REUTERS | Juan Carlos Ulate

Will life sciences provide a growth injection for international arbitration?

The use of international arbitration has expanded over the years to encompass a wide array of sectors. For example, while the majority of financial services disputes still end up in court, many of them are submitted to arbitration. Of the London Court of International Arbitration’s (LCIA’s) caseload in 2016, 20% comprised of such disputes. This was more than either construction or shipping.

This raises the question of which other industry sectors might provide a larger number of arbitrations in the future. One possibility is life sciences.

This industry sector is already the joint fifth biggest contributor to the LCIA’s caseload. It comprises 15% of arbitrations and mediations sent to the World Intellectual Property Organization (WIPO), and various institutions (including the International Chamber of Commerce (ICC) and American Arbitration Association (AAA)) have seen steady growth in the number of life sciences disputes referred to them. There are also reasons to suggest that the number of life sciences arbitrations may increase.

The life sciences industry has a global reach

The life sciences sector is a truly global industry. Life sciences giants frequently expand out of their home markets in search of better growth opportunities in emerging markets. Many of those emerging markets already have their own life sciences companies with significant annual revenues. For example, Mexico, India, Indonesia and South Africa all have pharmaceutical companies with turnover close to US $1 billion.

In addition, the complex supply and distribution chains employed by many life sciences companies often span multiple jurisdictions, as do the joint venture and licensing arrangements that many of these companies utilise.

Arbitration is well-suited for the resolution of disputes arising out of these types of complex, multi-jurisdiction arrangements, particularly given:

  • The neutrality resulting from neither party submitting to the “home” courts of the other party.
  • That any resulting arbitral award will be enforceable in any of the 157 countries that are signatories to the New York Convention.

The life sciences industry is growing

The life sciences industry has grown considerably in recent years (and is expected to continue growing). A consideration of some of the factors behind that growth suggests that more growth will likely result in the need to resolve a greater number of disputes.

Considerable growth for many companies has also been achieved through the significant consolidation that has occurred in the market in recent years. For example, in 2015, 236 mergers and acquisitions between pharmaceutical companies were closed worldwide, for a total value of over US $403 billion combined. Not only is this a good indicator of the potential future growth of the sector, it may also lead to further disputes. Again, the complex cross-border nature of many of these mergers and acquisitions is an indication that arbitration is likely to be used as a dispute resolution mechanism.

Further growth potential for the industry lies in the proliferation of newer, innovative companies specialising in biotech and medical devices. As these companies seek to compete or seek synergies with more established players, disputes may arise. Many of these disputes will be well suited to arbitration if the commercial arrangements are multi-jurisdictional or confidential.

Arbitration has other benefits for life sciences companies

There are significant additional benefits to arbitration for life sciences companies which, as they become more widely known, may result in those companies choosing arbitration for the resolution of certain disputes.

One such benefit is the confidentiality of arbitration. In particular, this provides a further level of protection for companies concerned about intellectual property or trade secrets being released in the public domain. For companies whose value can rest on the strength and exclusivity of their intellectual property, this is not an advantage to be overlooked. It has been recognised in certain instances already; for example, in Portugal, specific legislation (Decree Law 62/2011) has been enacted, mandating arbitration for intellectual property disputes in the pharmaceutical sector.

A further advantage is the ability for the parties to appoint arbitrators with the specialised skills required to resolve life sciences disputes. There is an increased trend of arbitration clauses in life sciences agreements requiring arbitrators to have certain qualifications or experience. A number of arbitral institutions (such as the International Centre for Dispute Resolution (ICDR)/AAA) now have panels of arbitrators with specific life sciences experience.

Scope for related disputes

In recent years there have been several investment treaty arbitrations relating to life sciences companies. This is in addition to litigation within the EU which considers the impact of EU competition law on arbitral awards involving life sciences companies. This is not surprising given that the sector is heavily regulated.

In conclusion, life sciences disputes already form a significant number of arbitration disputes and the number of arbitrations in the sector looks set to grow. In particular, while litigation will doubtless remain a mainstay for the resolution of life sciences disputes, the combination of the growth and increasing globalisation of the industry, with the benefits that arbitration offers for the resolution of complex multi-jurisdictional disputes, suggests that there are likely to be more life sciences arbitrations too.

Hogan Lovells Richard Trinick

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