From BioExecutive International, September 2005
The Devil is in the Details
by Raymond S. Fersko
Picking up where the last installment of BioSciLaw left off, this column addresses what the biotech executive ought to know in assessing dispute resolution options and preserving rights to intellectual property during the course of the strategic agreement. (See BioSciLaw Insights, 2005.) Those decisions, like most business decisions, require risk management. At the heart of risk assessment is probability theory. The quality of information forms the basis of probability estimates.
In November 1994, Federal Reserve Chairman Alan Greenspan stated that “the willingness to take risks is essential to the growth of a free market economy . . . [I]f all savers and their financial intermediaries invested only in risk-free assets, the potential for business growth would never be realized.”
In no place is this more apt than in the biotech industry. It is not for the faint hearted, and if you are not a risk taker, you shouldn't be in the industry.
It is important to understand that no choices are black and white. The choices that the biotech manager has today boil down to whether it is better to reject or not to reject, as opposed to accept or reject, and those choices are decided by probability.
Everything that has to do with probability is of a dual character: past frequencies can collide with degrees of belief when risky choices must be made. It is then up to the executive to evaluate new information and incorporate it.
NO SURE THING
The probable outcome of any litigation is difficult to determine, and whether to arbitrate or litigate is a decision that requires a continuous evaluation of new information as it develops. In light of my own experiences during the past 33 years, I see the answer to the question of arbitration versus judicial determination as a judgment call that must be tailored to the circumstances. The old saw that arbitration is speedy and less expensive is hardly the case. Management must assess the risk of one form vs. the other in each particular case. Where the risk is low, arbitration carefully planned to effect a speedy decision ( e.g. , baseball or night baseball, as discussed in our previous column) may be appropriate.
If the risk is high in the substantive issues in question, and in the potential effect of an adverse decision for the company, I recommend staying with the judicial system. In spite of all its infirmities, it still presents the litigants with a better chance of obtaining due process of law, equal protection under the law, and basic fairness, even if it is only achieved through the appeal process.
RAISED STAKES
As arbitration has grown in popularity, so have its costs. Alternative dispute resolution is considered by many to be a panacea, but the reality is the old saw that arbitration is fast and cheap becomes more inapposite as time goes by.
Once there was no discovery in the arbitration process; today there is considerably more. That takes time and that is the place where lawyers have the most opportunity to take advantage of the system as we know it.
In the normal litigation process, judges are paid through city, state and federal tax dollars. In arbitration proceedings, the participants have to pay the one to three arbitrators directly just as much if not more than they pay their lawyers. Instead of less lawyering, there is more lawyering. There is little or no basis for removing the arbitrator(s); if the arbitrator hands down an arbitrary decision, the appeal process is very difficult because of the Courts' mandate by statute, public policy, a general inclination, and the expressed strong desire not to substitute one tribunal's judgment for the judgment of another tribunal chosen by the parties. The Courts favor arbitration and will look for any basis that can sustain it.
Arbitration awards are sustained even when they conflict with the evidence. The Courts regularly confirm arbitral awards even when the findings of the arbitrator are shown to be inconsistent with the evidence or in situations where there have been no written findings upon which conclusions of law and/or fact have any sound footings.
This last point should be underscored as it is critical in dispute resolution because many arbitrators are sloppy in the manner in which they handle a case or analyze the issues. One European arbitrator at the International Chamber of Commerce told me that the pay by the ICC to the particular arbitrator was not very good so he was not inclined to think too much.
Moreover, many arbitrators protect themselves by purposefully abstaining from providing written findings in order to shield themselves from any obvious basis for a Court to find a “manifest injustice” which would require the vacating of the arbitral award. In short, the law and public policy, with few exceptions, generally lead to upholding the arbitral award absent the generally accepted standards of a party's rights being prejudiced. Those rights are fairly uniform in many jurisdictions around the world as a result of a number of international treaties resulting in grounds for vacatur that are pretty much uniform. Those grounds are:
- Corruption, fraud or misconduct in procuring the award
- Partiality of an arbitrator
- Arbitrators exceed their power so imperfectly that a final and definite award upon the subject submitted is not made
- Failure to follow the procedure of applicable law unless the party applying to vacate the award continues with the arbitration with notice of the defect and without objection.
It is essential to make the arbitrator set forth the basis upon which the award is rendered I recommend that either the parties agree to or create the rules in a specific forum. Regardless of the basis, no arbitration should be conducted pursuant to a procedure that does not require the arbitrator to set forth in detailed terms the basis for rendering an arbitral award. Perhaps it is a case of belt and suspenders, but it would be wise even when the arbitral forum's rules require specific findings of fact and conclusions of law and therefore the predicate that the arbitration clause in the underlying contract have the same requirement.
Pursuant to such an agreement, the respondent in an arbitration should not be able to argue that the arbitrator is not required to provide adequate findings of fact or conclusions of law. With the language in both the agreement and in the forum's rules, any challenge should not withstand scrutiny because of the language itself, the fact that the parties submitted the matter to arbitration, and the fact that the jurisdiction to decide the matter has for all intents and purposes been taken from the courts except for enforcement purposes. Therefore, the courts ought to abide by the arbitration decision.
