Alternatives To Litigation In International Technology Disputes
Litigation, or court resolution of disputes between parties, has increasingly been criticized, especially for resolution of disputes related to technology issues, and partly because of cost.
Alternative forms of dispute resolution are especially desirable in an international setting, because people in countries outside the United States are uncomfortable with the American judicial process. Non-American corporations feel threatened by American discovery procedures (methods of obtaining information from the opposing party), as well as the evidentiary rules surrounding American litigation.
The alternative forms for resolving international disputes, and the pros and cons of a variety of elements should be considered when terms including alternative dispute resolution procedures are incorporated into international agreements. This article will analyze many of those pros and cons.
A. Definition of ADR
The two most common types of alternative dispute resolution ("ADR";) tools are mediation and arbitration. Mediation is a process by which participants, together with the assistance of a facilitator (i.e., mediator), systematically isolate disputed issues in order to develop options, consider alternatives, and reach a consensual settlement that will offer a reconciliation. Arbitration is the submission by two consenting parties of their dispute to an impartial decision maker, usually for a binding determination.
B. Need for ADR
Litigation, or court resolution of disputes between parties, has increasingly been criticized, especially for resolution of disputes related to technology issues. First, litigation is expensive. Not only are legal fees astronomical, but the costs of experts and the costs of data gathering are also prohibitive. Second, litigation is also time consuming. The large number of lawsuits and appeals in process cause long delays in resolving a dispute, often taking up to nine years to resolve. Finally, litigation can be damaging to future business relations and frustrating to the parties. Thus, ADR is well-suited to resolve expert systems disputes because they can rapidly become obsolete, and timely resolution of disputes is necessary for the economic viability of the project. Furthermore, expert systems and knowledge based systems require an ongoing relationship among user, programmer, knowledge provider, and others which need to survive the resolution of a dispute.
C. Rising Use of ADR
There has been a huge increase in the number of ADR procedures used in recent years. One reason is that the benefits of ADR are quite tangible. Sixty-one major corporations and government agencies using ADR over a recent three-year period saved more than $49 million in legal expenses, an average saving per dispute of $800,000. According to the American Arbitration Association, the number of arbitrations involving hardware, software, licensing, commission, and service-related claims in the high-tech field rose by nearly 50 percent between 1982 and 1985.
The usual international ADR case is between two parties who operate places of business) in different countries. The parties to an international contract often have confidence only in their own law and have misgivings about the law of the other party. The underlying reason is not necessarily because the other law is in fact less favorable, but because foreign laws are unfamiliar and are perceived as strange. As a result, the use of ADR in international dispute resolution is proliferating.
II. PROS AND CONS OF ADR
Technological changes occur rapidly today in expert systems. Since litigation often involves lengthy delays, the underlying technology may become obsolete by the time disputes involving it are resolved, resulting in the loss of any competitive advantages which the expert systems agreement might have otherwise offered. ADR offers an opportunity to quickly resolve a user's claim. ADR allows the parties to prescribe, in the agreement, time limits on each of the various phases of the arbitration process.
ADR is generally a less costly proceeding than litigation. This may work to the advantage of a smaller company that would be unable to withstand a litigated war of attrition. However, expected savings attributable to the lack of pretrial discovery may be largely illusory because discovery often refines and narrows the issues for trial. Without discovery, the issues for consideration in ADR may be so ill-defined as to prolong the hearing. The cost of producing documents may simply become a trial, as opposed to a pretrial, expenditure.
Private proceedings are important to the parties because expert systems agreements often embody sensitive, highly confidential, and proprietary information of either or both parties. Litigation is ill-suited to protect against the disclosure of proprietary and confidential information, although some protective measures are available.
When privacy and confidentiality must be maintained, ADR is preferable to litigation. Neither the hearing nor the award are made public. The parties may also choose to impose additional restrictions on themselves and the ADR forum.
D. Maintenance Of A Relationship
The preservation of the business relationship during the resolution of the contract dispute is often a primary goal of the parties. The antagonism which typifies a lawsuit often renders ongoing project management for expert systems virtually impossible. Thus, while the parties attempt to resolve their differences, the system sits idle, wasting productive time which cannot be recovered because of the rapid pace at which technology becomes obsolete. ADR is more informal and relaxed than litigation. Company management has the chance to participate in resolving the dispute to an extent not possible with traditional litigation, where management typically defers to legal counsel. ADR, therefore, offers an opportunity to minimize, if not eliminate, potential damage to the delicate business relationship.
