Arbitrability Of IPR Disputes: A Balanced Approach

Prior to dealing with the conundrum of the arbitrability of the disputes relating to the Intellectual Property Rights (hereinafter also referred as “IPR”) in India, let us first understand the concept of IPR. The term “Intellectual Property Rights” has not been defined under any Indian statute. As per the World Intellectual Property Organization (WIPO), Intellectual Property refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. Some of the most commonly dealt IPR in India includes

• Copyright and related rights;
• Trade Marks including service marks;
• Industrial designs; and
• Patents

India, being a signatory of Trade-Related Aspects of Intellectual Property Rights, has enacted various statutes to protect and deal with the most of the IPR.

In the case of The Institute of Chartered Accountants of India vs. Shaunak H. Satyaand Ors. (AIR2011SC 3336), the Hon’ble Supreme Court of India has relied on the definition of the Intellectual Property as provided in Black’s Law Dictionary, 7th Edition, page 813, which states as under:

“The term ‘intellectual property’ refers to a category of intangible rights protecting commercially valuable products of human intellect comprising primarily trade mark, copyright and patent right, as also trade secret rights, publicity rights, moral rights and rights against unfair competition (vide Black’s Law Dictionary, 7th Edition, page 813).“

In the case of Gurukrupa Mech Tech Pvt. Ltd. vs. State of Gujarat and Ors. (2018)4GLR3324, the Hon’ble Gujarat High Court has defined the Intellectual Property as a negative right. The relevant extract is as under:

 The Intellectual Property Law is a negative right which means it is a right to exclude others from using the property generated by the registered owner. It is thus obvious that this law anticipates pre-emptive measures to prevent the misuse, as the property is intangible per se. Any reproduction in tangible medium becomes susceptible to misappropriation therefore, the statutory rights ought to be protected.

In the case of McDonalds India Pvt. Ltd. and Ors. vs. Commissioner of Trade & Taxes, New Delhi and Ors. 2017VIIAD(Delhi)350, the Hon’ble Delhi High Court described  the Intellectual Property Rights, as under:

 The peculiarity of intangibles or incorporeal property, of the kind this court has to deal with, i.e. intellectual property, is that unlike real property, its boundaries are unset. These rights are only real and effective to the extent they enable the owner or transferee to “keep out” from use those who are not permitted to do so. In other words, the nature of intellectual property and the remedies provided for their enforcement, hinge upon the right to exclude others from using it….

The IPR are thus considered as right in rem, as it enables the owner of the IPR to exclude the other persons from using or exploiting it. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property.

In order to understand the intricacies of whether an IPR dispute can be referred to arbitration or not, it is imperative to analyse the different judicial approach adopted by the various Courts in  deciding the matters involving the aspect of arbitration in IPR disputes over a span of time.

The Hon’ble High Court of Delhi in the case of Mundipharma AG vs. Wockhardt Ltd., (1991)ILR 1Delhi606, inter alia, held that the issue of  infringement of copyright in the packaging of the product cannot be the subject-matter of arbitration as the Chapter XII of the Copyright Act, 1957 relating to civil remedies in case of infringement of copyright, and every suit or other civil proceedings arising under that Chapter in respect of infringement of copyright in any work or the infringement of any other right conferred by Copyright Act have to be instituted in the district court having jurisdiction.

The Hon’ble High Court of Delhi in the case of Ministry of Sound International Ltd. vs. Indus Renaissance Partners Entertainment Pvt. Ltd., 156(2009)DLT406, wherein an agreement was entered between the parties vide which a licence had been granted to defendant no. 1 to use the trademarks/copyright in respect of ‘Ministry of Sound’, ‘The Ministry’, etc.,  of the Plaintiff, allowed the application filed by the defendant under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter also referred as “Arbitration Act”), for transferring the case to arbitration. In the present case, the grievance of the plaintiff was that the licence agreement had been terminated and thereafter, defendant could not use the said trademarks as per the terms of the said licence agreement and that the licence fee has not been paid by the defendant. The Hon’ble Court found the siad IPR dispute capable of being decided through arbitration.

