Demystifying the Arbitrability of Patent Disputes in India

[Prarthna Bathija is a fifth year B.A. LL.B. (Hons.) student, and Apoorv Madan a fourth year B.B.A. LL.B. (Hons.) student, at Jindal Global Law School, Sonipat]

The Booz-Allen Case and Conceptual Jurisprudence Relating to Arbitrability of Disputes

In the landmark case of Booz-Allen Hamilton v SBI Home Finance (“Booz-Allen”), the Supreme Court summarised the conceptual jurisprudence relating to arbitrability. The Court emphasised upon the nature of arbitral tribunals which are “private fora chosen voluntarily by the parties” as against courts which are public fora constituted under the laws of the country. The scope of the arbitrator’s powers is limited because of public policy considerations and by the fact that the parties mutually appoint an arbitrator in pursuance of a private agreement for adjudication of their rights and liabilities. Therefore, the arbitrator cannot make an award that is, inter alia, binding on third parties or public at large.

According to the traditional view, rightsin-rem (rights available against the entire world) are unsuitable for private arbitration and are thereby inherently non-arbitrable. However, as early as in 2011, in the previously mentioned Booz-Allen case, the Supreme Court acknowledged the fallibility of this traditional rule and explained that this general rule should not be inflexible or rigid. This acknowledgment found its basis in the realization that subordinate rightsin-personam, which should be subject to arbitration, may at times arise from rights-in-rem.

Thus, it follows from the Booz-Allen case that while an arbitrator cannot make a judgment-in-rem, disputes relating to rights-in-personam (despite arising from rights-in-rem) are open to arbitration.

Arbitrability of Disputes Involving Intellectual Property Rights (“IPR”) in India – Leading Case Law

The Booz-Allen judgment gave six categories of disputes that have commonly been considered non-arbitrable. These categories, however, did not explicitly include disputes involving intellectual property rights. Nevertheless, following the test laid down in judgment, we may reasonably conclude that the question of arbitrability of disputes involving IPR does not have an answer in a blanket affirmative or negative. The factual matrix of each dispute has to be considered to assess whether the remedies sought would affect the right of a party qua third parties. Notwithstanding this, the Supreme Court quoted a scholarly work (Mustill and Boyd in their 2001 Companion Volume to the 2nd Edition of Commercial Arbitration) which unequivocally lays down at least one general rule:

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.

[Emphasis Supplied]

Subsequent to Booz-Allen, various High Court cases considered the arbitrability of IPR disputes.  The significant cases include the 2016 Bombay High Court judgments of Eros International v Telemax (“Eros International case”) and  The Indian Performing Right Society Ltd v Entertainment Network (India) Ltd (“IPRS case”), along with the Madras High Court judgment of Lifestyle Equities Cv v Qdseatoman Designs Pvt Ltd (“Lifestyle Equities Case”) pronounced in 2017.

In the Eros International case, the Bombay High Court held that copyright issues arising out of an agreement were open to arbitration if the agreement between the parties contained an arbitration clause. In this case, the court noted that neither section 62 of the Copyright Act 1957 nor section 134 of the Trademarks Act, 1999 excluded the jurisdiction of an arbitration panel. In the Court’s opinion, it was clear that in a commercial transaction where parties themselves agreed to refer their disputes to a private forum the contention that the dispute is non-arbitrable could not stand. Therefore, the holding of the Eros International is consistent with the nuanced understanding of the rights distinction in the Booz-Allen case. It is also helpful to note that the Court found that in cases of both infringement and passing off action between two parties the remedies can only affect rights-in-personam and not rights-in-rem. This holding, therefore, offers valuable guidance on the scope of arbitrability over the vast array of IP disputes. The Court noted: “As between two claimants to a copyright or a trademark 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.” To explain this stance, the Court gave an example of an infringement and passing off suit. According to the Court, a claimant may succeed against B in the infringement suit. However, in no way does this guarantee that he would also succeed against C. In the words of the Court, “an infringement or passing off action binds only the parties to it.” (para 17).

The decision has been previously discussed and critiqued in an earlier post here. While the post mentions that the Court in this case found that “copyrights are not rights in rem”, a closer and contextual reading indicates that the Court did not lay down such a broad proposition. Expressly acknowledging that “Plaintiff’s or registrant’s entitlement” (emphasis supplied) to bring an action of copyright infringement is indeed a right in rem, the Court held that subordinate copyright or trademark infringement disputes arising out of rights in rem (i.e. entitlement over the intellectual property) may be an action-in-personam,

In late 2016, however, the Bombay High Court in the IPRS case found a dispute relating to copyright infringement non-arbitrable. This raised a question on the extent to which IPr disputes are arbitrable in India. While at first glance this seems to be a step in the backward direction for ensuring an arbitration-friendly regime in consistence with the aims of the Arbitration and Conciliation Act, 1996, it is important to understand this ruling in its particular factual context. Although both the Eros International case and IPRS case are concerned with infringement, the nature of remedies claimed and the scope of the disputes are different in two cases. The relief claimed in the IPRS case was not merely one of damages and/or an injunction, as in the Eros International case. In the IPRS case, the crux of the matter was the scope of copyright held by members of IPRS. A pronouncement of scope of their right by the arbitrator would have had the effect of disentitling IPRS to claim royalties on their work.

Subsequent to IPRS, in the case of Ayyaswamy v Paramasivam (delivered in 2016), the Supreme Court relied upon an extract from a book titled ‘The Law and Practice of Arbitration and Conciliation’ to instantiate “categories of disputes which are generally considered inarbitrable”. Interestingly, the extract mentions: “(i) patent, trademarks and copyright” as the first category of non-arbitrable disputes.

The latest in this string of cases, Lifestyle Equities (2017), is important because it clarifies that the Ayyaswamy case does not actually exclude intellectual property from the scope of arbitrability. It reasons out that the categories of non-arbitrable disputes mentioned in the judgment, being just an extract from a book, do notconstitute the ratio of the Supreme Court. Further, while this case does not per se involve a patent dispute, it reiterates the point that disputes related to patent validity affects rights-in-rem while disputes relating to patent use and infringement concern only rights-in-personam, and are by that virtue arbitrable.

Conclusion

From the foregoing analysis of the judicial precedents, the following judicial principle is apparent – arbitrability of any dispute depends on the question whether resolution of said dispute affects a right-in-rem or a right-in-personam. In turn, this depends on the factual niceties of every given case. While there is no specific judgment having the arbitrability of patents as crux of the dispute, the aforementioned case laws provide sufficient guidance. In most cases, if a party (usually the defendant) questions the validity of the underlying patent, the dispute is highly unlikely to be referred to arbitration. In the light of the cases discussed above, it is clear that an arbitrator, mutually appointed by the parties based on a private agreement, does not have the jurisdiction to decide on the issue of validity of the patent, and thereby, cannot grant the relief of revocation. The simple reason is that while a finding of infringement in most cases would only be applicable inter-se the parties, decision on validity of underlying patent (or any other intellectual property) destructs the right of the owner to claim infringement against third parties.

Prarthna Bathija & Apoorv Madan

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