One of the attractive features of ADR is flexibility. The parties may develop a structure that meets their needs more closely than the traditional litigation system is able to do. Foreign companies in particular, wary of dealing with American lawyers, discovery, depositions, and pretrial examinations, may greatly prefer the relative procedural simplicity of ADR.
The ability of the parties to select arbitrators or mediators who are qualified to deal with the issues specific to expert systems is a principal element of flexibility in ADR. The arbitrator or mediator need not be an attorney, and the common use of panels permits the inclusion of technical as well as legal experts. The parties to a dispute may choose an arbitrator or mediator in advance of a dispute by selecting a specific person or specifying that the person to be selected have a minimum level of expert systems experience.
ADR provides a narrower discovery than litigation, which may, in some forums, prevent the arbitrator or mediator from being able to compel the production of documents or the presentation of witnesses for deposition. While this restriction may be an advantage in some cases, it may also hinder the development of facts and lead to unjustified results. However, discovery is available in some forums (e.g., the American Arbitration Association) and may also be provided for by contract.
Lack of discovery may be a disadvantage when comparing ADR to the U.S. litigation system, with its well-developed discovery rules. However, American discovery procedures seem unduly burdensome to those unaccustomed to it. The large volume of documents and many compulsory depositions seem intrusive to people unfamiliar with American litigation. This form of discovery has made litigation a slow and expensive settlement process.
G. Forum Shopping
Forum shopping, which is a concern within the U.S., offers new possibilities for manipulating disputes in the international context. Differences exist in substantive law, public policy, and procedures in various countries that encourage the parties to a dispute to consider the advantage to them in selecting one available forum over another, and often to attempt to bring the dispute before an amicable forum. There are no universally accepted rules under conflict of laws governing the exercise of Jurisdiction by national courts, and thus the courts of several countries may be competent to hear a dispute with multi-jurisdictional contacts.
H. Procedural Complexities
Litigation in a single jurisdiction is subject to a variety of procedural complexities and may divert attention and resources from the central issues of the expert systems dispute. This problem is particularly true when nationals of other jurisdictions are involved. Procedural differences among the various legal systems provide an added source of confusion and cause disputes unrelated to the main issues between the parties.
The Westinghouse uranium litigation in the 1970s provides a good example of the sort of confusion that is generated, and the diversion of attention from central issues that results, from an injection into the dispute of conflicting expectations regarding the procedural rules to be followed. The American lawyers for Westinghouse, relying on the traditional tools of American pretrial discovery, sought the assistance of the courts of six countries outside the U.S. to compel the production of documents from an international cartel of uranium producers. Westinghouse was unsuccessful, largely because of the hostility of the foreign courts to the scope of American discovery procedures.
I. Enforceability (Judgments And Arbitration Awards)
An international expert systems dispute is not finalized simply because the litigation before a national court has resulted in a judgment and the parties have exhausted all appeals. Recognition and enforcement of foreign judgments depends on notions of courtesy and fairness that are often vaguely and inconsistently articulated. Theoretically, American courts recognize the judgments of foreign courts on a basis of reciprocity, although this requirement has been criticized and may no longer be the prevailing rule. Foreign courts tend to be even less willing than American courts to enforce foreign judgments.
J. Multiple Proceedings
In order to minimize the risk of multiple proceedings with potentially inconsistent results, the parties to a transaction should select in advance a single, mutually agreeable forum for dispute resolution. This choice should be made with careful attention paid to whether the chosen forum will in fact exercise jurisdiction, and whether the forum selection will be recognized and enforced by other possible alternative fore without a need for further proceedings. In addition, the public policies of any forum should be considered to ensure no interference with enforcement of the agreement as intended by the parties will occur.
Arbitrators and mediators are not required to enforce public policies extrinsic to the agreement of the parties. An ADR forum is thus more likely than a court to apply the law selected by the parties regardless of any choice-of-law principles that might prevent such application under the laws of the place of ADR. In the recent U.S. Supreme Court case of Mitsubishi Motors Corp. v. Soler Chrysler Plymouth. Inc.. the Court held that claims arising under the Sherman Antitrust Act are arbitrable in the context of an international distributorship agreement. The Court stated that " the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party's right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy."; The effect of this case is that an American court could, at the enforcement stage, vacate an award for failure of the arbitral tribunal to address and resolve antitrust claims.
