The Growth of International Arbitration in the Life Sciences Sector

April 8, 2021
Dorothee Schramm

,
Katie von der Weid

In an unpredictable world, international life sciences collaborations can lead to misunderstandings and enforcement challenges, making an effective dispute resolution mechanism an essential risk management tool.

Life sciences companies frequently engage in cross-border partnerships and collaborations to split financial and regulatory burdens, and to share the resources and know-how required to develop and bring products to market. The multiple partnerships for conducting clinical trials and commercializing COVID-19 vaccines worldwide are prime examples of how life sciences companies join forces to draw on their respective strengths across disciplines: proprietary technology, vaccine R&D, regulatory capabilities, and global manufacturing and distribution network. Life sciences players have been working together in this way long before the coronavirus crisis–and the trend is likely to continue.

Cross-border partnerships in the life sciences sector often are complex and involve heavily-negotiated contracts, for example on R&D collaboration, production and marketing, licensing and distribution, and technology transfer. Many of these agreements implicate valuable intellectual property (IP) rights. Even with the best intentions, life does not always go according to plan, and disputes often arise.When that happens, the value of your contract hinges on whether you have a reliable forum to enforce it.

More and more life sciences companies are turning to international arbitration to resolve contract disputes. Major arbitral institutions, including the International Chamber of Commerce (ICC) and the Swiss Chambers of Commerce, report an increasing number of life sciences-related arbitrations on a wide range of issues, from IP to commercial matters.

This article tells the story behind these trends, and explains why the main features of international arbitration make it a good choice to resolve life sciences disputes, including IP-related disputes.

What is international arbitration?

International arbitration is an adversarial proceeding that resembles litigation, but with some notable differences. Parties to an arbitration present their case to a sole arbitrator or a three-member arbitral tribunal, which renders a final and binding decision (award) that explains the tribunal’s reasoning. The proceeding typically involves an exchange of written submissions (including witness statements and expert reports), a streamlined document production process (which avoids U.S.-style “fishing expeditions” and targets the material evidence that goes to the heart of the case), and an evidentiary hearing that is focused on witness examination. The resulting award is fully enforceable against the losing party, and is usually easier to enforce internationally than a court judgment.

Arbitration requires an agreement to arbitrate, often in the form of an arbitration clause in the contract, and provides great flexibility. Best practice in international arbitration is a “hybrid” of common law and civil law traditions, and contract partners can freely choose whether they want the process to more closely follow one tradition or the other. This can be done when drafting the contract, or even at the outset of a case, where the procedure can be tailored to the specific needs of the particular dispute.

What are the advantages of arbitration?

Many life sciences companies use arbitration to resolve disputes because of its main benefits:

Neutrality. Neither party to a cross-border contract wants their dispute decided by the local courts of the opposing party, as there is a fear that this gives the “home team” an unfair advantage. Concerns of bias can especially arise in situations where there are political tensions between the countries concerned. Arbitration provides a neutral forum for dispute resolution, and typically takes place in a third country (e.g. Switzerland).

Choice of Arbitrators. Parties are free to select the arbitrators, to ensure that they understand the issues of the case and have the necessary credentials and experience. Many arbitrators have specific life sciences expertise, and regularly hear international disputes in that field. This may not always be the case for civil court judges, who typically hear a much broader range of cases throughout the day. Tribunals in more significant disputes often consist of three arbitrators, with each party selecting one co-arbitrator. The presiding arbitrator (or in other cases the sole arbitrator) will be agreed between the parties or co-arbitrators, or appointed by the arbitral institution chosen by the parties to administer the dispute. Either way, the parties’ respective preferences and the specific needs of the case will be taken into account to ensure that the arbitrator has the required expertise and industry knowledge.

Confidentiality. Arbitrations are typically confidential, which is critical for life sciences disputes that often involve commercially sensitive information. Companies can ensure confidentiality by choosing a place of arbitration or arbitration rules that provide for confidentiality, or by agreeing on confidentiality in their arbitration clause. 

Enforceable Decision. One major advantage of arbitration is that arbitral awards can be enforced around the globe more easily than court judgments. This is thanks to the New York Convention, an international treaty that requires contracting states to recognize and enforce awards made in another contracting state. Over 160 countries covering 86% of the world are currently contracting states of the New York Convention, including all of the world’s major economies (U.S., all EU countries, UK, Canada, Brazil, China, Japan, Russia, India, etc.).While enforcement is still subject to some country risk in certain parts of the world, the grounds for refusing enforcement are very limited. It is typically more difficult, for example, to enforce a U.S. court judgment in Russia than an arbitral award rendered in the U.S.

