Arbitrating IPR Disputes: Rethinking In Rem v/s In Personam Dichotomy
[Siddhaant is a student at Jindal Global Law School.]
India’s fledgling ADR regime imposes several restrictions on the subject matter arbitrability of disputes. Its apprehensions of fully liberalizing are evident from Section 34 of the Arbitration and Conciliation Act 1996 (Act) which provides non-arbitrability of the subject matter as one of the grounds for setting aside an arbitral award. Owing to several public policy concerns, Indian courts have reserved certain classes of disputes exclusively for the public fora. One such category of disputes is those pertaining to intellectual property rights. While the precise judicial stance on the arbitrability of IPR disputes is unclear, arbitrability of cases that involve rights in rem is prohibited. Through this article, I argue that the in rem vs in personam test is often futile for determining the arbitrability of IPR disputes, as such disputes almost invariably involve the determination of a right in rem. Instead, I suggest a more nuanced approach to IP arbitrability, wherein all classes of disputes are made arbitrable, but their effects are limited inter partes. I argue that such a framework strikes an appropriate balance between the public policy concerns surrounding IPR arbitrability, and the economic imperative of liberalizing India’s ADR regime.
Current Judicial Stance
The general test for subject matter arbitrability was laid down by the Supreme Court in its judgments in Booz Allen v. SBI (Booz Allen) and Vidya Drolia v. Durga Trading (Vidya Drolia). In the former case, the court propounded that those disputes that involve rights in rem are generally non-arbitrable, while rights in personam are arbitrable. In Vidya Drolia, the court refined its previous holding in Booz Allen and noted that in certain cases, rights in rem can give rise to an enforceable right in personam. It also held that matters having an erga omnes effect and affecting the rights of third parties may not be arbitrated.
Judicial interpretation of IPR arbitrability has developed on similar lines. In Eros International v. Telemax (Eros Telemax), the Bombay High Court allowed limited arbitrability of IPR disputes. Disputes relating to contractual licensing and infringement were held to be arbitrable as they involved rights in personam and did not affect third parties. However, the court also postulated that questions of validity and registration of IP rights are non-arbitrable, as they relate to sovereign functions of the state and have an erga omnes effect. Nevertheless, the jurisprudence surrounding this issue is far from settled as other High Court benches have delivered contradictory judgments. For instance, the Madras High Court in Sanjay Lalwani v. Joystar disregarded the Eros Telemax judgment and held that all IP disputes are inherently non-arbitrable. However, this decision has been the subject of scornful criticism in academic discourse. There is nothing inherent in IPR that makes it non-arbitrable. Intellectual property bears no intrinsic difference from tangible property (disputes relating to which are arbitrable), and there exists no discernible reason why only the former should be ousted from the domain of arbitration. Therefore, scholars generally recognize the position in Eros Telemax to be the correct.
Issues with India's Position
While the court’s decision in Eros Telemax may appear to be a nuanced one, the framework it operates in is not particularly helpful for IPR disputes. All IPR disputes invariably involve the determination of rights in rem. To illustrate, the court held that while an arbitral tribunal may pronounce judgment on trademark infringement, the question of the validity of the same trademark would be beyond its scope. However, in most trademark infringement cases, the defendant almost always invokes Section 9 of the Trademarks Act 1999 to assail the validity of the plaintiff’s mark. Section 9 provides the grounds for invalidity of a trademark, which includes inter alia descriptiveness and non-distinctiveness. This means that the court has to decide on the trademark’s validity (a right in rem) in a dispute that is technically in personam. As per the current position in India, neither of these claims would be capable of arbitration as they either involve a determination in rem or one which relates to the sovereign functions of the State (as only the State can grant monopoly over IP). If this is the case, it is evident that India’s current position of IP arbitrability would effectively prevent any IP dispute from being arbitrated. If a tribunal is going to be precluded from deciding the question of validity incidentally in an infringement action, parties would obviously prefer to take their disputes to civil courts, where they would be able to agitate their case more effectively. Circumscribing IP arbitrability to such a narrow class of disputes (to the extent that practically no disputes would be arbitrable) does not bode well for India’s desire to become an arbitration hub.
