1. Examining the Utility of IP
Carve-Outs in Light of Recent
Developments in US
Jurisprudence and
International Arbitration
by
Junghye June Yeum
Reprinted from
(2012) 78 Arbitration 279-285
Sweet & Maxwell
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2. Examining the Utility of IP Carve-Outs in Light of
Recent Developments in US Jurisprudence and
International Arbitration
Junghye June Yeum*
1. Introduction
The President of the Consumer Electronics Association, Gary Shapiro, recently lamented
that “the current rash of [patent] lawsuits, with costs averaging $3 million, is a bane to the
[electronics] industry”.1
In light of the toll such litigation is taking,2
Mr Shapiro noted that
the industry “would welcome industry arbitration rather than lawsuits … The only thing is
that it would have to be up to the companies themselves.”3
Businesses have enthusiastically embraced international arbitration as a preferred dispute
resolution mechanism in licensing and technology-related cross-border agreements. However,
the same has not quite happened regarding intellectual property (IP) issues. Frequently, the
arbitration clause in a cross-border agreement includes an exception, often called a
“carve-out”, so as to exclude IP issues from the scope of the agreement to arbitrate.
This article examines the validity of some of the most oft-cited justifications for including
an IP carve-out, in light of certain recent developments in US jurisprudence and international
arbitral rules. As shown below, increasingly the IP carve-out does not deliver its touted
benefits so much as delay resolution of the dispute and add unnecessary cost. That being
so, practitioners should be wary of employing an IP carve-out in an arbitration clause.
2. Commonly Cited Justifications for Including IP Carve-Outs
An IP carve-out ensures that issues involving the parties’ IP rights are heard by a court of
law, rather than by an arbitrator. One such typical IP carve-out reads as follows:
“16.2 Arbitration
Except for any controversy or claim relating to the ownership by either party
of any intellectual property rights, which shall not be subject to the provisions
of this section and shall be subject to the provisions of Subsection 23.4
(‘Forum’), any other Dispute between the parties shall be settled through
mandatory and binding arbitration to be conducted in Miami, Florida, and in
*
This article reflects only the present considerations and views of the author, which should not be attributed to
Baker & McKenzie.
1
Gary Shapiro, “CES 2012: Consumer Electronics President Sees Sales Growth Spurring Jobs; Advocates Arbitration
vs. Patent Lawsuits” International Business Times, January 9, 2012.
2
For example, Samsung reportedly spent some $60 million litigating against Apple in just 10 months; Apple
reportedly spent some $100 million over a year-long period. See “Apple and Samsung on the way to reconcile court
battles” RT News, April 18, 2012; “Samsung suffers German court setback in Apple battle” Reuters, January 20,
2012.
3
Shapiro, “CES 2012: Consumer Electronics President Sees Sales Growth Spurring Jobs; Advocates Arbitration
vs. Patent Lawsuits” International Business Times, January 9, 2012. Some IP disputes, of course, are unlikely to be
arbitrated, e.g. suits by so-called “patent trolls” who assert patents of dubious quality against defendants in jurisdictions
perceived to be plaintiff friendly. Nor do parties who employ “scorched earth” litigation tactics designed to seriously
cripple or drive the opposing side out of business favour arbitration.
279(2012) 78 Arbitration, Issue 3 © 2012 Chartered Institute of Arbitrators

3. accordance with the Commercial Arbitration Rules of the AAA, before a
single arbitrator” (italics in original).4
Whether IP rights may be resolved by arbitration is country specific. Certain countries
disallow resolution of IP disputes by arbitration as a matter of national policy. The United
States, by contrast, is very pro-arbitration; claims involving infringement and/or validity
of patents, trade marks and copyrights are all fully arbitrable. The US Patent Act permits
the arbitration of patent infringement and validity claims, as well as patent interference
disputes.5
Further, well-settled US common law precedent provides that trade mark6
and
copyright infringement7
and validity claims are also arbitrable. When agreeing to arbitrate
disputes regarding US patents or IP rights, parties are not limited to arbitrations conducted
in the United States.8
And yet, the parties to licensing and/or technology agreements still
often include a carve-out that excludes issues involving IP rights from the scope of the
agreement to arbitrate.