The informal nature of ADR produces several important benefits. First, informal proceedings are not burdened by detailed and inflexible rules of procedure and, as a result, may lessen the tension surrounding an expert systems dispute. This alone may facilitate a solution. Second, cultural differences may make one party uncomfortable in the courts of another party. This is especially important with internationally developed expert systems where the software developer is from one country and the knowledge provider is from another. In some cultures, the courts are not where business is done anyway.
Third, corporate management may have an active role in defining the issues in structuring an ADR solution. Management's participation helps to insure that the dispute will be viewed from a commercial perspective with the ultimate goal being a mutually satisfactory solution rather than a complete vindication of one position or another. Finally, the involvement of senior management may increase the chances for re-establishment of a good commercial relationship between the parties.
Expert systems agreement disputes often involve highly technical issues, and persons unfamiliar with the technology may be incapable of perceiving nuances of the claim which are essential to an appropriate resolution of the dispute. In litigation, it is extremely unlikely that either the judge or the jury will possess the expertise necessary to render an appropriate decision. On the other hand, ADR permits the parties to select from a large number of arbitrators and mediators, with expert systems expertise, and who are better-equipped than judges or juries to resolve any technical issues which may arise.
M. Preliminary Relief
Preliminary relief, which includes litigation devices such as temporary restraining orders and preliminary injunctions, is absolutely essential in some cases. For example, a vendor may respond to a user's desire to terminate its hardware maintenance agreement by threatening to terminate software support. The user may preempt such action by the vendor through preliminary relief.
Conventional ADR does not provide for immediate preliminary relief. However, the ADR agreement can be tailored by the parties to meet any need for temporary or permanent relief which may arise. The agreement may provide that the pursuit of temporary or preliminary relief in a court of law does not constitute a waiver of a party's right to pursue ADR. Conversely, the ADR agreement should state that the pursuit of ADR does not waive your right to apply to a court for preliminary relief In addition, the agreement may name a specific person to hear a request for temporary or preliminary relief
III. COMPARISON OF FORUMS
Private citizens and corporate entities from the U.S. actively participate in the American Arbitration Association (AAA), the world's largest arbitral institution, and in the International Chamber of Commerce (ICC). In addition, the U.S. has been a driving force in the development and propagation of the model international arbitration rules developed by the United Nations Commission on International Trade Law (UNCITRAL).
A. American Arbitration Association
The AAA, like many other arbitral forums, does not actually conduct arbitration hearings. Instead, it is an independent, non-governmental, nonprofit organization that supervises independent arbitrators in all types of domestic and international disputes under its Rules of Commercial Arbitration.
Once a party requests arbitration, an arbitrator is selected as specified in its contract, or if the parties fail to specify any method for appointing an arbitrator, the AAA provides the parties with a list of qualified persons from which an arbitrator is selected.
The parties will generally specify beforehand where arbitration is to take place and what rules of law will govern the proceedings. In the absence of such an agreement, the AAA Rules provide that the AAA, rather than the arbitrator, determines the place of arbitration. A weakness of the AAA Rules is that they make no mention of what substantive or evidentiary law should be applied in the absence of an agreement between the parties. The AAA Rules state that the arbitrator is the sole judge of what is relevant and admissible at the arbitration hearing.
The arbitration itself is a straightforward process under any of the three sets of AAA Rules. The parties begin the hearing by making brief oral statements clarifying the issues in the case. Next, the parties present their evidence. All witnesses are subject to cross-examination by both the arbitrator and the adverse party. Thus, the AAA encourages parties to be represented by counsel and it permits a party to be represented by attorneys from foreign countries, even if they are not licensed to practice law in a forum state. When both parties have completed the presentation of their cases, the AAA Rules require that the arbitrator ask them whether they have any further proofs to offer or witnesses to be heard. If not, the hearing is closed. From this moment, the arbitrator has 30 days to reach a decision and render an award. Since the arbitrator is not necessarily an attorney or judge and he/she has so little time in which to issue an award, the award is not required to be accompanied by a written opinion. In fact, the vast majority of AAA awards contain no such opinions. Some parties to an arbitration simply want an answer to the dispute without needing a formal opinion. All awards issued on the merits are final and may only be vacated by a court of law if corruption, fraud or abuse of discretion exists. The courts will not go behind the award to determine whether the arbitrator made errors either in fact or law.
U.S. businesses who negotiate AAA arbitration in their contracts will find that it is an excellent arbitral forum. AAA is particularly attractive to small and medium-sized businesses because its services are very reasonably priced. AAA arbitrators serve with minimal compensation except in protracted cases. The most attractive feature of AAA arbitration is the speed with which it resolves disputes. The AAA's average six-month time period from the start of arbitration to the granting of a final award compares favorably with any other international arbitral forum.
