Arbitrability of IP Disputes

The Common Law Perspective

Introduction

Arbitration is generally the result of a contract between parties, and most often the parties’ contract determines rights and obligations only as between the parties to that contract. Even though the parties’ contract establishes the matters that are subject to arbitration, the jurisdictional law at the seat of the arbitration often delineates what subject matter the parties can agree to submit to arbitration. Whether a particular subject matter is arbitrable is often referred to as ‘objective arbitrability.’^[2]

As used in this chapter, ‘arbitrability’ means the question of whether a particular issue in dispute is capable of resolution by arbitration or whether that issue is reserved for determination by the national courts or another forum under the relevant jurisdictional law.

Given that intellectual property is eminently portable within and across national borders, most IP disputes are – or become – international in nature.^[3] IP rights are usually granted and governed by individual states,^[4] and national legal systems address issues of arbitrability differently. The first part of this chapter describes the various IP rights that may be arbitrated, explains unique issues that arise in the context of arbitrating these IP rights and provides examples of the extent to which various common law jurisdictions allow arbitration of IP disputes.

Nature of IP rights and IP disputes

Most jurisdictions recognise the same general categories of IP rights: patents, trademarks, copyright, trade secrets and domain names. Article 2(viii) of the Convention Establishing the World Intellectual Property Organization of 14 July 1967 (amended on 28 September 1979) defines intellectual property to include rights related to:

• literary, artistic and scientific works;
• performances of performing artists, phonograms and broadcasts;
• inventions in all fields of human endeavour;
• scientific discoveries;
• industrial designs;
• trademarks, service marks, and commercial names and designations;
• protection against unfair competition; and
• all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields.

IP litigation and arbitration arise from disputes over infringement, validity, ownership or breach of contract relating to IP rights.^[5] As discussed in more detail below, infringement and breach of contract claims are considered arbitrable in most common law jurisdictions; however, because decisions regarding the validity of IP rights typically require enforcement by the relevant country’s IP office, validity challenges are often considered either not arbitrable at all or arbitrable with the limitation that any award binds only the parties to the arbitration. There are only a few jurisdictions, such as South Africa, that prohibit arbitrating intellectual property disputes entirely.^[6]

Applicable law

Challenges to the arbitrability of a particular dispute can be presented to either a national court or an arbitral tribunal. Both courts and arbitral tribunals take into consideration whether the underlying arbitration agreement contains a choice of law provision in determining the applicable law for arbitrability determinations. Absent a choice of law provision, a court generally will apply its own country’s laws and public policy considerations while an arbitral tribunal will typically apply either the law of the seat of the arbitration or the law of the jurisdiction in which the arbitral award is likely to be enforced.^[7]

What is arbitrable?

One reason that arbitration is particularly attractive as a means of resolving international commercial disputes is that awards rendered by international tribunals are readily enforceable in most jurisdictions worldwide. This is in large part because of the New York Convention, which provides for the enforcement of arbitral awards in the territory of any contracting state rendered in the territory of another contracting state. As of 2022, 170 states are signatories to the New York Convention, including the vast majority of the UN member states.^[8]

Article II(1) of the New York Convention provides for recognition of an international arbitration agreement ‘concerning a subject matter capable of settlement by arbitration’.^[9] Among the limited grounds for opposing enforcement of an award under the Convention is when the national courts where enforcement is sought determine that ‘[t]he subject matter of the difference is not capable of settlement by arbitration under the law of that country.’^[10] This raises the threshold question of arbitrability: what is – and what is not – capable of settlement by arbitration?

The existence of distinct national legal systems necessarily means that the scope of arbitrable subject matter varies from state to state. For the most part, national courts will enforce arbitral awards resolving disputes that are the subject of written agreements between parties; however, a subject matter may be determined to be ‘not capable of settlement by arbitration’ if national law forbids or restricts the arbitrability of particular claims or disputes.^[11] Examples of non-arbitrable disputes include criminal, bankruptcy and consumer matters,^[12] usually on grounds that private resolution of such disputes would be contrary to public policy.

With respect to IP rights specifically, issues such as the existence, validity, ownership and scope of those rights are often in dispute. Some IP disputes involve rights or obligations derived from contracts, such as assignments of ownership or licence agreements, and such disputes are generally accepted as arbitrable; however, other IP disputes involve rights that devolve from local or central governmental entities, such as infringement or validity.^[13]

Whether these disputes are arbitrable varies by jurisdiction. The national law of many common law states allows arbitration of all IP disputes – including both infringement and validity of the intellectual property – but awards determining infringement and validity might be enforceable only as between the parties to the arbitration. Such awards are deemed to have no effect in respect of the rights and obligations of third parties. A further explanation of the effect of such awards plus an examination of the arbitrability of IP disputes in select common law states follows.

Arbitral awards may have effect erga omnes or inter partes

Within a jurisdiction, IP rights are typically enforceable against all third parties: patent rights, trademarks, copyright, etc., can normally be enforced against any infringer in a national or local court of a sovereign state. Such rights have effect erga omnes, or ‘towards all.’ For example, in national courts, an IP owner can assert its rights against nearly any accused infringer. If, during the course of the court proceedings, the intellectual property is deemed invalid by the national court, such a determination will typically have effect erga omnes, and the owner cannot later assert the invalid intellectual property against a third party. In contrast, a determination may be held to have effect only inter partes, or ‘between the parties,’ in certain circumstances.

