Life in the Fast Lane: How Delaware’s Rapid Arbitration Act Can Resolve Licensing Disputes

Intellectual property licenses do not come in one shape and size. Rather, they are often customized based on deliberate decisions of the contracting parties. For example, a patentee may grant a nonexclusive license to commercialize but may restrict the rights granted in another license to research and development activities. Although sublicensing may be permissible, any sublicensee can acquire (at most) only the same rights as the original licensee.

Often, disputes arise regarding the scope of the licensed rights or the license in general. See, e.g., Sanyo Elec. Co. v. Intel Corp., C.A. No. 18-1709-RGA, 2019 WL 1650067 (D. Del. 2019) (lawsuit seeking declaratory relief related to a patent cross-license agreement); Unwired Planet, Inc. v. Microsoft Corp., 193 F. Supp. 3d 336 (D. Del. 2016) (analyzing license agreement to determine whether a payment was due). In such circumstances, the parties may need an expedited decision on the scope of the license. The question becomes how best to get such a decision. The Delaware Rapid Arbitration Act (DRAA) may provide the answer.

Time-Consuming and Expensive Traditional Resolution

Although there may be an incentive to resolve licensing disputes expeditiously, practical realities often intervene. Such disputes are often complex, and the rights afforded by the license may not be clear. Traditional litigation is time-consuming and expensive. Even if the license agreement includes an arbitration provision, there is no guarantee that the dispute will be resolved promptly. According to the American Arbitration Association’s Arbitration Road Map, the median time from filing until the issuance of the final award in cases under the association’s administration is 258 to 288 days.

Procedural hurdles found in traditional arbitration may extend the time to resolution. Often, the selection of the arbitrator is one such hurdle. See Gregory V. Varallo, Blake Rohrbacher & John D. Hendershot, The Practitioner’s Guide to the Delaware Rapid Arbitration Act 10 (2015). In situations where the arbitration agreement does not name a specific arbitrator or defines the appointment of an arbitrator in a vague manner, parties often will seek judicial aid to appoint the arbitrator. Such an ancillary proceeding can bog down the entire arbitration.

In addition, the law in many jurisdictions allows parties to involve courts in certain issues even while the arbitration is ongoing. Indeed, a body of law has grown around issues identified as “substantive” or “procedural” arbitrability, with one category of questions determined by a court and the other by the arbitrator. In Delaware, the Delaware Supreme Court has stated that “[i]ssues of substantive arbitrability are gateway questions relating to the scope of an arbitration provision and its applicability to a given dispute, and are presumptively decided by the court,” whereas “[p]rocedural arbitrability issues concern whether the parties have complied with the terms of an arbitration provision, and are presumptively handled by arbitrators.” Viacom Int’l Inc. v. Winshall, 72 A.3d 78, 82 (Del. 2013) (internal quotation marks omitted).

Finally, the need to confirm an arbitral award presents further opportunity for delay. Traditional arbitration requires the parties to confirm an arbitration award to obtain an enforceable judgment. 9 U.S.C. § 9. This process often leads to counterclaims to vacate the arbitration award, which can extend the process and result in a court rehearing many of the issues decided in arbitration.

A Faster Alternative

Recognizing the shortcomings of traditional arbitration, Delaware has enacted the DRAA, which guarantees expedited resolution of disputes, with a default time to resolution of 120 days from the date of the arbitrator’s appointment. 10 Del. Code § 5808. This time frame is significantly faster than the time required to resolve traditional arbitration, so including a DRAA provision in patent licensing agreements could promote expeditious resolution of complex licensing issues. And, like traditional arbitration, DRAA proceedings are completely confidential. Delaware Rapid Arbitration Rule 5.

So what is the DRAA and when does it apply? “The purpose of the [DRAA] is to give Delaware business entities a method by which they may resolve business disputes in a prompt, cost-effective, and efficient manner, through voluntary arbitration conducted by expert arbitrators, and to ensure rapid resolution of those business disputes.” 10 Del. Code § 5802. The act attempts to achieve these goals by mandating time periods within which an arbitrator must issue a final award and by eliminating by agreement of the parties the procedural hurdles that have bogged down traditional arbitration. Accordingly, to qualify under the DRAA, an arbitration agreement must satisfy a number of requirements:

1. The parties must expressly agree to arbitrate pursuant to the DRAA. Any arbitration agreement seeking application of the DRAA must be in writing, be signed by the parties, and include an “express reference to the ‘Delaware Rapid Arbitration Act.’” 10 Del. Code § 5803. Simply referring to a rapid arbitration under Delaware law will not invoke the act’s provisions.
2. The parties must specifically choose Delaware law to govern the arbitration agreement. Id. However, the DRAA is designed to grant significant flexibility to the parties, and although Delaware law must govern the arbitration agreement, the DRAA does not require that “the laws of [Delaware] govern the parties’ other rights, remedies, liabilities, powers and duties.” Id. § 5803(a)(4).
3. The DRAA provides that no party may be “a consumer,” meaning the DRAA is restricted to business entities, regardless of form. Id. § 5803(a)(3). At least one of the entities must either be organized under Delaware law or have its principal place of business in Delaware.
4. The DRAA focuses on eliminating disputes at various stages and mandating issuance of the final award within a set time frame. Indeed, the DRAA extracts from the parties a number of concessions designed to encourage faster resolution. Varallo et al., supra, at 22. The DRAA also requires parties to waive a number of rights. For example, parties must waive the right (1) to seek injunctions of any arbitrations under the DRAA; (2) to remove to a federal court any court proceeding under the DRAA; (3) to appeal an arbitrator’s interim awards; (4) to appeal an arbitrator’s final award, except under the limited procedures available in the DRAA; and (5) to challenge the propriety of an arbitration, except under the limited procedures available under the DRAA. 10 Del. Code § 5803(c).

Moreover, parties to arbitration agreements under the DRAA are deemed to have consented to (1) the arbitration procedures set forth in the DRAA; (2) the exclusive jurisdiction of the arbitrator to determine issues of substantive and procedural arbitrability; (3) the exclusive personal and subject matter jurisdiction of an arbitration, regardless of the location of the arbitration; (4) the exclusive personal and subject matter jurisdiction of Delaware state courts for the limited purposes set forth in the DRAA; and (5) except as set forth in the arbitration agreement, the arbitrator’s authority to determine the scope of the arbitrator’s remedial authority and to grant any appropriate relief. Id. § 5803(b). These waivers and consents are designed to ensure expeditious resolution of issues and avoid the procedural wrangling that has become common in traditional arbitration.

Using the DRAA to Resolve Licensing Disputes Quickly

Provided that the parties agree to the requirements of the DRAA, they will enjoy the many benefits associated with the DRAA. The first step is to choose an arbitrator. Parties are free to name a specific person or entity as arbitrator in their agreement. In dealing with intellectual property licenses, parties could select an arbitrator with significant patent experience, for example. If the parties cannot agree on an arbitrator or the process of selecting an arbitrator, the Delaware Court of Chancery is specifically empowered to select an arbitrator in an expedited fashion. Id. § 5805.

After an arbitrator is selected, the proceeding will be under way. The arbitrator is empowered to determine all issues of arbitrability and grant any appropriate relief under the applicable agreement. Id. § 5803(b). Although the DRAA is silent regarding permissible discovery, the parties are free to agree to whatever discovery limitations they wish, or, if they cannot agree, the arbitrator will decide. Any discovery, however, is subject to the arbitrator’s ability to complete the proceeding in the limited time frame set by the act.

Indeed, one of the DRAA’s central provisions is section 5808(b), which provides that a final award must be issued by an arbitrator within 120 days of the arbitrator’s accepting appointment, although, with the consent of the parties and the arbitrator, the period can be extended to 180 days. Id. § 5808. In an intellectual property licensing dispute, this would mean a resolution in about half the time of conventional dispute resolution. Moreover, the DRAA eliminates the procedural step of converting the award into a judgment by providing that the arbitrator’s final award is “deemed to have been confirmed” on the fifth business day following the period in which the parties may file a challenge in the Delaware Supreme Court or (if the agreement permits) seek review by a private appellate arbitration panel. Id. § 5810.

With respect to intellectual property licenses, the DRAA could provide a method to resolve disputes quickly and avoid lengthy state or federal court proceedings—particularly because the act deems the parties to have consented to personal and subject matter jurisdiction. Using the DRAA could resolve (in as little as four months) whether a party has a right to commercialize certain inventions, for example, an issue that could take years to decide in court. Similarly, using the DRAA could help rapidly resolve payment issues, sublicensing rights, and myriad other issues, as well as allow parties to select an arbitrator with experience in the specific field, who may better understand the technology at issue. As business entities look for a faster alternative to litigation or traditional arbitration in connection with intellectual property licenses, the DRAA could be a good choice.