Reasons most often cited for inserting an IP carve-out include:
1. that irreparable harm is presumed for IP infringements in US courts when
injunctive relief is sought;
2. that IP issues can easily be separated from other issues relating to the
underlying agreement;
3. that interim relief (such as a temporary restraining order (TRO) and a
preliminary injunction) is crucial in IP disputes, which arbitrators cannot grant
as quickly as can judges;
4. that arbitrator-granted interim relief is not enforceable; and
5. that arbitrators’ rulings on patent validity issues command less respect than
the rulings by the US Federal Circuit.
As explained below, many of these reasons/justifications are either overstated or no longer
fully warranted in light of recent development in US case law and international arbitration.9
3. Irreparable Harm is No Longer Presumed in IP Litigation
One of the principal reasons why the the IP carve-out has gained popularity among hi-tech
companies is that courts in the United States traditionally would presume irreparable harm
4
Heritage Skin Care Inc v Dyno-Heritage Brands Inc 1:03CV20282, 2003 WL 23762879 (S.D. Fla. February 13,
2003).
5
United States Code, Title 35: Patents ss.135 and 29435 USC §§135(d), 294(a)–(d). United States Code Title 35
is available on the United States Patent and Trademark Office’s website at: http://www.uspto.gov [Accessed June 5,
2012].
6
Courts in the US have routinely held that claims falling under the Lanham (Trademark) Act are arbitrable. See
Doctor’s Assoc Inc v Distajo 107 F.3d 126, 133 (2d Cir. 1997); Gingiss Int’l Inc v Bormet 58 F.3d 328, 332 (7th
Cir.1995). Courts also routinely refer claims for misappropriation of trade secrets to arbitration. See, e.g. Mitsubishi
Motors Corp v Soler Chrysler-Plymouth 473 U.S. 614, 627 (1985); McMahan Sec Co, LP v Forum Capital Mkts LP
35 F.3d 82, 88 (2d Cir. 1994).
7
See, e.g. Saturday Evening Post Co v Rumbleseat Press Inc 816 F.2d 1191 (7th Cir. 1987); Image Software, Inc
v Reynolds and Reynolds Co 273 F. Supp. 2d 1168 (D. Colo. 2003).
8
See, e.g. Deprenyl Animal Health Inc v University of Toronto Innovations Foundation 297 F.3d 1343 (Fed. Cir.
2002).
9
Another perceived risk in arbitrating IP disputes comes in the context of multi-jurisdictional matters; namely,
that agreements lacking an IP carve-out risk vacatur or non-enforcement of the ultimate arbitral award. However,
this dilemma can be resolved by carefully structuring the relief to be granted, as suggested by IP practitioners including
M. Scott Donahey. For example, Mr Donahey has suggested (M. Scott Donahey, Presentation at “International
Arbitration of Patent Disputes”, American Bar Association Annual Meeting, Dispute Resolution Section, San Francisco,
August 11, 2007) that, rather than a finding of invalidity, “the arbitrators should be asked to find that under the
conditions in which a court would find the patent invalid the arbitrators would find the patent unenforceable against
the other party to the arbitration”. Further, arbitrators, like courts of law, may sometimes have to apply the patent
law of multiple jurisdictions. Acknowledging this possibility, however, should not detract from the fact that arbitration
is still likely to be more efficient, and lead to more consistent results, than separate litigations in multiple national
courts.