Whether an arbitral award has an inter partes or erga omnes effect varies by jurisdiction as well as by type of intellectual property.^[14] In common law countries, most IP disputes are considered arbitrable at least to some extent. In many jurisdictions, an arbitral decision on patent validity only applies with regard to the parties in the arbitration because patent rights are considered to be an issue of public policy and can usually be deemed invalid only through state action.^[15] Typically, therefore, only a national court decision regarding patent validity can have effect erga omnes.^[16]

For this reason, some IP owners will consider arbitration less risky than court action because even if the arbitrator invalidates their intellectual property, they will lose only the right to enforce that intellectual property against the adverse party in the arbitration rather than against all third parties. There are trade-offs, however, because a determination of validity by a court may have some value with regard to third parties, providing IP owners with increased certainty going forward and potentially limiting or eliminating the time and cost of repeatedly litigating the validity of the same intellectual property.

With this understanding of the differences between awards that have effect erga omnes and inter partes, it is instructive to examine the arbitrability of IP disputes under the national law regimes of several common law jurisdictions.

United Kingdom

In the United Kingdom – comprising England and Wales, Scotland, and Northern Ireland – there is no statutory recognition of the arbitrability of IP disputes in the Arbitration Acts 1950, 1979 or 1996.^[17] Moreover, the UK Patents Act 1977 explicitly allows for arbitration in only very limited circumstances.^[18] For instance, when an application for a compulsory patent licence is opposed, the Comptroller General of Patents may order the proceedings, or any question or issue of fact arising in them, to be referred to an arbitrator if either the parties consent to arbitration, or the proceedings require a prolonged examination of documents or any scientific or local investigation that cannot, in the opinion of the Comptroller, conveniently be made before him or her.^[19]

Instead, the arbitrability of IP disputes has largely been recognised judicially.^[20] Trademark and copyright disputes are both fully arbitrable,^[21] and while patent validity is as well, a validity determination only has inter partes effect under English law.^[22] In general, English courts have interpreted arbitration agreements broadly.^[23]

United States

In the United States, federal statutory law expressly provides that parties can agree to arbitrate patent disputes, either by including an arbitration provision in a contract between them that involves a patent (i.e., a licence agreement, a joint development agreement, etc.) or by agreeing to arbitrate an existing patent dispute. The statute reads as follows:

A contract involving a patent or any right under a patent may contain a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract. In the absence of such a provision, the parties to an existing patent validity or infringement dispute may agree in writing to settle such dispute by arbitration. Any such provision or agreement shall be valid, irrevocable, and enforceable, except for any grounds that exist at law or in equity for revocation of a contract.^[24]

The same statute specifies that a resulting arbitral award will have only inter partes effect:

An award by an arbitrator shall be final and binding between the parties to the arbitration but shall have no force or effect on any other person.^[25]

During arbitration under this statute, an accused patent infringer could raise defences of non-infringement, unenforceability or invalidity; however, even if the asserted patent is determined to be invalid, that determination only has effect inter partes. In other words, an arbitral award invalidating a patent in the United States will not preclude the patent owner from asserting the same patent against third parties.

Unlike for patent disputes, there is no statute in the United States that expressly provides for binding arbitration of copyright disputes; however, US courts have held that copyright claims, including claims under the Digital Millennium Copyright Act, are arbitrable.^[26] This includes the validity of a copyright.^[27] Similarly, no US statute expressly provides for binding arbitration of trademark disputes.

Canada

There is no Canadian counterpart to the US statute that explicitly authorises patent arbitration, and the Federal Court of Canada has exclusive authority to make rulings that affect the registration of the patent and impact the rights of third parties.^[28] Still, an arbitral award in Canada that concerns a patent generally can be enforced as between the parties to the arbitration;^[29] that is, an arbitral award relating to the validity of the patent has effect inter partes but the Canadian Patent Office will not recognise arbitral awards that determine that a patent is invalid.^[30]

With respect to the arbitrability of copyright disputes, the Supreme Court of Canada has recognised that ‘[t]he parties to an arbitration agreement have virtually unfettered autonomy in identifying the disputes that may be the subject of the arbitration proceeding.’^[31]

In its 2003 decision, the court interpreted Article 2639 of the Civil Code of Quebec, which excludes from arbitration ‘disputes over the status and capacity of persons, family matters or other matters of public order.’^[32] According to the Supreme Court, ‘the Court of Appeal took the view that cases relating to ownership of copyright, as well as cases concerning the scope and validity of copyright, must be assigned exclusively to the courts because the decisions made in such cases may, as a rule, be set up against the entire world.’^[33] The Supreme Court found that the lower court ‘was in error when it said that . . . problems relating to the ownership of copyright must be treated in the same manner as questions of public order, because they relate to the status of persons and rights of personality, and must therefore be removed from the jurisdiction of arbitrators.’^[34] It went on to state:

The [Copyright] Act is primarily concerned with the economic management of copyright, and does not prohibit artists from entering into transactions involving their copyright, or even from earning revenue from the exercise of the moral rights that are part of it. . . . In addition, the Quebec legislation recognizes the legitimacy of transactions involving copyright, and the validity of using arbitration to resolve disputes arising in respect of such transactions.^[35]

One indicator of the pro-arbitration sentiment in Canada can be seen in Quebec’s Act respecting the professional status of artists in the visual arts, arts and crafts and literature, and their contracts with promoters.^[36] Section 37 of that Act, which applies to ‘every contract between an artist and a promoter which has a work of the artist as its object’,^[37] states as follows:

In the absence of an express renunciation, every dispute arising from the interpretation of the contract shall be submitted to an arbitrator at the request of one of the parties.^[38]

As a result of this statute, arbitration is the default mechanism for resolving disputes between artists and promoters that arise from the interpretation of contracts regarding their artistic works.

