International Arbitration and Technology Disputes

International Arbitration and Technology Disputes

March 28, 2023, Covington Alert

International arbitration can provide an effective means to resolve complex cross-border disputes across industries, including the technology sector. This alert is intended to provide a preliminary introduction to the world of international arbitration; its advantages and disadvantages; how the procedure has been used by technology companies; as well as some of the key considerations that companies should have in mind if they would like to take advantage of the benefits that arbitration has to offer. We also highlight the importance of drafting coherent arbitration clauses in contracts so, should a dispute come to light, you are well-prepared to arbitrate the matter under rules and a procedural scheme that best fits your objectives.

Arbitration is almost always a binding form of dispute resolution where a dispute is resolved with limited or no involvement from national courts. Instead, the parties agree to submit their disputes to a private tribunal, generally composed of one to three arbitrators selected by the parties or by an agreed-upon method. Arbitration is a creature of consent—parties must agree to arbitrate their disputes. Party consent may take many forms and may be given both before or after a dispute has arisen. But arbitration will not be available to the parties if such consent to arbitrate does not exist. As it is often quite challenging to obtain consent after a dispute has arisen, it is best practice to ensure that any dispute resolution clause in the contract provides for arbitration.

When disputes lawyers speak of international arbitration, they are commonly referring to two broad categories of arbitration: international commercial arbitration and investor-State arbitration (or investor-state dispute settlement). Key distinctions between these two categories of arbitration concern the manner in which consent to arbitrate is given, and often the types of parties involved.

International commercial arbitration generally refers to arbitration between commercial—often private—parties that agree to submit their disputes to arbitration. The consent to arbitrate such disputes is ordinarily found in a dispute resolution clause in the parties’ underlying contract.

Investor-State arbitration, on the other hand, involves disputes against States, where the consent to arbitrate is derived from international treaties (or an investment agreement with the host State). International treaties include bilateral investment treaties (or BITs) concluded between two States, international trade agreements, or multilateral treaties including, for example, the Energy Charter Treaty. Through such treaties States often agree to provide certain standards of protection, such as protection against nationalizing assets unless prompt, adequate, and effective compensation is paid. At the same time, States consent to arbitrate disputes with investors involving violations of these standards. These treaties accordingly provide foreign investors in a “host” State possible recourse—separate from the State’s domestic court system—for a State’s mistreatment of its investment.

Arbitration has several distinct advantages compared to domestic litigation. Chief among them are enforceability and neutrality. Arbitral awards are often easier to enforce across jurisdictions than court judgments. This is due to international conventions that require respecting a final arbitral award, most notably the New York Convention.[1] Arbitration also provides a neutral forum to resolve disputes, eliminating an opposing party’s ability to rely on a potential “home field advantage” in their national courts. Other advantages include the ability to select arbitrators with relevant expertise, the flexibility of arbitral procedure, and the option of a completely confidential proceeding. Selecting arbitrators with relevant expertise is particularly important where a dispute involves complex technologies. Flexibility in arbitral procedure allows the parties to select which rules will form the comprehensive framework governing the dispute. The parties also can agree to keep the dispute confidential, unlike in domestic litigation.

Critics often cite the lack of an appellate mechanism, broad arbitrator discretion (compared to courts), and the inability to bring non-consenting parties to arbitration as key disadvantages. The lack of an appellate mechanism is mitigated by the ability to launch challenge proceedings in domestic courts to set aside fundamentally unfair decisions or decisions where a tribunal has gone beyond its mandate. Arbitrator discretion can lead to the liberal admission of evidence, for example, or a procedural time table unsatisfactory to the parties. There are a number of ways to mitigate these issues, including through detailed and thoughtful drafting of arbitration clauses in the first instance. Finally, arbitration’s reliance on consent means it can sometimes be difficult to bring in all relevant parties. This avoids forcing companies into arbitration against their will, but it also creates challenges, such as when an affiliate company violates the contractual obligations of a parent company.

