Arbitration as a means of resolving commercial disputes has progressively become the default mechanism around the world, including in India. However, the public policy exception may be invoked to make certain subject matter inarbitrable. This article deals with one of these putatively inarbitrable areas in India: intellectual property and the reasoning of the Indian courts to render intellectual property disputes inarbitrable.
Arbitration of disputes (viz-a-viz traditional litigation) poses several distinct benefits in terms of time and cost-effectiveness, ensuring confidentiality, specialised and expert adjudicators, etc. It is for these obvious advantages that several countries like Australia, Japan, Germany, Canada, etc., have adopted a pro-arbitration approach even towards Intellectual Property (“IP”) disputes. Furthermore, transnational IP disputes are also being increasingly arbitrated, with institutions such as the World Intellectual Property Organisation (WIPO) and the International Chamber of Commerce (ICC) ensuring adequate mechanisms and support for the same.
However, the spectrum of arbitrability of any subject-matter is dictated by a country’s public policy, and thus, the approach towards arbitration of IP disputes varies amongst different jurisdictions. In India, there is no straight forward answer to the issue of arbitrability of IP disputes, either from the applicable statutory law or the juridical decisions. A look into the relevant provisions of the major IP legislations, namely (a) the Patents Act, 1970 (“Patents Act”) – Section 104; (b) the Trademarks Act, 1999 (“Trademarks Act”) – Section 134; and (c) the Indian Copyright Act, 1957 (“Copyright Act”) – Section 55 read with Section 62, suggest that IP was traditionally considered and treated only as a right in rem. Therefore, the aforesaid provisions do not provide a clear answer to the conundrum of the arbitrability of IP disputes.
Likewise, the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) also does not give a definite list of matters, which are arbitrable. Section 2(3) of the Arbitration Act provides that certain disputes may not be submitted to arbitration. Further, Section 34(2)(b)(i) of the Arbitration Act grants 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. However, there is no definitive answer to the exact scope of ‘subject-matter arbitrability’ in India.
Thus, to ascertain the arbitrability of IP disputes in India, it becomes pertinent to analyse two interlinked issues: (a) the criteria to determine arbitrability under the Indian arbitration law; and (b) the judicial approach to the arbitrability of IP disputes in India.
Determining arbitrability of IP Disputes – Pre Vidya Drolia
Until the recent four-part test laid down by the Hon’ble Supreme Court in the case of Vidya Drolia v. Durga Trading Company[1](“Vidya Drolia”), arbitrability of disputes in India was primarily determined by the criteria laid down by the Hon’ble Supreme Court in the case of Booz Allen Hamilton v SBI Home Finance[2] (“Booz Allen”).
In Booz Allen, the Hon’ble Supreme Court, while listing out well recognised examples of non-arbitrable disputes[3], also laid down two broad categories of disputes that are ousted from the scope of arbitration:
- Ouster based on rights in rem – Disputes relating to the rights that operated in personam could be resolved through arbitration, while those disputes that concerned in rem rights had to be necessarily adjudicated by public tribunals. However, the Hon’ble Supreme Court went on to clarify that the aforesaid rule was not a ‘rigid’ or inflexible one. It also observed that in personam subordinate rights flowing from rights in rem were clearly arbitrable.
- Ouster based on forum exercising exclusive jurisdiction – Disputes arising out of a special statute, which are reserved for the exclusive jurisdiction of special courts are generally considered to be inarbitrable.
Until 2020, the issue of arbitrability of IP disputes was always contested based on the aforesaid tests.
IP Disputes – rights in rem or rights in personam?
The dictum of the Hon’ble Supreme Court in Booz Allen, affirming that subordinate in personam rights flowing from rights in rem were arbitrable, had paved the way for arbitration of IP disputes in India. In fact, the Hon’ble Supreme Court, in Booz Allen, itself provided an instance to support this distinction, i.e., while rights under a patent licence may be arbitrated, the validity of the underlying patent may not. Thus, instead of a blanket ban on the arbitration of IP disputes, it became crucial for the courts and tribunals to have a case-by-case analysis of the actual issue involved to adjudicate on the arbitrability of IP disputes.
However, all the courts in India did not fully appreciate and cull out an exception of subordinate in personam rights under IP, which are generally considered to be rights in rem. In general, the Hon’ble Supreme Court, in A. Ayyasamy vs. A. Paramasivam and Ors.[4] and Emaar MGF Land Ltd. V. Aftab Singh[5],while dealing with the issue of arbitrability of fraud and landlord-tenant disputes, respectively, have also made general observations about IP disputes being outside the scope of arbitration. While these statements categorising IP disputes as non-arbitrable were obiter dicta and binding value of the aforesaid observations is contestable, there were various other judgments from High Courts categorising trademark infringement as a right in rem, and thus, inarbitrable.