Australia

No statute speaks to the arbitrability of IP disputes in Australia, but Australian courts historically have started from the premise that ‘any claim for relief of a kind proper for determination of a court’ is arbitrable.^[39] Specifically with respect to patents, the Supreme Court of New South Wales had occasion to address the arbitrability of patent disputes in Larkden Pty Limited v. Lloyd Energy Systems Pty Limited.^[40]

In that case, two parties – Larkden and Lloyd – entered into a licensing agreement that contained an arbitration provision. When Lloyd raised a dispute regarding ownership of an invention on which it obtained a patent, Larkden objected that the dispute was not arbitrable; that is, Larkden argued that Lloyd improperly sought to use arbitration as a means of determining whether patent rights would be granted – a power, it claimed, vested exclusively with the Commissioner of Patents or the Federal Court.^[41]

The Supreme Court upheld the jurisdiction of the arbitrator, noting that ‘[n]on-arbitrable matters include . . . whether or not a patent or trade mark should be granted. These matters are plainly for the public authorities of the state. Patents and trade marks are monopoly rights that only the state can grant.’^[42] The Supreme Court also determined that arbitrators cannot determine validity in a situation in which the grant of a patent is opposed.^[43]

However, the Supreme Court declared that there is ‘no impediment to the parties investing in the arbitrator power to resolve a dispute as between themselves as to their rights in and entitlements to a patent application, or for that matter an invention.’^[44] The Supreme Court was clear that the arbitral award would ‘not, nor could it, bind the Commissioner of Patents or the Federal Court to declare who, as between [the parties], is or is not an eligible person under the Patents Act or who, as between them, should or should not be granted any patent.’^[45]

In sum, while arbitrators in Australia cannot resolve IP disputes in such a way as to bind third parties or the public at large, arbitrators can issue determinations declaring the IP rights of parties.

Singapore

In Singapore, the Intellectual Property (Dispute Resolution) Act of 2019 amended Singapore’s Arbitration Act and the International Arbitration Act to specifically allow for the arbitration of IP disputes, regardless of whether an IP right is the central issue or incidental to the central issues in dispute. Under the amendment, arbitral awards concerning IP rights have effect inter partes.^[46]

The amendment includes the following IP rights: patents, trademarks, geographical indications, registered designs, copyrights, rights in a protected layout-design of an integrated circuit, grant of protection in respect of a plant variety, rights in confidential information, rights in trade secrets or know-how, rights to protect goodwill by way of passing off or similar action against unfair competition, or any other IP right of whatever nature.^[47] The amendment also encompasses the following IP disputes: ‘(a) a dispute over the enforceability, infringement, subsistence, validity, ownership, scope, duration or any other aspect of an IPR; (b) a dispute over a transaction in respect of an IPR; and (c) a dispute over any compensation payable for an IPR.’^[48] The amendment therefore, explicitly authorises arbitration over patent validity with effect inter partes.

Hong Kong

On 23 June 2017, as part of its ongoing efforts to become a leading centre for arbitration, Hong Kong issued the Arbitration (Amendment) Ordinance 2017 (the ‘Arbitration Ordinance’) to ‘clarify that disputes over intellectual property rights may be arbitrated and that it is not contrary to the public policy of Hong Kong to enforce arbitral awards involving intellectual property rights.’^[49] The Arbitration Ordinance provides that ‘an IPR dispute is capable of settlement by arbitration as between the parties to the IPR dispute’ and applies ‘whether the IPR dispute is the main issue or an incidental issue in the arbitration.’^[50]

The Arbitration Ordinance is similar in language to the Singapore Intellectual Property (Dispute Resolution) Act of 2019 and defines an IPR as a patent, trade mark, geographical indication, design, copyright or related right, domain name, layout-design (topography) of integrated circuit, plant variety right, right in confidential information, right in trade secret or know-how, right to protect goodwill by way of passing off or similar action against unfair competition, or any other IPR of whatever nature.^[51] The Arbitration Ordinance defines an IP right dispute as ‘(a) a dispute over the enforceability, infringement, subsistence, validity, ownership, scope, duration or any other aspect of an IPR; (b) a dispute over a transaction in respect of an IPR; and (c) a dispute over any compensation payable for an IPR.’^[52] In addition, the Arbitration Ordinance goes one step further and states that Hong Kong’s Patents Ordinance (Cap. 514) ‘does not prevent a party from putting the validity of a patent in issue in arbitral proceedings.’^[53]

Along with standard patents, which extend rights to the owner for a maximum of 20 years, Hong Kong also offers IP protection under short-term patents, which are renewable after four years from filing for a maximum term of eight years.^[54] Under Hong Kong’s Patents Ordinance (Cap. 514), the owner of a short-term patent may only commence proceedings before a court to enforce its rights in the short-term patent if the following requirements are met:

1. a certificate of substantive examination has been issued in respect of the patent;
2. a request for substantive examination of the patent has been made under section 127B and the examination has not been terminated by a court order under section 101A(4)(b); or
3. a certificate has been granted by a court under section 84(1), certifying the court’s finding that –
   1. the patent is wholly valid; or
   2. if the enforcement proceedings relate to a relevant respect of the patent, the patent is valid in that respect.^[55]

However, under the Arbitration Ordinance, short-term patent rights can be arbitrated regardless of whether any of the above requirements have been met, unless the patent owner is seeking an injunction in interlocutory proceedings.^[56] As is the case in court proceedings in Hong Kong, in arbitration, it is the short-term patent owner’s burden to establish the validity of the patent, and the fact that the patent has been granted is not itself evidence of validity.^[57]

Conclusion

Whether by statute or judicial determination, the trend in many common law countries is generally to allow arbitration of IP disputes, but awards determining certain issues, such as validity, might only have inter partes effect. It is, therefore, important for parties to consider the law and policies of the particular jurisdiction in which arbitration would take place when drafting and seeking to enforce an arbitration agreement.

