Arbitrability of IPR in India: Have Courts Put a Snooze on Booz Allen?

[Manasa S Venkatachalam is a 4th year B.A., LL.B. (Hons.) student at Gujarat National Law University]

The advent of arbitration into various other areas of law raises increased issues of arbitrability of certain subject-matters. Following issues of fraud, lease agreements and tortious claims, perhaps the next big question with respect to arbitrability in India arises with respect to intellectual property rights (“IPR”). With IPR being increasingly arbitrated through several international mechanisms like the World Intellectual Property Organization, the feasibility of the same in the Indian context is a question that requires a definite answer. This issue becomes even more relevant in the wake of the 2020 Madras High Court judgment in Sanjay Lalwani v. Jyostar Enterprises, which has recognized matters of IPR to be de facto non-arbitrable.

Arbitrability in India

Section 34(2)(b) of the Indian Arbitration and Conciliation Act, 1996 (“Arbitration Act”) gives the Courts the power to set aside an arbitral award where the subject-matter of the dispute is not capable of settlement by arbitration or is in conflict with the public policy of India. This follows Article 34(b) of the UNCITRAL Model Law on International Commercial Arbitration, 1985, which contemplates national courts’ power to set aside arbitral awards. Yet, the Arbitration Act, or any other legislation for that matter, does not define the scope of “subject-matter arbitrability”. Thus, the sole source to draw the borders for what subject-matters can or cannot be arbitrated is case law.

Booz Allen: The first step

Perhaps the biggest step taken by the Indian Supreme Court (“SC”) in resolving the question of subject-matter arbitrability was made in its 2011 judgment in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. The SC identified three conditions to be satisfied in order for a subject matter to be arbitrable: First, the dispute must be covered under the arbitration agreement; second, the party/ parties to the dispute must have referred the same to arbitration; and third, the dispute must be capable of adjudication and settlement by arbitration.

The SC also listed out some well recognized examples of non-arbitrable disputes to be those relating to rights and liabilities arising out of criminal offences, certain matrimonial disputes, guardianship matters, insolvency and winding up matters, testamentary matters and eviction or tenancy matters.

On a more general note, the judgment lays down a test to determine arbitrability- rights in rem are generally non-arbitrable while rights in personam are arbitrable, requiring the former to be adjudicated by courts and public tribunals. However, the SC makes it very clear that this is not a rigid or inflexible rule. It goes one step further to establish that “subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”

Rights in Rem v. Personam: How have courts ruled in regards to IPR?

A right in rem is a right exercisable against the world at large, as opposed to a right in personam which is an interest protected solely against specific individuals. The SC in Booz Allen itself provides an example to support this distinction- while rights under a patent license may be arbitrated, the validity of the underlying patent may not. This is because an arbitrator derives power from the arbitration agreement entered into by parties, implying that the arbitrator does not have jurisdiction to find on matters which would bind third parties.

Unfortunately, there have been several decisions since Booze Allen that either do not interpret the judgement correctly, or obviously ignore the distinction laid down by the SC. An example that highlights such a proposition is the 2016 decision in A. Ayyasamy v. A. Paramasivam, where the SC found patents, trademarks and copyright to be “generally treated as non-arbitrable”. However, the binding value of this classification is easily contestable given that the Ayyaswamy judgment did not deal with anything remotely IPR-related. This matter has been fairly settled by the Madras High Court in Lifestyle Equities CV v. QDSeatoman Designs Pvt. Ltd, where it has recognized this particular aspect of Ayyaswamy judgment to be a restatement of scholarly opinion and not application of judicial mind by the SC.

In complete contrast, an interpretation on Booz Allen can be found in the Bombay High Court’s judgment in Eros International v. Telemax Links India Pvt. Ltd. Pursuing the SC’s logic while resolving whether copyright infringement could be arbitrable, the Court held that when there were 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 and it is never an action in rem”. It noted that while registration of a mark gives the registrant a right against the world at large (in rem), outcome of copyright disputes between two claimants had no consequence on third parties and so were rights in personam which were arbitrable.

The Telemax judgment was shortly followed by Indian Performing Rights Society (IPRS) Limited v. Entertainment Network, where the Bombay High Court had to adjudicate upon the challenge to the arbitrator’s award on an issue of copyright license for sound recordings. The arbitrator has found that the user of a broadcast (here, the network) need not obtain a license for the underlying copyright in the musical or literary work, as was obtained from IPRS. In doing so, the Court rightly held that this was adjudication in rem, as it would render IPRS’s copyright licenses unnecessary in similar agreements with other licensees who wanted to use sound recordings of the original work. Thus, the Court had valid grounds to distinguish from its ruling in Telemax.

Unfortunately, not all cases have done justice to the reasoning laid down in Telemax, and by extension Booz Allen. In two cases dealing with negative covenant to use trademark post expiry of franchise agreement (see here and here), the Bombay High Court, while relying on Telemax (and so incorrectly interpreting it) has recognized trademark and copyright proceedings to be matters in rem, and so de facto non-arbitrable.