The strong impetus to have IP arbitrability is bolstered by the fact that foreign investment agreements often involve technology transfer or IP licensing. Foreign investors would obviously prefer to resolve their IP disputes through arbitration rather than the tedious civil court system. The government has also been unsuccessful at attempting to expedite the resolution of IPR disputes, as is evidenced by the failure of the Intellectual Property Appellate Board (IPAB). The collapse of the IPAB transferred all IPR cases to High Courts, further exacerbating its already overwhelming backlog.
There are several other reasons as to why arbitration would be especially appropriate for IPR disputes. Since arbitration is now explicitly recognized as a confidential process under the Act, parties would feel far more comfortable arbitrating IPR disputes involving trade secrets or sensitive patents and designs. Furthermore, since some IPRs such as patents require immense technical know-how, parties would be able to appoint expert arbitrators who are far more qualified on IP matters than generalist judges.
Therefore, there clearly exist strong policy reasons for liberalizing India’s current position on IP arbitrability. Nevertheless, the policy reasons for disallowing the arbitrability of disputes concerning the validity of IP rights are equally apparent. Arbitration in such cases, especially where one party has significantly stronger bargaining power, would undermine the authority of State instrumentalities and potentially deny weaker parties access to justice if they are precluded from approaching public fora. Therefore, any arbitration framework should ideally strike an appropriate balance between the aforesaid policy considerations.
I submit that if India is to keep up with global judicial trends, it must adopt a more nuanced framework to determine IP arbitrability. I argue that arbitrators ought to be able to decide on the validity of IP rights, but this determination should not have an erga omnes effect. Instead, the outcome of the dispute should only be binding inter partes and not operate as res judicata for potential future claims.
Several jurisdictions now follow this approach. For instance, a French court in Socie’te’ Lov Hidravlika DOO v. SA Diebolt held that an arbitrator can decide on the issue of the validity of a patent arising incidentally out of a contractual dispute, but such a determination would bind the parties alone. Article L 615-17 of the French Intellectual Property Code also provides that civil actions relating to intellectual property can be amenable to arbitration. In the United States, Section 294 of the Patent Act provides that while the validity of a patent may be decided by an arbitral tribunal, the award shall not bind third parties. I argue for a similar approach in India. For trademarks, Section 134 of the Trademarks Act 1999 provides that no court inferior to a District Court would have jurisdiction under the statute. Herein, the following clause may be added- “Nothing in this section shall prevent two parties from submitting their dispute to arbitration. Any determination of an arbitral tribunal in this regard shall only bind the parties to the dispute”. Similar clauses could also be added to other IP statutes such as those governing patents, copyright and designs. Such an approach would appropriately balance public policy concerns. On one hand, private bodies would not be able to meddle with State conferred monopolies, and on the other, a defendant’s right to raise invalidity as a ground of defence would not be curtailed.
India's current position on the arbitrability of IP disputes is inadequate and may impede the growth of India's ADR regime. If only in personam disputes are considered arbitrable, practically all IPR disputes would be transferred to the domain of civil courts. I argue for a more nuanced approach to the problem; one that takes into account the specific characteristics of different types of IP rights. Disputes relating to registrable IP rights must be considered amenable to arbitration, with the caveat that the effect of any determination relating to the validity of the IP will be inter partes. With respect to the right of publicity, which is simultaneously a fundamental right and an IP right, the current test of arbitrability unnecessarily precludes such disputes from being arbitrated. Therefore, there is a need to move beyond a strict interpretation of the in rem/in personam dichotomy and adopt an approach that strikes a balance between India’s public policy concerns and its commercial interests.