However, with the increasing commercialisation of IP, the first bent towards arbitrability of IP disputes was shown by the Hon’ble Bombay High Court in Eros International Media Limited v. Telemax Links India Pvt. Ltd.[6] (“Eros”), wherein it analysed the arbitrability of IP dispute against the criteria laid down in Booz Allen. In this case, while resolving the issue of arbitrability of copyright infringement, the Hon’ble Bombay High Court held that both infringement and passing off actions are actions in personam, wherein it was stated as follows:
“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.”
Thus, a claim of infringement by an identified person/ entity arising out of a breach of contract is arbitrable as it is a subordinate right in personam. In clarifying this position, the Hon’ble Court correctly emphasised upon the inevitable overlap between commercial transactions and intellectual property in the modern world, and the irrationality of placing a blanket embargo on the arbitrability of IP disputes of all forms. Eros was a slightly more nuanced decision in comparison to another decision of the Hon’ble Bombay High Court in the case of EuroKids International Private Limited vs. Bhaskar Vidhyapeeth Shikshan Sanstha[7], wherein the Hon’ble Bombay High Court had observed that since there is no dispute about the claimant’s ownership of the trademark and copyright involved in the present case, the proceedings filed cannot be considered as proceeding in rem and are thus arbitrable.
The Hon’ble Bombay High Court continued to follow the case-by-case approach in its subsequent decisions, while squarely applying the principle of right in rem vs. right in personam. Notably, in Indian Performing Rights Society v. Entertainment Networks[8], it was called upon to adjudicate whether or not an arbitral tribunal could rule on the validity of the copyright itself. The Hon’ble Court, holding in the negative, stated that allowing the tribunal to decide purely legal issues such as the existence of copyright, amounts to a decision on an action in rem, which is beyond the jurisdiction of an arbitral tribunal.
IP Disputes – Ouster of jurisdiction with IPR Statute?
The second argument against the arbitrability of IP disputes, which remains unexamined by the Hon’ble Supreme Court, is the issue of ouster of jurisdiction under the IPR statutes.
This question was first brought up by the Hon’ble Delhi High Court, in Mundipharma AG v. Wockhardt Ltd.[9], wherein it was held that every suit in respect of infringement of any right conferred by the Copyright Act would have to be instituted in the district court having jurisdiction, implying that such infringement cannot be the subject-matter of arbitration.
However, in Eros, the Hon’ble Bombay High Court rejected the aforesaid contention and held that Section 62 of the Copyright Act (corresponding to Section 134 of the Trademarks Act), only implies that infringement and passing off actions cannot be brought in a court lower than a jurisdictionally competent District Court. Thus, it held that neither of the provisions ousts the jurisdiction of an arbitral tribunal. All that they restrict is actions being brought before the registrar or the board.
While the interpretation adopted in Eros is indubitably a pro-arbitration stance, it seems to be a far-stretched interpretation of the provisions of the two legislations under question, which do require matters under the respective acts to be adjudicated by civil courts. The interpretation also needs to be scrutinised in the light of the explanation regarding the non-arbitrability of disputes covered under India’s debt recovery laws, as examined by the Hon’ble Supreme Court in Vidya Drolia.[10]
The Vidya Drolia Test
While determining the arbitrability of landlord-tenant dispute, governed by the Transfer of Property Act, 1882, the Hon’ble Supreme Court, after delving into the interpretation of ‘non-arbitrability’ itself, propounded a fourfold test to ascertain the instances in which the subject matter of a dispute in an arbitration agreement is not arbitrable (Vidya Drolia Test). These include:
- When the cause of action and subject matter of the dispute relate to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.
- When the cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralised adjudication, and mutual adjudication would not be appropriate and enforceable.
- When the cause of action and subject matter of the dispute relate to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable.
- When the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
The Hon’ble Supreme Court has further explained that these tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically, will help and assist in determining and ascertaining, with a great degree of certainty, when a dispute or subject matter is non-arbitrable[11] under the Indian law. Thus, the issue of arbitrability will now have to be scrutinised from the lens of the Vidya Drolia Test.
However, the uncertainty in relation to the arbitrability of IP disputes persisted since the Hon’ble Supreme Court in this case specifically mentioned that:
“grant and issue of patents and registration of trademarks are exclusive matters falling within the sovereign or government functions and have erga omnes effect, which means that rights and obligations arising from this decision shall be generally applicable on all. Further, such grants confer monopoly rights, and hence they are non-arbitrable.”