The most recent example of an incorrect interpretation of the law of the land is presented in Madras High Court’s judgment in Sanjay Lalwani, which dealt with a dispute regarding deed of assignment of copyright in satellite rights and theatrical rights of a film. The Court in its judgment interpreted Booz Allen to have categorically held that arbitration is not maintainable with respect to matters in rem, ultimately arriving at the conclusion that arbitration is not maintainable in matters of copyright.

Evaluating oust of jurisdiction within IPR statutes

An interesting argument that is particular to the issue of IPR but is yet to be engaged with by the SC is the issue of ouster of jurisdiction by the Copyright Act, 1957 and the Trademarks Act, 1999.This question was first brought up by the Delhi High Court in1990 in Mundipharma AG v. Wockhardt Ltd, where the court engaged with Chapter XII of the Copyright Act. It found that every suit in respect of infringement of any other right conferred by the Copyright Act would have to be instituted in the district court having jurisdiction, implying that such infringements cannot be the subject-matter of arbitration.

This line of law was again engaged with in the IPRS judgment by the Bombay High Court, where it found section 62(1) of the Copyright Act to mandate institution of every suit or civil proceeding in the Civil Courts, ousting the subject-matter from the ambit of arbitration.

However, the IPRS judgment was in complete contrast to the previous interpretation of this provision in the Telemax judgment. Regarding section 62 of the Copyright Act to correspond to section 134 of the Trademarks Act, it interpreted the former to imply that infringement and passing off actions cannot be brought in a court lower than a jurisdictionally competent District Court. Thus, it held that neither section oust the jurisdiction of an arbitral panel. All that they restrict is actions being brought before the registrar or the board.

While the Telemax interpretation is definitely a welcome pro-arbitration stance, it does appear to be a stretch on the language of the provisions of the two legislations under question, which do require matters under the respective acts to be adjudicated by civil courts.

Perhaps a better argument that can assume to circumvent this requirement is found in the position taken by the Delhi High Court in HDFC Bank Ltd. v. Satpal Singh Bakshi, where the issue pertained to arbitrability of matters under the jurisdiction of the Debt Recovery Tribunals. The Court noted that for matters that are to be decided by tribunals which act as a replacement of civil courts, there is no special rights created for parties and are so arbitrable. By extension, this ratio would also apply to matters under the jurisdiction of the civil courts. This ratio has been clearly upheld by the SC in M.D. Frozen Foods Exports Pvt. Ltd. and Ors. vs. Hero Fincorp Limited, where it has held all disputes relating to the “right in personam” as arbitrable,  giving parties the right to choose an alternative forum.

Thus, the SC’s final stance on the matter makes it clear that for subject-matter ordinarily adjudicated by the civil courts or tribunals set-up as alternatives to courts, parties have the right to arbitrate their disputes. Consequently, sections within the Copyright and Trademarks Acts which confer jurisdiction on civil courts for adjudication of matters covered by the acts do not serve as bars to arbitration.

Vidya Drolia: Back on track?

The SC in its 2020 judgment in Vidya Drolia v. Durga Trading Corporation reinforces the Booz Allen ratio. It goes one step further and notes that the expressions “rights in rem” and “rights in personam” may not be correct for determining non-arbitrability because of the interplay between the two. Furthering the Booz Allen stance, it notes that a right in rem can result in an enforceable right in personam. This is an important point to note for arbitrability of IPR, given that an IPR owner’s right is a right in rem, enforceable against the world at large. However, issues of passing off in trademarks and copyright infringement issues are disputes in personam, the outcomes of which do not affect the rights of third parties. Thus, it is pertinent for courts to take into account this distinction and allow for rights in personam to be arbitrated in order to rightly uphold party autonomy.

Conclusion

The SC has rightly identified that the intrinsic limit of arbitration as a private dispute resolution mechanism is that it is binding only on the parties to the arbitration agreement. By implication, rights in rem cannot be arbitrated as they would go beyond the powers vested in the arbitrator by virtue of the arbitration agreement. This being said, disputes regarding copyrights, trademarks and other forms of IPR cannot be automatically excluded from the ambit of arbitration simply because the basis of these rights are those in rem. Judicial mind is required to be applied to understand the nuances of a matter, and only then rule as to its arbitrability.

To hold outright that matters of IPR are not arbitrable not only violates the ratio that has been laid down by the SC, but also erodes the basis of the 1996 Act, which is to promote commercial dispute resolution and give effect to party autonomy. Vidya Drolia puts out any more challenges to the arbitrability of IPR to rest, and implicitly sets aside any confusion generated by the Aiyaswamy judgment.  Hopefully, subsequent approach by courts to this issue will be influenced by this positive reinforcement of the law of the land, and will promote a pro-arbitration environment in India.

–Manasa S Venkatachalam

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