Leffler
Erin focuses her practice on complex commercial litigation, employment law and product liability defense. She uses the depth of her litigation experience to advise clients and identify issues that will leverage optimal outcomes. Erin represents a variety of national, regional and local businesses in commercial litigation matters involving business torts, contract disputes, labor and employment matters, and commercial real estate disputes. She also defends pharmaceutical and medical device manufacturers in mass tort and multidistrict litigation matters. In addition, Erin represents manufacturers and sellers of products in various industries in cases alleging breach of warranty, negligence, strict liability and wrongful death.
2019-03-05T20:14:19+00:00October 1st, 2018|