While the Hon’ble Supreme Court, in the later part of its judgment in Vidya Drolia, clarified that the issue of arbitrability should necessarily be dealt with, on a case-to-case basis[12], the statement regarding patent registration having an erga omnes effect could have been interpreted to impose a blanket ban on arbitration of IP disputes. However, any such ambiguity was soon clarified by the Hon’ble Delhi High Court in the case of Hero Electric Vehicles Pvt. Ltd. & Anr. v. Lectro E-Mobility Pvt. Ltd. & Anr. (“Hero”).[13]
In Hero, the Hon’ble Delhi High Court was confronted with the issue of arbitrability of a trademark infringement and passing off dispute between two family groups, in terms of a Family Settlement Agreement (“FSA”) and Trademark and Name Agreement (‘TMNA’). The Plaintiff (Family-1) had filed a suit against the Defendant (Family-4) seeking a permanent injunction to restrain the Defendant from using the trademark. The Defendant filed an application under Section 8 of the Arbitration Act, contending that the matter must be referred to arbitration in terms of the FSA. The Hon’ble Court, while dealing with the question of arbitrability of IP disputes, held that in the facts of that case what had to be determined was not the rights in the IP owned by the parties but whether the right to use of IP assigned in the FSA and the TMNA were being exercised in accordance with the terms thereof, thus making the disputes an adjudication of the rights in personam which were held to be arbitrable.
The said principle was subsequently followed by the Hon’ble Delhi High Court in Golden Tobacco Limited v. Golden Tobie Private Limited[14] as well as in the decision in Vijay Kumar Munjal v. Pawan Kumar Munjal (“Vijay Munjal”)[15]. In Vijay Munjal, the Hon’ble Delhi High Court, while dealing with a Section 11 application under the Arbitration Act, categorically held that the assumption that all matters relating to trademarks are outside the scope of arbitration is plainly erroneous. There may be disputes that may arise from subordinate rights such as licences granted by the proprietor of a registered trademark. Undisputedly, these disputes, although, involving the right to use trademarks, are arbitrable as they relate to rights and obligations inter se the parties to a licence agreement. Similarly, disputes arising inter se the contracting parties in respect of their rights and obligations under the contract, are arbitrable, and any action seeking enforcement of such contractual rights inter se the contracting parties, is an action in personam.
Conclusion
Disputes arising solely from a contract maybe treated like a contractual dispute irrespective of whether such a contract pertains to licensing/ assignment of IP (where the statutory or proprietary rights of the owner of the IP are not in question) or other commercial arrangements between parties. Arbitration in contractual IP disputes is the need of the hour on account of the arbitration being both cost-effective and time efficient. Additionally, with the increasing number of cross-border IP licensing agreements being entered into by Indian entities, the foreign entities find arbitration a preferable dispute resolution mechanism. It is for this reason that other pro-arbitration Asian jurisdictions like Singapore and Hong Kong have recently brought significant amendments to delineate specific categories of IP disputes that are arbitrable. It remains to be seen if the Indian legislature would follow a similar path to settle the debate on the arbitrability of IP disputes in India.
For further information, please contact:
Pallavi Rao, Partner, Cyril Amarchand Mangaldas
pallavi.rao@cyrilshroff.com
[1] (2021) 2 SCC 1.
[2] 2011 5 SCC 532.
[3] The court noted the following examples of disputes which were considered to be non-arbitrable – (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights and child custody; (iii) matters of guardianship; (iv) insolvency and winding up; (v) testamentary matters, such as the grant of probate, letters of administration and succession certificates; and (vi) eviction or tenancy matters governed by special statutes where a tenant enjoys special protection against eviction and specific courts are conferred with the exclusive jurisdiction to deal with the dispute. A seventh category of dispute namely disputes relating to trusts, trustees and beneficiaries arising out of a trust deed and the Indian Trusts Act, was added to the list by Vimal Kishore Shah v. Jayesh Dinesh Shah, AIR 2016 SC 3889.
[4] (2016) 10 SCC 386.
[5] (2019) 12 SCC 751.
[6] 2016 6 Bom CR 321.
[7] 2015 4 Bom CR 734.
[8] 2016 SCC OnLine Bom 5893.
[9] ILR (1991) 1 Del 606.
[10] To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act. Therefore, the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration.
[11] Supra note 1, paragraph 76.5.
[12] Supra note 1, paragraph 138 – 141.
[13] 2021 279 (DLT) 99.
[14] 2021 SCC OnLine Del 4506.
[15] 2022 290 DLT 719.