The Hon’ble Supreme Court in the case of Booz Allen and Hamilton Inc. vs. SBI Home Finance Ltd. and Ors., AIR2011SC 2507,  while observing that all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, held as under:

Disputes relating to sub-ordinate rights in personam arising from rights in rem have always been considered to be arbitrable.

In the said case, the Hon’ble Court also categorised following disputes to be inherently non-arbitable:

1. disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
2. matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
3. guardianship matters;
4. insolvency and winding up matters;
5. testamentary matters (grant of probate, letters of administration and succession certificate); and
6. eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

Interestingly, the Hon’ble Court while deciding the aforesaid case which was pertaining to the arbitrability of the dispute pertaining to the enforcement of a mortgage by sale, referred to the book Mustill and Boyd in their 2001 Companion Volume to the 2nd Edition of commercial Arbitration, and quoted the excerpt from the book as under:

Many commentaries treat it as axiomatic that ‘real’ rights, that is rights which are valid as against the whole world, cannot be the subject of private arbitration, although some acknowledge that subordinate rights in personam derived from the real rights may be ruled upon by arbitrators. The conventional view is thus that, for example, rights under a patent licence may be arbitrated, but the validity of the underlying patent may not….. An arbitrator whose powers are derived from a private agreement between A and B plainly has no jurisdiction to bind anyone else by a decision on whether a patent is valid, for no-one else has mandated him to make such a decision, and a decision which attempted to do so would be useless.

A three judge bench of the Hon’ble Supreme Court in the case of Suresh Dhanuka vs. Sunita Mohapatra, AIR2012SC 892, while allowing the SLP of the Appellant against the order and review order passed by the Hon’ble Orissa High Court on the appeal of the respondent herein against the order passed by the District Judge, Khurda, under Section 9 of the Arbitration Act,  vide which the Respondent was restrained from marketing the products manufactured by her under the trademark ‘Naturoma Herbal’ or ‘Naturoma’, observed as under:

Accordingly, having regard to the arbitration clause, which is Condition No. 10 of the terms and conditions of the Deed of Assignment, the interim order passed on the application under Section 9 of the Arbitration and Conciliation Act, 1996, filed by the Appellant in keeping with the terms and conditions agreed upon between the parties, was justified and within the jurisdiction of the District Judge, Khurda. As we have mentioned hereinbefore, the interim order passed by the learned District Judge, Khurda, restraining the Respondent from selling her products by herself or by any other person, save and except through the Appellant, was apposite to the circumstances.

In the above case, there was no objection by either of the party regarding the maintainability of arbitration in the present matter, inter alia, pertaining to the assignment of 50% ownership in the trademark. Nonetheless, the approach adopted by the Hon’ble Supreme Court in the said case in a way clarifies the scope of arbitrability of IPR disputes arising from the agreement entered between the parties.

The Division Bench of the Hon’ble Madras High Court in the case of R.K. Productions Pvt. Ltd. vs. N.K. Theatres Pvt. Ltd., 2014(1)ARBLR34(Madras), allowed the appeal against the order of the learned single Judge vide which the ld. judge allowed the section 8 application of the Arbitration Act, of the Respondent for referring the matter to arbitration, inter alia,  pertaining to the adjudication of the balance amount and the issue of infringement of copyright arising out of terms of the copyright assignment agreement which also contained arbitration clause. The Hon’ble Court primarily allowed the appeal on the ground that there are inextricably mixed issues which cannot be easily bifurcated and the defendant nos. 2 to 4 were not parties to the copyright assignment agreement.