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4. when considering preliminary/permanent injunction applications. The potential for such
semi-guaranteed interim injunctive relief from US courts often helped companies with IP
rights gain the upper hand in IP-related disputes or settlement negotiations. However, a
number of recent US court rulings have effectively abrogated this traditional rule and the
attendant benefits.10
In Perfect 10 Inc v Google Inc,11
the US Court of Appeals for the Ninth Circuit held that
irreparable harm is not automatically presumed in a copyright preliminary injunction case,
reversing 25 years of precedent. Perfect 10 creates and copyrights photographic images of
nude models. It sued Google and sought a preliminary injunction, arguing that Google’s
web and image search and related caching feature, its Blogger service, and its practice of
forwarding Perfect 10’s takedown notices to the website www.chillingeffects.org12
all
constituted copyright infringement. The district court, however, denied Perfect 10’s motion
for preliminary injunction, holding that Perfect 10 failed to demonstrate that it was likely
to suffer irreparable harm without injunctive relief being granted.13
The Ninth Circuit’s preliminary injunction ruling in Perfect 10 follows the US Supreme
Court’s decision on permanent injunctions in the landmark case eBay v MercExchange LLC
in 2006.14
In that case, the Supreme Court held that plaintiffs in patent infringement suits
“must satisfy a four-factor test before a court may grant” a permanent injunction, the first
factor being “that [the plaintiff] has suffered an irreparable injury”.15
In reliance thereon,
the US Court of Appeals for the Second Circuit in Salinger v Colting16
abrogated its
longstanding presumption “that a plaintiff likely to prevail on the merits of a copyright
claim is also likely to suffer irreparable harm if an injunction does not issue”, because this
presumption is “inconsistent with the principles of equity set forth in eBay”.17
Equally gone are the days when irreparable injury is presumed in trade mark and false
advertising cases. In Leatherman Tool Group Inc v Coast Cutlery Co,18
for example, the
district court found that Leatherman made a preliminary showing that its competitor, Coast
Cutlery, deliberately included in advertising false statements concerning the sharpness of
its knife blades. The court, however, did not issue a preliminary injunction because it found
Leatherman’s claim of diverted sales to be too speculative, and insufficient to prove that
Leatherman would be irreparably harmed by its competitor’s false advertising.19
These recent US court rulings leave IP owners, in order to obtain preliminary injunctive
relief, with the burden of proving why the wrongdoing cannot be remedied by money
damages. That has made obtaining interim injunctive relief in IP litigation much more
difficult. By comparison, the emergency application in arbitration is less constrained by the
court-imposed standard for preliminary injunction. As one commentator notes,
“there is no set format for the applications—submissions have ranged from a 2-page
letter to a 60-page formal application with 500 pages of supporting documentation”.20
Equally important, due to the newly imposed four-prong test discussed above, it now takes
longer to litigate a preliminary injunction motion in IP cases. By contrast, as explained
10
For cases applying the former rule, see Nat’l Football League v McBee & Bruno’s Inc 792 F.2d 726, 732 (8th
Cir. 1986); MAI Sys. Corp v Peak Computer , 991 F.2d 511, 520 (9th Cir. 1993).
11
2011 WL 3320297 (9th Cir. Aug. 3, 2011).
12
[Accessed June 5, 2012].
13
Perfect 10 2011 WL 3320297 (9th Cir. Aug. 3, 2011).
14
547 U.S. 388, 390–94 (2006).
15
MercExchange 547 U.S. 388, 390–94 (2006).
16
607 F.3d 68 (2d Cir. 2010).
17
Salinger 607 F.3d 68, 79 (2d Cir. 2010).
18
2011 WL 4832566 (D. Or. Oct. 12, 2011).
19
Leatherman 2011 WL 4832566 (D. Or. Oct. 12, 2011); see also Voice of the Arab World, Inc v MDTV Med News
Now Inc 2011 U.S. App. LEXIS 10882 (1st Cir. May 27, 2011) (irreparable harm cannot be presumed in trade mark
case).
20
See “Pre-Arbitral Emergency Measures of Protection: New Tools for an Old Problem” PLI Litig. & Admin.
Practice, Course Handbook Ser., No.H-865, 2011, p.199.
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5. below, major international arbitral institutions in recent years have addressed criticism that
arbitration fails to offer speedy interim relief by greatly strengthening the procedural
framework under which preliminary injunctive relief can be granted speedily in IP matters.