Time Efficiency. Arbitration is typically faster than litigation for several reasons: (1) Arbitration does not suffer from the backlog of cases that many courts face, and effort is made at the outset of a case to verify that the arbitrators have sufficient time to devote to the case. (2) Court judgments are usually subject to at least one or two levels of appeal, which often involve reconsideration of the facts and/or the law and can be lengthy. By contrast, an arbitral award is final, and not subject to lengthy ordinary appeals. In arbitration-friendly jurisdictions, an award can only be set aside on very limited grounds (e.g. lack of jurisdiction or a violation of due process). Regarding time and cost, it is worth choosing the place of arbitration wisely. In Switzerland, for example, the Swiss Supreme Court decides directly on applications to set aside an award, often within six to seven months, based only on written briefs (which can even be filed in English). In London, by contrast, there can be up to three layers of appeal against an award. (3) Arbitration practitioners know that companies want to resolve their disputes efficiently and quickly, and arbitral institutions increasingly offer expedited proceedings (e.g. ICC, WIPO, Swiss Rules). For example, the ICC’s expedited procedure applies to cases where the amount in dispute is less than $3 million, which are heard by a sole arbitrator in a six-month timeframe.

A related advantage of arbitration is that case timing is predictable. When a case begins, the parties and the tribunal jointly agree on a full procedural schedule, and normally stick to it. In a complex dispute, this timetable might be one or two years.

Cost Efficiency. The largest portion of a company’s budget for a given dispute is the cost of legal counsel. Because arbitration is typically quicker than litigation, it can also be cheaper.Moreover, you can use the same counsel for all of your arbitrations, regardless of where they take place. This increases counsel’s familiarity with your business, enhances efficiency, and puts you in a better position to negotiate volume discounts. Compared to litigation, arbitration also gives the winning party a greater chance to recover all or a substantial portion of its legal and other costs. In the event of success, full or substantial recovery is the norm.

Saving the Relationship. Depending on the jurisdiction, arbitration can be a more consensual process than litigation, which can help save the business relationship. Proceedings are usually conducted in a respectful tone, and there is typically a certain degree of procedural cooperation between the parties. That said, if your primary goal is to save the business relationship and find a win-win solution, you may prefer to engage in mediation as a first step, before escalating the dispute to arbitration if an amicable settlement is not possible within a short timeframe.

Of course, no dispute resolution mechanism is perfect, and there are situations where a life sciences dispute might be better suited to litigation. For example, you may prefer litigation to resolve small disputes, establish a legal precedent or obtain a public decision with persuasive value for future disputes–provided that you can agree on a reliable forum.

Why is there an increase in IP arbitrations?

In the past, contracts often included a “carve out” in their arbitration clause, saying that all disputes arising out of or in connection with the contract would be finally decided by arbitration, except for disputes relating to IP rights. This led to complications, because commercial disputes often involve a variety of interconnected issues, with IP issues just being one part of the larger dispute.In practice, judges or arbitrators may have a hard time determining which part of the dispute should be resolved where.

An increasing number of life sciences companies are turning their back on “carve outs” and are using international arbitration to resolve disputes over IP rights because of its advantages:

Ability to Consolidate Patent Disputes. Many cross-border contracts in the life sciences industry involve patents. If disputes must be resolved by court litigation, claims for the transfer, invalidity or infringement of a patent must generally be brought in each country where the patent is registered. In some countries (e.g. Germany), different courts hear infringement actions and patent invalidity defences. By contrast, arbitration allows parties to resolve a multi-country patent dispute in a single proceeding, which avoids the need for several legal teams and the risk of conflicting decisions.

Confidentiality. Confidentiality is more readily achieved in arbitration than in court proceedings, as explained above. An arbitration hearing involves only the parties, in contrast to a court hearing, which may be open to the public (including competitors) and where even the parties’ pleadings may be publicly available. Arbitration allows life sciences companies to keep their secrets out of the newspaper.

Arbitrator Selection. The ability to select the arbitrators is another important advantage of IP arbitration. This often leads to panels of arbitrators with complementary areas of expertise, and who typically have or develop a deep understanding of the underlying technical or scientific issues.

Time. Another important consideration is the time it takes to resolve IP disputes. In one example, a final arbitral award was rendered in a dispute between R&D partners over patent co-ownership and access rights while related patent infringement proceedings were nowhere near completion, and were made obsolete by the award.

Again, no dispute resolution mechanism is perfect, and in some instances you may prefer litigation over arbitration for your IP disputes. One advantage of the courts is that their decisions on patent ownership and invalidity can be directly registered in the national patent register, whereas in most countries, arbitral awards on such decisions are only effective between the parties themselves. Switzerland is an exception, and allows the outcome of an award to be directly registered in the patent register. In any event, a patent decision that binds only the parties is in most cases sufficient in practice (e.g. the dismissal of a licensor’s claim for royalty payments based on patent invalidity, or an order that the patent be transferred).

Dorothee Schramm and Katie von der Weid are lawyers at the law firm Sidley Austin LLP

This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content of the article is personal to the authors and does not reflect the views of the firm or its clients.