The Hon’ble Delhi High Court in the case of Vimi Verma vs. Sanjay Verma & Ors., 2013 SCC Online Del 4194, while entertaining petition under Section 9 of the Arbitration Act, restrained the respondents from using the mark/name SIMPLEX or any other mark which is identical and/or deceptively similar to the petitioner’s mark SIMPEX,  as the said use was not only violating the petitioner’s statutory and common law rights in the said trademarks but also breaching the terms of the MoU/family settlement entered between the parties, vide which the trademarks were distributed between the parties. In the present case, the said MoU contained the arbitration clause and while deciding the present petition, the Hon’ble Court held as under:

Since there is an arbitration clause in the MoU, the petitioner has filed a Section 9 petition. There is no bar upon the trademark infringement matters being dealt with in arbitration proceedings as also in a Section 9 petition.

In the case of Steel Authority of India Ltd. v. SKS Ispat and Power Ltd. & Ors., Notice of Motion (L) No. 2097 of 2014 in Suit No. 673 of 2014, the Hon’ble High Court of Bombay held that the present suit was for the reliefs against infringement and passing off, which by their very nature do not fall within the jurisdiction of the arbitrator. The Hon’ble Court dismissed the section 8 application of the Arbitration Act filed by the Defendant to refer the matter to arbitration, on 3 grounds:

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 disputes concerning infringement and passing off do not arise out of the contract between the parties, which contains the arbitration agreement; and

There are other parties who are arraigned as party Defendants to the present suit, who are not parties to the arbitration agreement.

In another case of EuroKids International Private Limited vs. Bhaskar Vidhyapeeth Shikshan Sanstha, Arbitration Petition No.1061 OF 2014, the Hon’ble Bombay High Court adopted different approach than the above case and while entertaining petition under Section 9 of the Arbitration Act, restrained the respondents from using the trademark and copyright of the petitioner. In the said case, the Hon’ble Court observed that since there is no dispute about the petitioner’s ownership of the trademark and copyright involved in the present case, therefore, the proceedings filed by the petitioner cannot be considered as proceeding in rem. Thus, the Hon’ble Court allowed the petition filed by the petitioner to restrict the respondent from breaching the terms of the franchise agreement entered between them.

In the case of Eros International Media Limited vs. Telemax Links India Pvt. Ltd. and Ors., 2016(6)BomC R321, the Ld. Judge of the High Court of Bombay, while allowing the application filed by the defendant under Section 8 of the Arbitration Act, for referring the matter to arbitration pertaining to the copyright infringement claim arising out of the term sheet entered between the parties which contained an arbitration clause in widest possible terms, made some very pertinent observations:

A claim in rem is distinct from a claim for enforcement against an individual….

As between two claimants to a copyright or a trade mark in either infringement or passing off action, that action and that remedy can only ever be an action in personam. It is never an action in rem….

In trade mark law it is true that the registration of a mark gives the registrant a right against the world at large.

It is possible that an opposition to such an application (before the Registrar) would be an action in rem, for it would result in either the grant or non grant of the registration, good against the world at large….

But an infringement or passing off action binds only the parties to it…. 

Where there are matters of commercial disputes and parties have consciously decided to refer these disputes arising from that contract to a private forum, no question arises of those disputes being non-arbitrable. Such actions are always actions in personam, one party seeking a specific particularized relief against a particular defined party, not against the world at large.

The Hon’ble Bombay High Court in the case of The Indian Performing Right Society Ltd. vs. Entertainment Network (India) Ltd., Arbitration Petition Nos. 341 and 1017 of 2012, MANU/MH/1597/2016, while allowing the  petitions filed under Section 34 of the Arbitration Act for setting aside the Arbitral award of the arbitrator, wherein the Ld. Arbitrator while dealing with the disputes which has arisen between the parties out of the copyright license agreements, inter alia, held that the owner of the copyright in sound recording does not need a license or authorisation from the owner of the copyright in literary or musical work to the extent that such literary or musical work legitimately forms a part of and is incorporated in the sound recording. While setting aside the award, the Hon’ble Court held as under:

In my view, the learned arbitrator has rendered a finding on the legal character and validity of the ownership of the respondent in the copyright and thus the said award would be in the nature of an adjudication on an action in rem……