4. IP Issues Cannot be Easily Carved Out from an Arbitration Clause
IP carve-outs also gained popularity on an assumption that the carved-out IP issues could
be clearly separated from the other issues to be arbitrated. However, US courts have
repeatedly rejected arguments that infringement and/or validity issues are separate and
distinct from other issues arising out of licence agreements.21
For example, in Zoran Corp
v DTS Inc, Zoran sued for patent misuse based upon an IP carve-out while DTS pursued
related claims against Zoran in arbitration. Months of motion practice ensued, with the court
concluding that:
“In light of the factual commonalities between Zoran’s arbitrable FRAND [fair,
reasonable and non-discriminatory] allegations and those allegations properly decided
in the first instance by this Court, and given the attendant possibility that some of the
arbitrator’s findings may result in issue preclusion, the action will be stayed pending
the arbitrator’s determination on the FRAND issues.”22
Thus, the parties frequently end up battling over the scope of the carved-out issues and who
is to determine the arbitrability thereof, thereby prolonging the dispute. This turf battle often
leads to multiple additional layers of motion practice in court, a process that can drag on
for months or even years before the dispute reaches a merit stage.
A recent development in Oracle v Myriad23
is instructive. The arbitration clause in that
case had the following IP carve-out:
“Any dispute arising out of or relating to this License shall be finally settled by
arbitration as set out herein, except that either party may bring any action, in a court
of competent jurisdiction (which jurisdiction shall be exclusive), with respect to any
dispute relating to such party’s Intellectual Property Rights …” (emphasis added).
Based on this carve-out, Oracle filed suit in December 2010 claiming that Myriad infringed
trade mark and other IP related to Oracle’s Java software. Meanwhile, Myriad pursued
International Centre for Dispute Resolution (ICDR) arbitration pursuant to the arbitration
agreement. Multiple motions were filed over the scope of the IP carve-out and the
arbitrability thereof, with each party seeking to enjoin the other’s action.
Over a year later, in January 2012, the court ruled that “the general incorporation of
UNCITRAL rules did not clearly and unmistakably evidence the parties’ mutual intent to
have the arbitrator determine arbitrability”, and the fact that
“the court in which [IPR-related] action is filed shall have exclusive jurisdiction evinces
the parties’ intent to vest that court with the sole authority to determine whether those
claims may be litigated in court or are subject to arbitration” (original emphasis
omitted).24
21
See, e.g. Rhone-Poulenc Specialites Chimiques v SCM Corp 769 F.2d 1569, 226 U.S.P.Q. 873 (Fed. Cir. 1985)
(holding that “[t]he issues of scope and infringement should be considered together as they are not separate and
distinct issues”).
22
Zoran Corp v DTS Inc 2009 WL 160238, *6 (N.D. Ca. Jan 20, 2009); see also Heritage Skin Care Inc v
Dyno-Heritage Brands Inc 2003 WL 23762879 (S.D. Fla. Feb 13, 2003) (carve-out prompted months-long motion
practice over the scope of the carved-out issues).
23
Case No.C 10-05604 SBA (N.D. Cal. Dec. 2010).
24
See Jan 17, 2012 Order Granting Plaintiff’s Motion for Preliminary Injunction, Dkt 59, 64, at 7–8, Oracle Case
No.C 10-05604 SBA (N.D. Cal. Dec. 2010).
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6. Myriad was also enjoined from proceeding with its ICDR arbitration except as to Oracle’s
claim for breach of contract.25
Nonetheless, the following month, in February 2012, the
parties stipulated and agreed to stay the IP-part litigation and proceed with the arbitration
after all.26
It should also be noted that court rulings on motions to stay or enjoin arbitration are
often appealed by the losing party, with further fights over whether a wrongfully enjoined
party should recover against an injunction/stay bond for provable damages.27
In sum, an IP carve-out in practice often cannot easily be segregated from other issues
to be arbitrated in the underlying technology agreement and, that being so, the ensuing
jurisdictional dispute results in a delayed resolution of the dispute.
5. Fast Interim Equitable Relief can be Obtained in Arbitration
Proponents of IP carve-outs point out that in US state and federal courts, a litigant can often
obtain a TRO in merely a day or two (sometimes even on an ex parte basis), pending a
preliminary injunction hearing to take place weeks later.28
However, as explained above,
IP disputes no longer presume irreparable harm in preliminary injunction cases. Thus the
parties are now likely to take longer to litigate the issue of irreparable harm, and the court
is likely to take longer to decide the preliminary injunction motion.