B. International Chamber Of Commerce
The International Chamber of Commerce Court of Arbitration was formed after World War I to promote arbitration of all types in international commercial disputes. The Court of Arbitration is not an arbitral body, but it is an administrative council within the general framework of the International Chamber of Commerce. The Court of Arbitration issues Rules of Conciliation and Arbitration and supervises the application of these rules by the arbitrators. The participants normally select a person or persons that will serve as arbitrator(s) in the proceedings. However, the ICC Court of Arbitration will appoint arbitrators if the parties cannot agree among themselves.
Once an arbitrator has been selected by the parties or appointed by the ICC Court of Arbitration, he or she decides on the "terms of reference"; upon which the parties will submit their case for arbitration. The basis for the preparation of this document is the parties' specification of the issue to be determined, the place of arbitration, and procedural rules to be followed, including the substantive law to be applied by the arbitrator. If the parties fail to reach an agreement on the terms of reference, the ICE Rules grant the arbitrator sweeping authority to proceed to arbitration by applying whatever rules he or she deems appropriate
After hearing all of the evidence, the arbitrator renders a tentative award. Although the ICE Rules do not require a written opinion, most awards are accompanied by a memorandum explaining the arbitrator's reasoning. The tentative award is then sent to the Court of Arbitration for final approval or modification, but an arbitrator's award is rarely disturbed. No appeal is permitted from a final award.
The ICC Rules of Conciliation and Arbitration have several unattractive features. First. the duration of an average ICE case is almost two years, which is substantially longer than the time taken by other arbitrage forums to resolve similar cases. Second, the ICE determines costs according to the amount of money involved in the dispute. Third, the ICE Rules grant arbitrators broad discretion to decide all questions not resolved by the parties in advance of arbitration.
Despite the uncertainties in the Rules of Conciliation and Arbitration, the ICE Court of Arbitration is a good arbitrage forum for certain types of disputes. Sophisticated parties will avoid shortcomings by specifying in their arbitration clauses where they want the arbitration to take place and what substantive and procedural law they want applied. For parties that are willing to pay for the kind of expertise that ICE arbitrators can provide, the expense of ICE arbitration is less likely to be a major concern. However, less sophisticated parties, especially those disputes involving smaller amounts of money, might be well-advised to look to other arbitrage forums.
C. United Nations Commission On International Trade Law
The United Nations Commission on international Trade Law (UNCITRAL) adopted, in 1976, a comprehensive set of arbitration rules intended to be used as a model for future arbitral rules in states around the world. Today, the UNCITRAL Arbitration Rules are widely used throughout the world.
The UNCITRAL Rules can apply to both ad hoc and institutional arbitration if the parties to the contract have so agreed. It is important to note that the UNCITRAL Rules can be modified by the parties incorporating them into the contract, so that the parties retain ultimate control over their initial ad hoe arbitration agreement. The UNCITRAL Rules provide arbitrating parties with the power to obtain interim measures of protection, such as pre-judgement attachments and temporary injunctions barring the removal of assets from a jurisdiction. If the parties do not specify an arbitrator in advance, the Secretary General of the Permanent Court of Arbitration at The Hauge will designate an "appointing authority"; who will subsequently name an arbitrator.
The rules of procedure in UNCITRAL arbitral proceedings are flexible, allowing the arbitral tribunal to conduct the arbitration in such a manner as it considers appropriate, provided that the parties are treated with equality and that at any stage of the proceedings each party is given a full opportunity to present its case. Each party may call witnesses and have oral argument after framing the issues for the tribunal by submitting written statements of claim and defense. All awards must be in writing and the reasons upon which the award is based must also be stated. The award is made public only with the consent of both parties.
The fees of the arbitral tribunal shall be reasonable in amount, taking into account the amount in dispute, the complexity of the subject matter, the time spent by the arbitrators, and any other relevant circumstances of the case. Such costs will generally be specified in the award. Additional costs, such as legal expenses of the successful party, fees of the appointing attorney and secretary-general, and travel expenses, may be included in the award. In most cases, the costs of arbitration are to be assigned to the unsuccessful party.
IV. THE IBM/FUJITSU ARBITRATION
International Business Machines ("IBM";) is the world's largest computer company. Fujitsu Limited ("Fujitsu";) is the largest computer company in Japan and fourth largest in the world. Fujitsu develops and markets IBM-compatible mainframe computers and related software. Both firms compete in the world market for the manufacture and sale of mainframe computers and associated products, including operating system software.