The Civil Law Perspective

Kinds of IP disputes

As in most common law jurisdictions, IP disputes between private parties are to a large extent considered arbitrable in civil law jurisdictions. This is particularly so for IP arbitration involving contractual claims and obligations.

Conversely, genuine IP right issues such as patent validity disputes are still brought largely before national courts and deemed non-arbitrable (or only arbitrable to a limited extent) in many jurisdictions. This is mainly because a patent is a right that is granted by a state to a patent holder and that is limited to a specific subject matter, territory and time.^[58] Where the validity of a patent is in dispute, generally, only the national courts or competent patent authorities may declare that patent null and void erga omnes. Overall, three main tendencies can be distinguished in civil law jurisdictions:

• express recognition of full arbitrability, including patent invalidity declarations by arbitral tribunals (e.g., Switzerland and Belgium) or express prohibition (e.g., South Africa, considered as a hybrid legal system),^[59] which is the exception;
• the acceptance of inter partes awards or incidental decisions on patent validity without res judicata effect (e.g., France, Italy and Portugal);^[60] and
• absent express laws, which are so far a matter of debate (e.g., Spain and China).^[61]

The approach of different legal systems to arbitrability of IP disputes

Against this background, we assess the arbitrability of patent validity disputes in key modern civil law jurisdictions. In doing so, first we briefly set out the situations in Switzerland and France, where arbitral tribunals have the power to decide on patent validity erga omnes or inter partes, respectively.

We then assess the legal practice in their respective jurisdictions: Germany and Japan. Despite being known for their arbitration-friendly climates, traditionally neither Germany nor Japan recognised patent validity arbitration; rather, patent validity questions are subject to the exclusive competence of special courts (in Germany) or the patent office (in Japan). This may now be changing, following reforms introduced in both Germany and Japan, as discussed below in more detail.

Switzerland

Switzerland has undoubtedly adopted one of the most liberal and pro-arbitration stances among civil law jurisdictions when it comes to IP disputes.^[62] Under Swiss law, IP disputes have long been considered arbitrable and not subject to any statutory restrictions.^[63] Specifically in the context of international arbitration, Section 177(1) of the Swiss International Private Law contains a broad definition of arbitrability and stipulates that ‘[a]ll pecuniary claims may be submitted to arbitration’. Swiss courts have regularly interpreted this to cover any claims with a pecuniary value for the parties.^[64]

Arbitral awards on patent validity are recognised and enforced by the Swiss Federal Institute on Intellectual Property (for the purposes of making the necessary entries in the patent register) provided that they have been declared enforceable by a Swiss court. Through that process, recognised arbitral awards will have an erga omnes effect.^[65]

Remarkably, the Swiss approach remained unchanged even after the establishment of the Federal Patent Court in 2012. Despite its exclusive jurisdiction in civil matters relating to patent validity and infringement, the majority view in Switzerland continues to allow patent arbitration.^[66]

France

An alternative, more restrictive approach to patent validity arbitration has emerged in France. Contrary to Switzerland, France traditionally denied IP arbitration.^[67] In 2008, the Paris Court of Appeal accepted the arbitrability of patent validity as long as the issue was raised incidentally as a defence or counterclaim in a contractual dispute. Arbitral awards on patent validity would, however, not have res judicata force and remain inter partes.^[68] Subsequently, the arbitrability of IP disputes was expressly stipulated in Law No. 2011-525 dated 17 May 2011 (amending the Intellectual Property Act).^[69]

Germany

Introduction

In Germany, arbitration concerning genuine IP law issues, such as patent validity, remain rare.^[70] As in France, IP disputes were traditionally considered non-arbitrable; instead, patent litigation continues to be the norm. This is particularly attributable to the fact that Germany operates under a ‘split’ or ‘bifurcated’ patent litigation system. Other countries following the bifurcated system include Austria, Hungary, South Korea, China and – with certain restrictions (see below) – Japan.^[71]

Unlike in many jurisdictions,^[72] patent validity proceedings are tried separately from infringement claims. The latter involve an action by a patent holder for damages or injunctive relief resulting from an alleged infringement of the patent.^[73] In Germany, jurisdiction over infringement claims is concentrated in 12 regional courts with specialised divisions.^[74]

Conversely, patent validity disputes (also known as ‘revocation actions’) are subject to the exclusive jurisdiction of the Federal Patent Court (FPC) in Munich.^[75] The FPC’s decision to partially or fully revoke a patent it considers invalid has erga omnes effect.^[76] Revocation actions are typically a response by the alleged infringer to an infringement claim.^[77] Despite their interrelation, both proceedings are tried separately and at a considerably different pace.^[78]

