IP Arbitration

The relevance of Intellectual Property (IP) in trade is on the rise, in particular concerning cross-border transactions. IP is characterized by multi-country licensing of patents, trademarks, copyright, and trade secrets, as well as larger market forces such as globalization, digitalization, and the internet. In an international economy, Intellectual Property Rights (IPRs) are often among a brand’s most valuable assets. Therefore, the inclination to protect these rights is also becoming stronger. Disputes regarding IP are conventionally contested before national courts. Nonetheless, in recent times there has been a substantial sway towards arbitration.

Arbitration is the private, judicial determination of a dispute by an independent third party. An arbitration hearing may comprise the use of an individual arbitrator or a tribunal. A tribunal may consist of any number of arbitrators though some legal systems insist on an odd number for obvious reasons of evading a tie. The disputing sides hand over their power to resolve the dispute to the arbitrator(s). Arbitration is a substitute to court action, and generally, equally final and binding. Arbitration is being increasingly used for disputes involving IP, especially when the concerned parties are from different jurisdictions. Arbitrators are chosen based on their depth of knowledge in different fields.

Can IP be Arbitrated upon?

Usually, arbitrability, the question of whether the subject matter of a dispute may be resolved through arbitration, arises in the context of arbitration of IP disputes. As IPRs such as trademarks, patents, etc., are granted by national authorities, it is often contended that disputes concerning such rights should be determined by a public authority within the national system. Nevertheless, it is now widely accepted that disputes relating to IPRs are arbitrable, similar to disputes involving any other type of privately held right. Any right, which a party can dispose of by way of settlement should, in principle, also be capable of being the subject of arbitration since, akin to a settlement, arbitration is founded on party agreement. As a result of the consensual nature of arbitration, any award rendered will be binding only on the parties involved and will not as such affect third parties.

When talking about IP arbitration, two main issues must be considered:

  1. Is an arbitration clause in place? A central element of many IP disputes is the IP owner’s right to prevent others from using his or her IP. Usually, there is no contract in place between the rival parties. If there is, (for instance – license agreements, technology agreements, trademark co-existence agreements), IP-specific arbitration clauses should be looked at;
  2. Is the matter of the dispute arbitrable? In IP disputes, the existence, validity, ownership, or scope of certain IP rights are preliminary questions to be resolved before the merits of a case can be determined. With regard to registered IPR (such as patents, utility models, trademarks, or designs), the question of whether such IPR has been lawfully registered by the authorities is typically resolved in front of the national courts and authorities.

Most IP disputes brought as arbitrations revolve around contractual issues. Contractual disputes are regularly regarded as being arbitrable in most nations, even if they are related to IPR. The area of IP disputes that attracts the objection of lack of arbitrability is further limited by the fact that only certain categories of IPRs are likely to be omitted from the scope of arbitrations. These rights are all those that revolve around the validity and existence of a registered IPR.

Currently, most IP arbitrations, particularly in the international realm, arise out of defined contractual relationships. A “defined legal relationship, whether contractual or not,” usually suffices to bring about arbitration proceedings. As long as the preliminary question could also be subject to a settlement between the parties, it is, generally, held that this question should be arbitrable.

Advantages of IP Arbitration

The territorial scope of IPR brings unique hurdles when it comes to enforcement. For instance, if a licensee breaches a worldwide patent licensing agreement, the licensor may have to initiate parallel proceedings in several jurisdictions where infringing activity occurs. Such parallel proceedings are expensive and tough to coordinate. The parties are also exposed to the risk of courts taking varying stands. Furthermore, a decision in one jurisdiction could harm the proceedings in other jurisdictions. Given these problems, a single international arbitration proceeding looks extremely attractive when compared to an array of local proceedings.

The detailed advantages of IP arbitration are:

  1. There’s a single proceeding under the law determined by parties as opposed to multiple proceedings under different laws, with the risk of conflicting results;
  2. Parties can select the arbitrator(s) with relevant expertise and the ones who are specialists in the area of dispute;
  3. There is party autonomy;
  4. The relative speed of arbitration is much faster. Arbitration is premeditated to allow for set decision-making periods and is faster than court proceedings;
  5. Confidentiality is possible in arbitration. The dispute may contain technical or commercially sensitive information about products/services that are still in development;
  6. There is neutrality regarding national interests;
  7. There is minimal damage to the commercial relationship between parties;
  8. A single, uniform procedure is followed; and
  9. Arbitration has a binding effect (if the parties have previously agreed upon it).