On the other hand, major international arbitral institutions have taken action in response
by establishing a mechanism whereby emergency interim relief can be granted prior to or
at the same time as the filing of an arbitration demand.
For example, the new ICC Arbitration Rules which came into force on January 1, 2012
(the 2012 ICC Rules) provide for a pre-arbitral emergency arbitrator procedure which can
be invoked even before a Request for Arbitration has been filed.29
This is arguably more
expeditious than the court procedure for a TRO, which is typically sought by attaching a
Complaint. The emergency arbitrator procedure in the 2012 ICC Rules contemplates that
an applicant may secure effective interim relief in less than three weeks from the
commencement of the emergency procedure.30
This is comparable to the typical preliminary
injunction timeframe discussed above, which increasingly is even longer due to the
abrogation of the presumptive irreparable harm rule in IP disputes.
More specifically, under the 2012 ICC Rules,31
the President of the ICC Court should
appoint the emergency arbitrator no later than two days from the application32
; the emergency
arbitrator must establish a procedural timetable for the emergency arbitrator proceedings
normally within two days of receiving the file33
; the respondent’s challenge to the emergency
arbitrator must be made within three days of receiving notice of the appointment34
; and the
emergency arbitrator must make a written order no later than 15 days following receipt of
the file unless this period is extended by the President of the ICC Court as necessary.35
The ICDR International Arbitration Rules also permit expedited emergency relief before
an arbitrator has been appointed.36
Upon receipt of an art.37 application, the ICDR
administrator shall appoint an emergency arbitrator within one business day of the request.
25
See Jan 17, 2012 Order Granting Plaintiff’s Motion for Preliminary Injunction, Dkt 59, 64, at 7–8, Oracle Case
No.C 10-05604 SBA (N.D. Cal. Dec. 2010).
26
See Feb 6, 2012 Stipulation And Order, Dkt 73.
27
See, e.g. Nokia Corp v InterDigital Inc et al Case No.10-1358 (2d Cir. May 23, 2011) (ruling to stay litigation
over arbitration was reversed on appeal, prompting another bout of motion practice over fee recovery).
28
See John Marsh, “Arbitration and Trade Secrets: Avoiding the Trap” Trade Secret Litigator, May 4, 2011.
29
2012 ICC Rules art.29 and Appendix V.
30
See 2012 ICC Rules art.29 and Appendix V.
31
Appendix V arts 2(1) and 6(4).
32
Appendix V art.2(1).
33
Appendix V art.5(1).
34
Appendix V art.3(1).
35
Appendix V art.6(3) and (4).
36
See ICDR International Arbitration Rules art.37; see also M. Gusy, J. Hosking and F. Schwarz, A Guide to the
ICDR International Arbitration Rules (New York: Oxford University Press, 2011), Ch.37.
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7. Any challenge to the emergency arbitrator must be made within one business day. The
ICDR has the sole authority to consider and rule on challenges. Within two business days
of appointment, the arbitrator must establish a schedule for considering the merits. No
formal hearing is necessary as long as the parties have a reasonable opportunity to be heard.37
Other major arbitral institutions such as the Singapore International Arbitration Centre
(SIAC) and the Stockholm Chamber of Commerce (SCC) provide similarly ambitious
emergency arbitrator procedures.38
In addition, courts are generally empowered to issue a TRO in aid of arbitration prior
to or pending the arbitration proceeding under a statutory mechanism and/or common-law
principle.39
Thus, the parties do not need to include an IP carve-out merely to have the ability
to temporarily restrain an opponent pending an application for preliminary relief in
arbitration.
Arbitrator-issued interim relief is enforceable
Proponents of IP carve-outs also argue that interim injunctive orders issued by arbitrators
may not be enforceable.40
However, US courts have uniformly held that interim equitable
relief granted by arbitrators has the same force and effect as court-issued rulings.41
For example, in Draeger Safety Diagnostics Inc v New Horizon Interlock Inc,42
the
defendant failed to comply with the arbitrators’ interim award for emergency relief. The
court held that the interim relief was “ripe” for confirmation, and ordered compliance
therewith. Similarly, in Pacific Reinsurance Mgmt Corp v Ohio Reinsurance Corp,43
where
the defendants failed to comply with an interim final order setting up an escrow account,
the Ninth Circuit affirmed the district court’s confirmation of the interim final order. And
in Norrell Health Care Inc v Redwood Empire Nurses,44
where the defendants did not abide
by the arbitrators’ non-compete interim order, the court ordered compliance and awarded
the plaintiff attorney fees and costs associated with the enforcement proceeding.