Unsurprisingly, the bifurcated system has been subject to considerable criticism. A key concern, apart from the additional costs of parallel proceedings, has been the fact that an alleged infringer cannot bring a defence or counterclaim based on patent invalidity in infringement proceedings.^[79] Since infringement claims are regularly concluded before revocation actions,^[80] patent holders may provisionally enforce a successful infringement judgment, irrespective of a pending appeal or parallel revocation action. This increases the risk that a patent may be enforced despite actually being invalid, leaving the parties in a state of legal uncertainty until the revocation action has been decided (the ‘injunction gap’).^[81]

Under the current law, an alleged infringer has the following three main options:

• making an application for suspension of the infringement proceedings;^[82]
• seeking a provisional stay of enforcement of the infringement judgment;^[83] or
• seeking an action for retrial of the case.^[84]

Suspension applications are subject to the (infringement) courts’ discretion and are generally denied. A patent holder’s interest in the continuation of the proceedings is considered to outweigh the alleged infringer’s interest in a suspension in light of the registration of the patent and limited duration of the right of exploitation.^[85] To succeed, an applicant must show that a patent will ‘in all probability’ be revoked.^[86] A suspension will also be granted where the FPC notifies the infringement court that it considers the patent invalid (or revokes it).^[87]

The second option, a request for provisional stay of enforcement, applies where an appeal against an infringement judgment is pending. As in the case of a suspension, provisional stays are granted in limited cases (i.e., where irreversible damage is at stake or the judgment was manifestly incorrect) but will generally succeed where the FPC subsequently revokes the patent.^[88]

Once an infringement court judgment has become final and binding, an infringer’s last resort is an action for retrial. A patent revocation by the FPC may constitute a ground for retrial, provided the infringer could not raise a particular defence earlier or through an appeal.^[89] A failure to appeal an infringement judgment, however, does not necessarily make an action for retrial inadmissible. It has been held that, after all, an infringement court would not have been competent to decide on patent validity.^[90]

In January 2020, to remedy the effects of an injunction gap and to avoid the issuance of an injunction before a decision on patent validity has been rendered, the German government introduced a bill by which the FPC ‘should’ provide its preliminary view on patent validity within six months from the filing of a revocation action not only to the parties but, importantly, ex officio to the infringement court.^[91]

This led to the revision of the ‘qualified notice’ stipulated in Section 83 of the German Patent Act (GPA), which became effective in its current form as of 1 May 2022.^[92] The amendment is aimed at streamlining the infringement and revocation proceedings; it seeks to increase the chances that an infringement court may take into account the FPC’s view on patent validity and suspend its proceedings where the FPC considers a patent to be potentially invalid. Whether this change will bear the desired fruits remains to be seen.^[93]

It will be interesting to see whether the German model, which represents a compromise between the traditional bifurcated system and a full streamlining of the infringement and revocation proceedings, will be outperformed by the EU Unitary Patent Court (UPC) system, which is designed to be a true alignment of both proceedings and is expected to be implemented in late 2022 or early 2023.^[94]

Arbitrability of patent validity disputes

The bifurcated patent litigation system in Germany has traditionally been used to explain its reluctance to accept patent validity arbitration.^[95] At present, German law does not expressly regulate whether patent validity disputes are arbitrable. At the same time, following the amendments of the German Code of Civil Procedure (GCCP) in 1998, a new debate has sparked with patent validity arbitration being increasingly recognised.^[96]

Section 1030 of the GCCP is modelled after Section 177(1) of the Swiss International Private Law and reads:

Eligibility for arbitration

1. Any claim under property law may become the subject matter of an arbitration agreement. An arbitration agreement regarding non-pecuniary claims has legal effect insofar as the parties to the dispute are entitled to conclude a settlement regarding the subject matter of the dispute.
2. An arbitration agreement regarding legal disputes arising in the context of a tenancy relationship for residential space in Germany is invalid . . .
3. Any stipulations of the law outside of the present Book, according to which disputes may not be subjected to arbitration proceedings, or only if specific prerequisites have been met, shall remain unaffected hereby.

As under Swiss law, German law adopts the general principle that all proprietary and pecuniary claims^[97] may be subject to an arbitration agreement and, therefore, be arbitrated. Patents, as exclusive exploitation rights granted to a patent holder, fall under this category.^[98] Non-pecuniary claims under Section 1030(1), sentence 2 of the GCCP, in contrast, may only be submitted to arbitration insofar as they can be the object of a settlement.^[99]

Exceptions to the rule of arbitrability only arise from arbitration agreements in connection with residential leases, which are considered void (Section 1030(2)) and express provisions outside the GCCP rules on arbitral proceedings (Section 1030(3)). While the exact scope of disputes excluded from arbitration under Section 1030(3) is arguable, certain disputes related to, for instance, employment law, family law and insolvency law are considered non-arbitrable (or are subject to restrictions).^[100] It is in this regard that the arbitrability of patent validity matters continues to cause friction. After all, even if an arbitral tribunal were to find a patent validity dispute to be admissible, the annulment or enforcement courts may reach a different conclusion.^[101]

Reservation to FPC as a ‘special court’

The proponents of a restrictive interpretation of arbitrability point to the creation of the FPC as a ‘special court’ to decide revocation claims pursuant to Section 65(1) of the GPA, which they consider to be an explicit exclusion provision within the meaning of Section 1030(3) of the GCCP.^[102] While admitting that an ‘exclusive jurisdiction’ provision alone is not sufficient to reject arbitrability, a different consideration would apply when a special court (e.g., the FPC) has been established. This is what the Federal Parliament’s commentary to the bill for the 1998 GCCP revision would provide. Other IP disputes (including infringement claims) merely subject to exclusive jurisdiction would remain arbitrable.^[103]