In an international context, it is important that the agreement provide either for the parties to submit to the jurisdiction of a particular court or for an arbitration mechanism. Otherwise, if there is a dispute, each side will attempt to have the dispute resolved by their own national courts which may lead to parallel proceedings in different countries. When providing for a particular forum in which to resolve a dispute, courts will generally honor the parties' agreement. On an ad hoc basis after a factual inquiry, courts may decline to enforce agreements to litigate in a particular forum if the choice is unduly inconvenient or unreasonable and the venue is important to the enforcement of an ultimate judgment. If the country is not a party to one of several conventions governing the enforcement of foreign judgments, or agrees to enforce on the basis of principles of comity, there could be a problem in obtaining recognition and enforcement of a foreign judgment based upon the arbitration award.
SELECTING THE ARBITRATION ORGANIZATION
There are many different arbitral bodies that may be available for the conduct of an arbitration. No two are really alike. They each have their own strengths and weaknesses. The International Chamber of Commerce tends to be very expensive; the United Nations Commission for International Trade Law provides the most flexibility in the conduct of arbitration, although there must be an Appointing Committee that plays a role in picking the arbitrator(s) if the parties do not reach agreement on their own. In an international context, the London Court of International Arbitration, as well as the American Arbitration Association through its International Centre for Dispute Resolution, provides a fairly reasonable cost structure.
LITIGATE THE BIG, ARBITRATE THE SMALL
As a general rule, most countries favor arbitration. The rationale is: ease of enforcement; privacy and confidentiality; a choice of decision maker; promptness of resolution; possibility of cost savings; and, in the international context, the avoidance of the uncertainties of litigating in a foreign judicial system. Yet, the disadvantages are: the difficulty of appealing an arbitrator's decision; there may be undetected partiality or bias in arbitrator(s); and arbitration may not result in savings, and may even be more expensive because of high travel costs and high fees to the arbitral body. Increasingly higher fees are being requested by the arbitrators themselves. It's like the judge coming in and telling you, “I will dispose of your case only if I have in hand an adequate amount of money or comfort that it will be paid, or else your case sits in limbo and may even be dismissed.” Ultimately every case depends a great deal upon the decision maker, or the make up of a jury, and the general difficulty of substantially appealing an arbitrator's decision heavily weighs against using arbitration in such cases in my view , no matter how carefully an arbitration clause may be written.
DEVIL IN THE DETAILS
In the inaugural column of BioSciLaw, I made an attempt was to poignantly demonstrate that every executive should be armed with all of the tools that are available to cover all of the business and legal issues relevant to a successful strategic collaboration. There, as in all agreements, the negotiating executive must create an agreement that enables the company to put its business strategies into force and to protect all possible intellectual property that results from the company's innovations.
The typical strategic agreements in the biotech world generally resemble a CRADA (Cooperative Research and Development Agreement). The following discussion relates primarily to the context of a CRADA. Future columns will discuss other types of agreements and permutations of issues that should be provided for in such agreements.
A CRADA generally has three stages: research, development, and commercialization. In stage one, a detailed research plan carefully defines the goal or endpoint of the R&D, usually defined as the “project product.” The research plan is significant because it is an agreement on which party has what responsibilities, both activities and financial obligations. Most important, the plan should carefully specify what technology each party brings to the table.
There should be no ambiguities. Every possible term should be defined. If the definitions are not correct, parties will never get to their endpoints. There will never be any “there” there. Accordingly, amongst other things, it is important to define your inventions, know how, patent rights, technical assistance, interest in joint developments, interest in third party development, proprietary rights (including all of the foregoing). And the same goes for the other party.
Similarly, among all of those categories, there may be some that are jointly owned, some that are jointly owned with a third party, and some that belong to a third party to begin with and may require in-bound licenses.
By making it clear at the outset what each party brings, it should also be clear what each party is entitled to when there is a development that does not fit into any of the intellectual property in existence at the outset of the CRADA.
In the research phase, project teams or steering committees from each side usually decide upon budgets and rights to new inventions and ultimate project products. But there are always attendant obligations with rights, and parties seeking to obtain rights must be willing to undertake the attendant obligations, such as prosecution and enforcement of patents.
Ultimately there are issues with respect to the specific obligations of the parties in connection with registration of the project product: Which party will make, use or sell the product in a particular geographic territory? Will there be exclusive rights in certain defined areas? In some cases, the parties may want to form a joint venture in some geographical territories and license the technology, manufacture of the technology or the sale of the project product to a third party.
It is not unusual for the party granting the license rights to require an exercise of an option in connection therewith. Too often, I see agreements that state a party has option rights; however, in my opinion, those option rights are often ambiguous and unenforceable. If the terms of those option rights are not carefully defined, it is not certain that the grantee of the option rights will ever be able to effectively enter into the license agreement to which it purportedly has an option.
If you do not know all the terms of the license, then you really have a right to negotiate or perhaps the right of first refusal. When drafting the license agreement, just as in drafting the CRADA, it is important to set forth the obligations of each party in as much detail as possible. In similar fashion, if the licensee is to perform, spell out what is expected. When considering the commercialization of a product, cover everything from marketing to regulatory to finance issues, as well as future scientific advances. In connection with royalties, specify the currency, deal with the tax issues, and leave nothing to chance.
There are three basic rules in approaching any agreement:
- Get it in writing and make the writing clear.
- Trust no one.
- In the words of President Ronald Reagan, trust but verify.