The Scope of IP Arbitration in India

In India, what forms part of arbitrable subject-matter is determined as per the test laid down in the Booz Allen Case. The following two categories of disputes are thus inarbitrable in nature:

  1. Disputes involving the adjudication of actions in rem as opposed to actions in personam, such as disputes relating to criminal offenses, guardianship matters, etc. (the first test of arbitrability);
  2. Disputes arising out of a special statute, which are reserved for the exclusive jurisdiction of special courts, such as matters reserved for small causes courts (the second test of arbitrability).

There exist statutory remedies for infringement of copyright, trademark, and patent. As per the legislation, these remedies must be granted by courts. The statutory mention of courts, as a forum to grant these remedies, creates the primary obstacle in arbitrating IP disputes.

In the Mundipharma Case, the issue was whether a claim of ‘copyright infringement’ was arbitrable. The Delhi High Court held the dispute to be inarbitrable given that infringement of copyright is a statutory claim having definite statutory remedies that are to be granted exclusively by civil courts.

Later, in the Steel Authority of India Limited Case, a claim of ‘trademark infringement’ was held to be inarbitrable by the Bombay High Court, stating that, “the rights to a trademark and remedies in connection therewith are matters in rem and by their very nature not amenable to the jurisdiction of a private forum chosen by the parties.”

The Eros vs. Telemax case brought about the first positive change to this rigid trend. The respondent was allowed a copyright license to distribute the petitioner’s films. The license contained a clear negative covenant that forbade the use of copyrighted films upon the termination of the contract. The respondent violated this term. Then, the petitioner brought about arbitration for ‘violation of the contractual covenant’ – a claim, although sourced purely in contract, still necessitated an infringement of copyright to be established.

The Bombay High Court held for the first time that it would be too broad, impractical, and against all commercial sensibilities to hold that the entire realm of IP disputes is inarbitrable. Hence, the court accurately observed the stance that that IP disputes arising purely out of contracts are arbitrable because they are actions in personam, i.e., “one party seeking a specific particularized relief against a particular defined party.” Thus, the decision applied the first test of arbitrability. The court further went on to hold that a finding of infringement had to be made for establishing such a contractual breach and that an arbitrator was authorized to make such a finding of infringement as ‘infringement’ can only be in personam. Therefore, an infringement claim can now be determined by arbitration. The second test was rebutted in this case, stating that the law nowhere provides that the court is an ‘exclusive’ forum, and thus, arbitration should be allowed.

Since the Eros case, other IPRs’ disputes that are primarily born out of such negative clauses in contracts have also been upheld as being arbitrable. So, as per the current position in India, there is no blanket ban on the arbitrability of IP disputes. Instead, arbitrability is decided based on the nature of the claims raised. Disputes of royalty, marketing, geographical area, and other terms of the license agreements, which are purely contractual, are arbitrable. However, a dispute of validity/ownership of an IPR should be decided by the court or assigned public authority since the dispute would result in a decision affecting the public’s right to use the particular right.

Final Thoughts 

Arbitration, as a means of dispute resolution, has emerged to be quite a successful effort. This trend has not only been observed in India but all around the world. With the onset of globalization, IPRs have also become more global and commercialized, which is apparent from the growing number of cross-border arrangements and agreements. Due to these agreements and arrangements, the request of IPR owners to deal with IP disputes at an international level is also growing. When parties seek machinery for dispute settlements, they regard their commercial interests as the main concern, and they desire the dispute settlement to be confidential, highly flexible, and effective so that their cross-border disputes can be solved without ruining their commercial rapport in the industry. Arbitration can very well be a preferred mode of solving IP disputes due to several reasons such as avoidance of parallel litigations, IPR experts deciding the matter, confidentiality, speed, flexibility, and finality.

While arbitrating IP disputes offers numerous advantages, parties must plan well in advance to make the most of those advantages. At the start of any transaction, parties need to clarify their respective contractual IPRs and incorporate a well-drafted arbitration clause. Special consideration must be given to the issue of arbitrability, both when selecting the seat of the arbitration and when determining the probable place of enforcement. These issues may influence the specific form of relief to be demanded in an award. In conclusion, given the unique nature of IP disputes, in many cases, parties should be well advised to contemplate the selection of arbitration rules designed specifically for IP disputes, such as the World Intellectual Property Organization (WIPO) Rules or American Arbitration Association (AAA) Supplemental Patent Arbitration Rules, to name a few.