According to the opposing view, the mere existence of a special court (or exclusive jurisdiction) for certain matters cannot be equated with an express prohibition to arbitrate such matters. Reference is made to an expert report commissioned by the Federal Ministry of Justice (prior to the Federal Parliament’s commentary) unequivocally confirming that all pecuniary claims are arbitrable, including patent validity disputes – despite their reservation to the FPC. Coincidentally, the language of the Federal Parliament’s commentary is not regarded as entirely conclusive.^[104]

State monopoly and patent disposability

Another key consideration raised relates to the intent and purpose of the GPA. The traditional view rejecting the arbitrability of patent validity suggests that state monopoly over these matters ought to be guaranteed. Since patents concern rights granted by sovereign act, they may only be judged and revoked erga omnes by the state (i.e., the FPC).^[105]

According to the contrary view, this point essentially concerns the ‘disposability’ of a patent. As mentioned above, this criterion is now limited to non-pecuniary claims that are considered to warrant special protection by the state and, therefore, are not at a private person’s disposition.

Conversely, disposability should, so the argument goes, be irrelevant for assessing pecuniary claims as a patent remains at its holder’s full disposal. A patent holder may voluntarily surrender a patent anytime by making the necessary representations before the competent authority.^[106] The judiciary does not initiate revocation proceedings or actively investigate the validity of patents on its own motion, unless a revocation action is filed and the necessary evidence adduced; in fact, some stress that commercial arbitration is based on the state’s willingness to cede part of its decision-making power, as even private rights are granted by the sovereign. The same would, therefore, apply to patent validity arbitration.

Effect of arbitral awards

Closely linked to the above argument of state monopoly is concern about the limited powers of arbitral tribunals. Only the FPC (not a tribunal or any other German court) is competent to revoke a patent.^[107]

While recognising the above, the opposing view counters that arbitral awards generally only have inter partes effect and leave the FPC’s competence to an erga omnes patent revocation intact.^[108] Arbitral awards on patent validity could, therefore, be handled in two ways:

• First, tribunals could make a finding on patent validity and order the patent holder to relinquish the patent under the applicable domestic procedures. Such an award should be unproblematic as it would only affect the parties at issue.^[109]
• Alternatively, a tribunal may examine the patent validity issue incidentally. The resulting award would therefore be for damages, specific performance or otherwise. No finding on patent validity would be made. Any incidental conclusion on the patent’s validity would not have preclusive effect. This is particularly so since preclusion under German law (Rechtskraft) would be limited to the actual relief granted, not the reasoning or incidental determinations.^[110]

These alternatives would eventually coincide with the Swiss and French approaches presented above.

Against this background, and while case law has yet to provide more guidance, the higher regional court in Munich (Landgericht Munich I (the Munich court)) recently issued a noteworthy judgment in which it adopted a pro-arbitration approach.^[111] While, strictly speaking, the case concerned a claim for the assignment of a patent application, the Munich court confirmed in obiter dictum, that revocation actions (i.e., disputes about the validity and existence of patents) were also arbitrable.

The plaintiff, based in France, specialised in the production of blow moulds for polyethylene terephthalate bottles. The defendant, based in Germany, supplied production lines for the food and beverage industry, including machinery to produce blow moulds. The parties had conducted tests on the plaintiff’s base moulds with the defendant’s production lines. The plaintiff alleged that, following the tests, the defendant had unlawfully applied for patents using certain technical details of the plaintiff’s blow moulds and requested the assignment of such patents plus damages. The defendant objected to the Munich court’s jurisdiction, noting that the parties had concluded a non-disclosure agreement (NDA), according to which any related disputes would be settled by way of arbitration.

In its judgment, the Munich court upheld the defendant’s jurisdictional objection. It ruled that the NDA’s arbitration clause was sufficiently broad to cover the dispute at hand and dismissed the claim.^[112] In the court’s view, the dispute was arbitrable both under Swiss law (i.e., the law governing the NDA) and German law (i.e., the lex fori).

First, with regard to German law, the court held that the present dispute concerning the patent application assignment was arbitrable under Section 1030(1) of the GCCP since patents involve not only personal but also proprietary and pecuniary rights of inventors.^[113] Further, the fact that a patent was granted by sovereign act would not prevent the inventor from freely assigning a patent application.

In its obiter dictum, the Munich court expanded on disputes concerning patent validity and existence, seemingly siding with the view whereby parties would not per se be precluded from arbitrating such disputes. The court based this view on two considerations: (1) the fact that inventors are free to waive their rights to a patent; and (2) while arbitral tribunals might not be empowered to render erga omnes decisions on patent validity, an award could order a party to relinquish a patent by applying to the competent patent authority.^[114]

Second, the Munich court was equally convinced that the dispute was arbitrable pursuant to Swiss law. In particular, it saw no indication of a breach of Swiss public policy and noted that Section 177(1) of the Swiss International Private Law did not set any stricter limitations on arbitrability than German law did.

The Munich court’s judgment has been generally welcomed and is particularly timely in light of the increasing number of IP-related arbitrations in Germany. It remains to be seen how other courts will handle similar disputes in the future.

EU developments

Recent developments in the European Union also support the view that patent validity disputes are arbitrable. Specifically, the European Union is in the process of revamping its patent system with the unitary patent (UP) and the UPC.^[115] The new system reaches beyond the existing European patent (EP) and is intended to harmonise the protection of EPs and UPs within the European Union. In other words, under the new system, EPs may be granted and therefore protected and enforceable with unitary effect. In the future, national patents will coexist with EPs and UPs, but under separate systems.