Non-compliance with an interim or emergency order is also likely to affect cost allocation
in the ultimate final award of damages.45
For example, the 2012 ICC Rules46
provide that
the arbitral tribunal is empowered to reflect non-compliance with the emergency arbitrators’
order in its final award of damages.
Thus, arguments for the IP carve-out based upon non-enforceability of the preliminary
injunction issued by the arbitrator appear to be unwarranted.
6. Is Court Ruling Worth the Cost?
One final justification for an IP carve-out is the belief that a patent may be better served by
a trial, because if a patent has survived review in the Federal Circuit, it is granted greater
respect than an arbitration award, which has only inter partes effect.47
When the Federal
37
It is reported that, as at March 1, 2012 the AAA and/or the ICDR had administered 21 cases since the introduction
of the emergency arbitrator provision under art.37 wherein the emergency arbitrator granted interim relief of between
four and seven days on average absent parties’ agreement to an extension of time.
38
See SCC Arbitration Rules Appendix II; SIAC Arbitration Rules r.5.
39
See, e.g. Pre-paid Legal Services Inc v Smith, 2011 U.S. Dist. LEXIS 118972 (E.D. Okla. October 13, 2011);
New York Civil Practice Law and Rules §7502(c).
40
See, e.g. John Marsh, “Arbitration and Trade Secrets: Avoiding the Trap” Trade Secret Litigator, May 4, 2011.
41
See generally G. Lemenez and P. Quigley, “The ICDR’s Emergency Arbitrator Procedure in Action Part I: A
Look at the Empirical Data” (2008) 60 (Aug-Oct) Disp. Res. J.; G. Lemenez and P. Quigley, “The ICDR’s Emergency
Arbitrator Procedure in Action Part II: Enforcing Emergency Arbitrator Decisions” (2008/2009) 61(Nov-Jan) Disp.
Res. J.
42
2011 U.S. Dist. LEXIS 14414 (E.D. Mich. Feb. 14, 2011).
43
935 F.2d 1019 (9th Cir. 1991).
44
1991 U.S. Dist. LEXIS 6615 (N.D. Cal. May 6, 1991).
45
See, e.g. 2012 ICC Rules art.29(2) (the “parties undertake to comply with” the order).
46
In art.29(4).
47
35 USC §294(d).
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8. Circuit construes the claim language in a patent, that claim construction is controlling
precedent for all future disputes involving that patent in any forum, even against parties
who did not participate in the first matter. However, this can cut both ways. A patentee’s
loss in a validity fight means its patent becomes invalid as against the world. By contrast,
an arbitral award of invalidity would not preclude the patentee from subsequently suing
another entity on the same patent. Thus, the perceived benefit of collateral estoppel can
instead be a harm, depending upon the outcome.
Further, a party’s desire to obtain the Federal Circuit’s ultimate seal of approval on its
patent should be measured against the cost of an “additional $2 million” on top of an average
$3 million litigation cost at the trial level.48
7. Conclusion
In light of these new developments in US jurisprudence and the international arbitration
community, combined with the rapidly rising costs of litigating in the United States, counsel
should carefully consider whether the IP carve-out frequently included in the arbitration
clause of a licensing or technology agreement is worth the cost. Although not without its
own challenges, arbitration of all issues in a technology agreement, including IP issues,
offers a more streamlined and efficient mechanism for resolving the parties’ disputes relating
to the underlying agreement. Absent compelling reasons specific to a given situation, an
IP carve-out in the arbitration agreement should no longer be automatically inserted.
48
See http://www.managingip.com/Article/2089405/Cost-and-duration-of-patent-litigation.html [Accessed June
5, 2012].
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