In recent years, technology companies have taken advantage of international arbitration as a form of dispute resolution in a variety of different contexts. Notable reported examples include Korea’s LG Corporation winning an award in a patent infringement arbitration against rival Japanese electronics manufacturer Sharp Corporation;[2] Singaporean technology company Plintron Holdings successfully defending against breach of contract claims brought by Brazil’s Surf Telecom;[3] and U.S.-based Monsoon Blockchain Storage prevailing in an arbitration against Korean LED manufacturer Magic Micro over Magic Micro’s violation of a 2018 share purchase agreement.[4] There also have been high profile arbitrations in the pharmaceutical sector, such as Lilly’s successful defense of a $1.8 billion trade secrets claim filed by French biotech firm Adocia S.A.

While technology companies have often made use of commercial arbitration—both domestic and international—companies are also increasingly turning to investor-State arbitration as a means to seek redress for State conduct alleged to harm their investments. For example, in January of last year, Chinese telecommunications company, Huawei, filed a Request for Arbitration against Sweden, after the State refused to lift its ban on the use of Huawei’s products in Sweden’s 5G rollout.[5] Huawei brought multiple claims under the China-Sweden BIT, alleging that Sweden’s 5G ban violated the protections to which it was entitled under the BIT as a Chinese investor in Sweden.

The dispute between Hong Kong telecommunications company PCCW and Saudi Arabia over investments in a failed Saudi telecommunications consortium provides another example. PCCW’s subsidiary, PCCW Cascade, submitted the dispute to arbitration this past July under the China-Saudi Arabia BIT.[6] PCCW Cascade seeks to recoup its investment after the telecommunications consortium was forcibly liquidated by royal decree.[7]

In a final example from a different region, a multi-national technology company, and its relevant domestic subsidiary, recently turned to an investment treaty to resolve a dispute with a Latin American State.  After notifying the State of the dispute, the company was able to resolve the issue amicably.

It is never too early for a company to think about its dispute resolution options. For both international commercial and investor-State disputes many important strategic decisions are made at the point of contracting or investing, respectively.

A contractual dispute resolution clause is of paramount importance, yet is often given short shrift as a promising collaboration deal is closing. That contractual provision will often specify whether or not arbitration is available and, if so, the scope of disputes to be submitted to arbitration, whether executives will first try to resolve the dispute before arbitration, the choice of arbitration rules, the number of arbitrators, whether the arbitration will be confidential, and/or the availability of multi-party arbitration. It is therefore always important when drafting these clauses to closely scrutinize their language and effect before concluding any agreement. We often work with companies to develop a consistent, cohesive arbitration strategy across markets and industry segments, so that the approach to arbitration fits our client’s needs, not the needs of its various partners in various markets.

Similarly, when investing in a foreign market, companies may find it useful to consider whether there are international investment protections available under a particular treaty. Companies can structure their investments to take advantage of investment treaty protection, just like they structure their investments for tax reasons. But companies that wait and seek to restructure their investments after a dispute has arisen risk that their claims may be rejected as inadmissible. The best time for a company to consider treaty protections (and any dispute-resolution options under that treaty) is before making any investment.

Companies should consider whether there is a treaty which may apply—whether a bilateral investment treaty or multilateral treaty, e.g., the Energy Charter Treaty. It is also important to closely examine a treaty’s arbitration clause to determine what claims can be brought under the treaty, what kind of investments the State has consented to protect, and the jurisdictional requirements for bringing an investment dispute.

In short, though no one wants to think about disputes early in any commercial relationship or at the time of investing in a new and exciting market, it is important to give careful consideration to the terms of any dispute resolution clause that will govern an arbitration should the relationship become frayed, and to think about the treaty protections that may be available to your international investment.

If you have any questions concerning the material discussed in this client alert, including issues related to contractual arbitration clauses or investment treaty protections, please contact the members of our International Arbitration practice.