… The learned arbitrator has held that the claimant was not required to obtain any license from the respondent which itself shows that the rights of the respondent as a licensor are destructed in the impugned award not only against the claimant but also against the world at large. In my view, the claims made by the claimant were in the nature of an action in rem and the impugned award rendered by the learned arbitrator is a decision in an action in rem and thus would bind not only the parties to the arbitration but also third parties…

In the year 2016, the Hon’ble Supreme Court in the case of A. Ayyasamy Vs. A. Paramasivam and Ors., AIR2016SC 4675, while deciding that the mere allegation of fraud is not sufficient to detract from the obligation of the parties to submit their disputes to arbitration, referred to the book written by O.P. Malhotra on ‘The Law & Practice of Arbitration and Conciliation’, Third Edition, authored by Indu Malhotra and quoted from the book as under:

Following categories of disputes are generally treated as non-arbitrable:

1. patent, trademarks and copyright;
2. anti-trust/competition laws;

• insolvency/winding up;

1. bribery/corruption;
2. fraud;
3. criminal matters.

There can be no dispute that in the said judgment there had been no discussion on the aspect of the arbitrability of the IPR disputes and the said observation with respect to the arbitrability of the IPR dispute came in the judgment due to the reference to the book authored by Mr. O.P. Malhotra. Further, the presence of the word “generally” in the said extract also supports the contention that there is no complete bar on the arbitrability of IPR disputes and the question of arbitrability has to be seen on case to case basis.

The Hon’ble Bombay High Court in the case of Deepak Thorat vs. Vidli Restaurant Ltd., Commercial Arbitration Petition (L) No. 290 of 2017, MANU/MH/1681/2017, while dismissing the appeal under Section 37 of the Arbitration Act, filed for challenging an interim order passed by the sole Arbitrator restraining the Appellant from using the trademarks of the Respondent post termination of the franchise agreement held as under:

It is pertinent to note that the present arbitration reference is not an infringement or passing off action. What the Respondent seeks to enforce here is a negative covenant contained in the franchise agreement between the parties, which inter alia required the Petitioner franchisee to desist from using the mark.

The Ld. Judge also observed that the arbitration reference does not even remotely concern adjudication of the Respondent’s ownership right or right to use the concerned trademark, and the controversy is simply and barely on the footing of a franchise agreement, which contains a negative covenant, namely, whether or not the franchiser is entitled to enforce that negative covenant against the franchisee.

The Division Bench of the Hon’ble Madras High Court in the case of Lifestyle Equities CV vs. Q.D. Seatoman Designs Pvt. Ltd. and Ors., 2017(72)PTC 441(Mad),  while hearing the intra-court appeals against the order passed under Section 9 of the Arbitration Act, upheld the order passed by the ld. single judge wherein the ld. judge held that both parties are in reality claiming a better right of usage vis-a-vis the other, and that this would clearly bring the facts of the present case within the realm of a right in personam rather than a right in rem. Hence, the matter can be resolved through arbitration. In the said case, it was also observed as under:

That there is no quarrel with the proposition that the grant of registration of a copyright or design under the relevant statutes can be achieved through/only by statutory authorities constituted under the respective statutes.

That the Hon’ble High Court of Delhi in the case of Centre For Development of Telematics vs. Xalted Information Systems Pvt. Ltd., ARB. A. (COMM.) 6/2018 and O.M.P.(I) (COMM.) 82/2018, while allowing petition under Section 37(2) of the Arbitration Act, set asides the order dated 15.10.2017 passed by the Arbitral Tribunal holding that the relief sought by the petitioner is not arbitrable. In the present dispute between the parties, the Hon’ble Court on the petition filed under Section 9 of the Arbitration Act by the petitioner, retrained the respondent from dealing with or using the source code and SRS of the software developed pursuant to or in connection with the MoU entered between the parties which contained arbitration clause. In the said case, it was observed that the reliefs sought though pertaining to copyright are only against the respondent and, therefore, such reliefs are in personam.