Admittedly, the European Union’s focus appears to lie in the promotion of patent litigation rather than arbitration. The UPC will have exclusive competence to settle disputes concerning EPs and UPs, including infringement and revocation claims.^[116]

Based on the Agreement on a Unified Patent Court (the UPC Agreement), the UPC is designed to be a court for participating EU Member States, comprising a Court of First Instance and a Court of Appeal. The Court of First Instance has numerous divisions, including a central division located in Paris and Munich, and several local divisions set up in individual Member States (or, alternatively, regional divisions if the participating Member States prefer to establish divisions jointly. The Court of Appeal is based in Luxembourg.

In principle, the local or regional divisions will hear infringement claims, while the central division is competent to hear revocation actions.^[117] Where an infringement claim is pending, a revocation action must be filed with the same local or regional division.^[118] Conversely, if a revocation action is pending, an infringement claim may also (but does not need to be) filed before the central division.^[119] Where an infringement claim is pending and a revocation counterclaim^[120] is initiated, the local or regional divisions have discretion to:

• hear both infringement and revocation proceedings;
• refer the entire case to the central division, subject to the parties’ agreement; or
• refer the revocation counterclaim to the central division, and suspend or continue with the infringement proceedings.^[121]

It remains to be seen how the UPC will exercise its discretion; however, it is expected that the local or regional divisions will hear most infringement and revocation cases jointly, following the current practice in most Member States. The UPC system appears to go beyond the German model in that it allows alleged infringers to bring revocation counterclaims and ensures that infringement and revocation proceedings are more closely streamlined.^[122]

Despite the European Union’s focus on patent litigation, the UPC Agreement provides that an affiliated patent mediation and arbitration centre (the Centre) will be established.^[123] As in the case of Germany, the applicable EU framework does not expressly prohibit patent validity arbitration. While the UPC Agreement stipulates that an arbitral tribunal or mediation panel may not revoke or limit a patent,^[124] the UPC’s draft Rules of Procedure indicate that an arbitral tribunal may order a party to surrender its patent and that the parties may request the UPC to confirm such arbitral award.^[125] This provision seems to support the view that inter partes awards on EP and UP validity will be possible under the EU system.^[126]

The Centre provides yet another opportunity to promote the use of arbitration and alternative dispute resolution in connection with IP-related disputes.

Summary

In Germany, opinion seems to be shifting towards increased acceptance of patent validity arbitration. This is based on the broad language of Section 1030 of the GCCP and the lack of an express prohibition in the law. It is generally recognised that tribunals can sufficiently address the parties’ interests via inter partes awards while guaranteeing the state’s monopoly over the issuance of patents and protecting public interests.^[127]

This is also the path the European Union appears to be taking. This trend further conforms to the principle of effectiveness: if infringement claims are arbitrable, it would be odd to prohibit an alleged infringer from disputing the patent validity in the same arbitration or a separate counterclaim or counterclaim. Future case law will tell which approach tribunals and courts will adopt.

Japan

Introduction

Japan is another civil law jurisdiction that has adopted the German bifurcated system. Traditionally, the bifurcation of revocation claims and infringement claims was strict; however, in the early 2000s, and in light of the criticism of the bifurcated system, Japan started innovating its patent litigation system. As a result, Japan substantially eased the separation between infringement and validity proceedings, therefore distinguishing itself from the German model.^[128] This, in turn, has had the interesting effect of potentially increasing the acceptance of patent validity arbitration that is seated in Japan.

In Japan, infringement proceedings are subject to the exclusive jurisdiction of either the Tokyo or Osaka district courts, with special divisions for IP matters.^[129] Meanwhile, only the Japan Patent Office (JPO) in Tokyo has exclusive authority to revoke an invalid patent.^[130] This traditionally meant that an alleged infringer could not bring a revocation action or defence against an infringement claim, unless the JPO had first decided on patent validity. To correct the defects of the bifurcated system, Japanese infringement courts have increasingly admitted validity defences.

In 2000, the Supreme Court accepted the infringement courts’ practice in its seminal Kilby ruling and held that an infringement claim could be dismissed where obvious sufficient grounds for patent invalidity exist.^[131] The Kilby precedent was subsequently cast into law in the 2004 amendments of the Patent Act.

Pursuant to Article 104-3(1) of the Patent Act, infringement courts are now expressly authorised to refuse to enforce a patent if they consider that there are sufficient grounds for invalidation:

If it is found, in litigation involving the infringement of a patent right or the violation an exclusive license, that the patent should be invalidated . . . the rights of the patentee or exclusive licensee may not be exercised against the adverse party.^[132]

However, given that an infringement court’s determination on patent validity only has inter partes effect, there was a risk that a patent would remain valid erga omnes if the JPO decided not to revoke it. To address this risk of conflicting decisions, Article 168 of the Patent Act empowers both infringement courts and the JPO to suspend their respective proceedings and requires them to notify each other of any pending patent claims, much like the recent reforms in Germany.^[133]

Article 168 of the Patent Act reduces the risk of conflicting decisions but does not eliminate it. The JPO could still decide to revoke a patent after an infringement judgment (in favour of a patent holder) has become final and binding, and such conflict could not be ‘corrected’ with an action for retrial of the infringement judgment.