In 1964, IBM developed a new series of mainframe computers known as the System 360, which contained operating system software that could run a great variety of application programs originally designed for other IBM computers. The System 360 allowed users to expand and modify their computer systems while preserving their investment in application software. After users committed themselves to the System 360, IBM was assured future sales of mainframe computers and related products since IBM was the only manufacturer that offered compatible products. Thus, IBM held a legal monopoly created by its new operating system software. When Fujitsu began development of its computer mainframe in 1971, the IBM/System 360 had achieved widespread acceptance with mainframe computer users. In order to effectively compete with IBM, Fujitsu had to develop an operating system that could run the same application programs as the IBM system. In 1976, Fujitsu began shipping its first IBM-compatible mainframe computer system.
After the U.S. Congress passed the Software Protection Act of 1982, which specifically extended copyright protection to computer programs, IBM accused Fujitsu of violating its operating system copyrights. IBM and Fujitsu attempted to resolve their disputes by entering into a settlement agreement in 1983. Under this agreement, Fujitsu agreed to pay IBM $471 million for its previous and future distribution and use of certain "designated"; programs. This agreement also provided for the exchange of certain interface information between the parties. This agreement also provided for a formal dispute settlement process.
The 1983 agreement quickly collapsed. The agreement had failed to adequately resolve the questions of how Fujitsu could use IBM programming material in its ongoing development of IBM-compatible software and how IBM was to be paid. In June of 1985, IBM filed a demand for arbitration with the AAA alleging that Fujitsu had breached its obligations under the 1983 settlement agreement and violated IBM's operating system copyrights. In response, Fujitsu asserted that its use of IBM programming material did not violate the 1983 settlement agreement or IBM's intellectual property rights.
B. The Arbitration
Fujitsu and IBM chose two arbitrators, one a law school professor and expert in dispute settlement, and the other a retired computer executive. The arbitration proceedings consisted of four key stages. First, the arbitrators disposed of several procedural claims regarding jurisdiction and ripeness. Second, "responsible executives"; meetings were held at which the parties briefed and argued their positions before the arbitrators and a panel of select IBM and Fujitsu executives concerning the nature of Fujitsu's software development procedures and whether such procedures violated IBM's right under the 1983 settlement agreement. Third, hearings on crossmotions for summary judgment were held. The arbitrators ruled that IBM had breached its direct licensing obligations under the 1983 settlement agreement but refused to grant any of the motions concerning the scope of copyright protection or to decide the issue whether U.S. or Japanese copyright law applied.
Fourth, the arbitrators directed the parties to negotiate, with the arbitrators acting as mediators. As a result of that mediation, IBM and Fujitsu were finally able to arrive at a comprehensive resolution of their disputes, executing two new substantive agreements. Under the first agreement, executed in December 1986, Fujitsu agreed to pay a $400 million licensing fee in settlement of IBM's copyright infringement claim as to hundreds of Fujitsu programs as well as Fujitsu's past use of IBM programming material in the development of IBM-compatibles.
The second agreement, which was executed in February 1987, provided for the parties to "clean the slate with respect to all disputes and to establish effective protective procedures"; for Fujitsu's use of IBM programming material in its own software development. Fujitsu agreed to pay an annual "access"; fee for the future right to use the "designated"; programs containing IBM programming. In addition, each party agreed to license its operating systems on the hardware of the other party if so requested by customers. Finally, the parties agreed to establish a "secured facility"; regime to allow controlled use of programming material by both parties in their software development while protecting their respective intellectual property rights.
Due to the parties' inability to negotiate successfully the terms of the Secured Facility regime, the arbitrators issued an order in September 1987, setting forth the regime's procedural requirements. The basic principles of the regime are as follows: (1) adequate compensation for access to proprietary information; (2) independent monitoring by a neutral expert for compliance with the arbitrator's decision; (3) immunity from challenge by the other party; and (4) a limited period of time in which to examine the other parity's programming information. The most unique aspect of this agreement is its extensive grant of authority to the arbitrators to define the intellectual property rights that otherwise might not be protected under the existing copyright laws, and to resolve any disputes which might arise between the parties in the future. The arbitrators have continuing jurisdiction over all disputes between IBM and Fujitsu well into the year 2002.
Because of the diversity of national forums that exist around the world, a common denominator is needed to unite the resolution of claims. ADR is the most flexible tool to satisfy this need. As litigation increases and the complexity of technology disputes continues to escalate, the use of ADR will proliferate.