Conclusion

From the analysis of the above cases, it is apparent that different views have been taken by the judges of the Hon’ble Supreme Court and High Courts of India. Though from the analysis of the above cases, it is obvious that there can be no blanket bar on the arbitrability of the disputes relating to IPR arising out of the agreement entered by the parties and it will depend on the facts of each case.

There is no iota of doubt that the IPR matters which fall under the ambit of special authorities constituted under the relevant act, like Registrar of Trade Marks, Controller of Patents and Designs, Intellectual Property Appellate Board, etc., cannot be subjected to arbitration. Cancellation of trademark registration, adjudication of opposition proceeding, grant of compulsory license for patent, cancellation of design, grant of compulsory license in works withheld from public are such few examples.

It will be interesting to again refer the judgment of Eros International Media Limited (supra), wherein the Hon’ble Judge has given few illustrations to show that an infringement action per-se does not amount to right in rem. The illustrations are as under:

A may allege infringement and passing off by B. A may succeed against B. That success does not mean that A must necessarily succeed in another action of infringement and passing off against C.

The converse is also true. Should A fail in his action against B, he may yet nonetheless succeed in his action against C. This applies equally to copyright actions.

A man may be able to demonstrate that his copyright in a film, a literary work, an artistic work or any other work in which copyright is said to subsist is infringed by a certain party. But he may not be able to show such an infringement at the hands of another party. Both are actions in personam.

What is in rem is the Plaintiff’s or registrant’s entitlement to bring that action.

That entitlement is a result of having obtained or acquired copyright (either by authorship or assignment) or having statutory or common law rights in a mark.

From the above illustrations, it is manifest that if a dispute is arising out of the terms of the contract between the parties, and the dispute falls within the ambit of the arbitration clause of the contract, even though such dispute pertains to the copyright or trademark infringement, it still could be decided by arbitration as it will fall under the ambit of right in personam.

Though most of the IPR disputes arising out of the contract will be amenable to arbitration but not every dispute. Whether a particular IPR dispute arising out of the contract can be adjudicated through arbitration will depend on the facts of each case

Let us take an example that Person A has a patent in his name. Person B takes a license to exploit the patent. The parties execute a license agreement which contains a very wide arbitration clause. As per the terms of the agreement, the Person B shall cease immediately from using the patent after the period of 1 year. After the lapse of 1 year, Person B does not stop using the patent. Person A initiates arbitration proceedings against Person B, wherein Person B files a counter claim and takes an objection that Person B recently got to know that the Patent has been wrongly granted as it was not novel when the patent application was filed. Such a challenge can’t be adjudicated by the Arbitrator as it will fall under the scope of right in rem because if the patent is revoked, the right of Person A in the patent will also go.

In today’s world, there are lot of commercial documents and transactions happening which deal with intellectual property rights of various descriptions as part of the overall transaction, in the form of mergers, acquisitions, joint ventures, technology transfer, technical tie-ups, licensing, etc., and the parties are willingly adopting the measure of arbitration for settlement of disputes arising out of such arrangements. Considering the recent trend of pro arbitration approach adopted by the judiciary in India, there are bright chances of more cases arising out of the agreements relating to IPR being settled through arbitration. Needless to mention that the jurisprudence of arbitrability of IPR disputes is still developing and we are likely to see more litigation on this aspect.

---

 

Disclaimer:

This article is for informational and educational purposes only. While every care has been taken in writing this article to ensure its accuracy at the time of publication, the Author or Vaish Associates Advocates assumes no responsibility for any errors which despite all precautions, may be found therein. This article neither constitutes a contract nor will form the basis of a contract. The material contained in this document does not constitute/substitute professional advice that maybe required before acting on any matter. No claim is made by virtue of the use of any trademark or images used in this article. All trademarks and images belong to their respective owners. Any Copyright infringement is prohibited. Views expressed in this article are personal views of the author, and not of the firm.