In the past, it was debated whether a JPO decision could potentially qualify as grounds for initiating a retrial of an infringement judgment;^[134] however ever since the introduction of Article 104-4 of the Patent Act in 2011 this is now prohibited.^[135] This may however lead to the somewhat unsatisfactory result that the JPO’s revocation of a patent may not ‘trump’ an infringement court’s judgment.^[136] Effectively, the JPO’s exclusive authority to make erga omnes decisions appears to have been weakened. Time will tell how these developments will shape the future of Japan’s IP litigation.^[137]

Arbitrability of patent validity disputes

Japan is generally recognised as an arbitration-friendly jurisdiction, although it still lags behind Germany in terms of caseload and international arbitration practice. In the past 15 to 20 years, Japan has been undertaking substantial efforts to promote itself as an international arbitration hub,^[138] which has led to the establishment of various arbitration and mediation facilities, including the Japan International Dispute Resolution Centre in Osaka and Tokyo, the Japan International Mediation Centre in Kyoto and the International Arbitration Centre in Tokyo for IP disputes.^[139] Meanwhile, Japan is in the process of amending its Arbitration Act of 2003.^[140]

The current Arbitration Act does not contain any explicit provision on arbitrability; however, Articles 2(1) and 13(1), which regulate the scope of a valid arbitration agreement, provide:

Article 2(1) The term ‘Arbitration Agreement’ as used in this Act means an agreement to refer the resolution of all or certain civil disputes which have already arisen or which may arise in the future in respect of a certain legal relationship (irrespective of whether contractual or not) to one or more arbitrators, and to accept the award made therefor (hereinafter referred to as an ‘Arbitral Award’).
Article 13(1) Except as otherwise provided for in laws and regulations, an Arbitration Agreement shall be effective only when the subject thereof is a civil dispute (excluding disputes of divorce or dissolution of adoptive relation) which can be settled between the parties.

Article 13(1) allows a civil dispute to be arbitrated if the parties can freely dispose of it.^[141] The disputes that are ineligible for arbitration and must remain under the exclusive power of the state include divorce matters, dissolution of adoptive relations and certain labour disputes.^[142] While no express restrictions exist in relation to infringement or patent validity arbitrations,^[143] only infringement claims have regularly been considered to be arbitrable.^[144] Patent validity arbitration remains contested.

Express reservation of revocation competence

Traditionally, patent validity arbitration has been disputed by reference to the JPO’s exclusive authority to grant and revoke patents under Articles 66, 123 and 178(6) of the Patent Act. This provision has therefore been regarded as an express restriction of arbitrability since all matters related to patents were considered to be reserved to the state, including any (incidental) determination of their validity.^[145]

As in Germany, the opposing line of thought points to the fact that patent holders may dispose of their patents anytime by way of surrender.^[146] Consequently, in light of a patent’s disposability, patent validity disputes ought to be arbitrable. The JPO’s exclusive authority of revocation with erga omnes effect would remain intact since arbitral awards are only inter partes.

Post-Kilby approach

Following the relaxation of the bifurcated system with the Kilby case and the 2004 Patent Act reform, the traditional view that Article 178(6) of the Patent Act per se precludes patent validity arbitration appears to have become moot.^[147] Instead, in line with the past opposing view’s reliance on a patent’s disposability, it is argued that just as it is possible to raise validity challenges before infringement courts, the same ought to apply to arbitral tribunals. If an infringement court is empowered to issue an inter partes judgment on patent validity, arbitral tribunals should be equally competent to do so.^[148] Again, in neither case would the JPO’s exclusive revocation authority be affected as no erga omnes finding on patent validity would be made. This is particularly so in the absence of any express statutory provisions to the contrary.

Patent validity arbitration may also prevent contradictory results. While a final and binding infringement judgment may not be retried despite a subsequent patent revocation by the JPO owing to Article 104-4 of the Patent Act,^[149] no such prohibition exists under the Arbitration Act; therefore, an award granting a patent holder’s claim could, in theory, be set aside on public policy grounds following the JPO’s patent revocation.^[150]

Summary

Japan’s recent changes to its patent litigation system may have loosened the strict separation of infringement and revocation proceedings, but the possibility of conflicting decisions persists. This, in turn, may strengthen support for patent validity arbitration.

Conclusion

Patent validity arbitration, while still controversial in jurisdictions such as Germany and Japan, seems to be increasingly accepted in the civil law world, particularly in Switzerland and France. While Germany and Japan are making efforts to reform their patent litigation systems, in the near future, patent holders and alleged infringers may have a broader spectrum of dispute resolution methods to choose from.

Some national courts seem to already recognise the arbitrability of infringement and revocation claims, particularly where the parties had agreed to arbitrate their dispute.^[151] In this regard, it might also be worth citing an International Chamber of Commerce arbitral tribunal that, as early as 1989, equally confirmed that it saw no conflict between the jurisdiction of national courts and arbitral tribunals.^[152] The case is particularly fitting in that it examines both the Japanese and German legal systems for patent dispute resolution.

The claimant, a Japanese company, had sued a German company based on alleged breaches of patent licensing contracts and patent infringement by the respondent. The latter, in turn, challenged the patent’s validity. The tribunal found that it was empowered to make a finding on patent validity in line with the parties’ intention to confer on it broad jurisdiction and noted that any award would only have inter partes effect. Remarkably, the tribunal relied on Japanese law (which governed the contract) and its principle of favouring arbitration over litigation, as well as German law (which governed the patent issue), emphasising that it did not expressly prohibit patent validity arbitration.

The outlook is promising.

Notes