This article is written by Tavishi Jain, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).

Introduction

Intellectual Property has become an indispensable part of our everyday lives, business and economy. It protects creativity and uniqueness, allowing the owner to harness the same towards greater growth, and encouraging others to foster innovation. These rights include patents, trademarks, copyrights, industrial designs, geographical indication, trade secrets, semiconductor and integrated circuits, biological diversity, and plant varieties. 

This article talks about the arbitrability of Intellectual Property disputes, specifically those pertaining to Trade Mark agreements. This is in light of the recent judgement in the case Golden Tobie (P) Ltd. v. Golden Tobacco Ltd. [2021 SCC OnLine Del 3029] by the Delhi High Court. The High Court considered the arbitrability of a dispute with regard to a Trademark License Agreement. The said matter can help examine the arbitrability of IPR matters as a favourable step where the dispute arose from a contract.

Case analysis : Golden Tobie (P) Ltd. v. Golden Tobacco Ltd.

The Hon’ble Delhi High Court examined the legal position relating to trademark disputes being arbitrated. The decision in Golden Tobie Private Ltd. v. Golden Tobacco Ltd. is a recent one and opines arbitration to be a welcome mechanism for dispute resolution wherein the parties have an arbitration agreement or clause, with minimum judicial intervention in these matters. Further insight may help in examining and possibly opening avenues to bring various IPR disputes within the ambit of arbitration. 

The Delhi High Court examined Section 8 of the Arbitration and Conciliation Act, 1996, for matters relating to trademark disputes between parties. The court arrived at the conclusion that the said dispute concerning breach of the trademark licensing agreement was arbitrable and the same was thus referred to arbitration. 

It was observed that arbitrability of IPR disputes in India has been a perplexing subject due to Section 62 of the Copyright Act, 1957 which provides for infringement that could not be brought before any court lower than the district court with the relevant competent jurisdiction. The Bombay High Court in the matter of Eros International Media Ltd. v. Telemax delved into the interpretation of section 62 and declared that the said provision did not oust arbitration. It was observed that IPR disputes involved various matters which are private to the concerned parties since intellectual property rights were a species of property rights and thus were not distinct. 

A key observation made by the court was that an arbitrator was empowered to do what a civil court could do. This would thus bring IPR disputes within the ambit of arbitration.

Allowing for the arbitrability of IPR disputes can be a stepping stone towards settlement and time-efficient resolution of disputes. This can be an imperative move in the direction of resolving action in personam. 

Facts

The parties had entered into an exclusive Supply Agreement and a trademark license agreement, along with an amendment agreement. As per these agreements, the plaintiff had been granted an exclusive, non-assignable, non-transferable license for the manufacture and distribution of the defendant’s products. 

The plaintiff pleaded that the defendant, via a termination notice, claimed that timely payment had not been made as per the agreement between the parties. The defendant had terminated the said agreements with immediate effect. The plaintiff, as a result, had no right to manufacture and sell the exclusive brands of the defendant. A suit in this regard was thus filed. 

The plaintiff claimed that the said agreement could not be terminated by the defendant in such a manner since the default in royalty payment cannot be made a ground for termination of the said agreement. The plaintiff stated that due information of the trademark license agreement was sent to the Securities and Exchange Board of India (SEBI) and the Trademark Registry. The said agreement conferred the right to use the concerned trademarks in perpetuity. The plaintiff contended that according to the aforementioned facts, the dispute between the parties would be a dispute in rem. In light of Vidya Drolia and Ors. vs. Durga Trading Corporation, according to the plaintiff, the present dispute would not be within the scope of arbitration. It was argued that the action of termination of the concerned agreement is related to government and sovereign functions and would thus be a dispute in rem. 

Defendant, in response, cited clause 12 of the Trademark License Agreement between the parties while requesting that the suit be referred to a sole Arbitrator to be appointed in terms of the said clause. Reference was made to the case Hero Electric Vehicles Pvt. Ltd. & Anr. v. Lectro E-Mobility Pvt. Ltd & Anr and it was argued that the assignment of trademarks under the trademark license agreement was in fact action in personam. The defendant thus filed an application under Section 8 of the Arbitration and Conciliation Act, 1996. 

Background and precedent decisions

In the matter of Vidya Drolia and Ors. v. Durga Trading Corporation, the Hon’ble Supreme Court had dealt with the question of what disputes can be considered as arbitrable. The Apex court propounded a fourfold test to determine the arbitrability of a dispute and listed out the following conditions for a dispute which is non-arbitrable.

With reference to Para 76 of the judgement:

1. Where the cause of action and subject matter of the dispute relates to actions in rem, and that does not pave the way for any subordinate actions in personam from rights in rem.
2. Where there is an erga omnes effect, wherein the cause of action and subject matter of the dispute have an effect on the rights of any third party. In these cases, the disputes being dealt with centralised adjudication would be enforceable.
3. Where the cause of action and subject matter of the dispute relates to such functions of the state which are in the public interest and thus, are such sovereign functions that cannot be alienated. In such disputes, the mutual settlement would not be enforceable.
4. Where the subject matter of the dispute is non-arbitrable as provided by a statute expressly or by necessary implication. The same would be mandatory in nature. 

In this judgement, the Hon’ble Supreme Court further added that these tests were not water-tight or inflexible in nature. It was stated that these tests would assist in determining the arbitrability of the dispute, however, these may seldom overlap, and thus, a more holistic application of these tests would be appropriate. 

The court, in this case, observed that the grant and issue of patents and registration of trademarks falls within sovereign or government functions. The court was of the view that such matters have an erga omnes effect. These are in essence of a grant of monopoly rights, and thus would not be arbitrable. Such matter involved an action in rem.

In Hero Electric Vehicles Pvt. Ltd. & Anr. v. Lectro E-Mobility Pvt. Ltd & Anr., the plaintiff sought a decree of the permanent injunction so as to restrain the defendants from using “Hero” when dealing with electric bikes, or any such mark that is similar, which has the potential of being deceptive. The defendants sought reference of the said dispute to arbitration via an application under Section 8 of the Arbitration & Conciliation Act, 1996. The plaintiff opposed this application and cited the Supreme Court’s opinion with regard to the arbitrability of trademark-related disputes from the Vidya Drolia judgement (supra). The Delhi High Court allowed the arbitration of the dispute in this case. It was observed that the dispute does not pertain to the registration or grant of trademarks. The concerned trademarks were, in fact, registered and granted. The dispute was with regard to the rights of usage of the trademark, which were enumerated in a contract and did not pertain to a statute like the Trade Marks Act. This, thus, does not necessitate the applicability of sovereign functions and centralised adjudication. 

In the Hero Electric case (supra), the court was of the opinion that at the stage of examination of such arbitrability, the court is not required to enter into the merits of the subject matter, as the same would amount to a mini-trial. It was held that the court must refer the dispute to arbitration unless it is clear that no valid arbitration agreement exists, or the dispute at hand is wholly outside the purview of arbitration. In pursuance of these observations, it was held that the conferment of the trademark, in this case, was not through a statutory action and the trademark so assigned was as per the terms of the license agreement, and not the Trademarks Act (cite the hero case here). Therefore, the application for reference of the dispute to arbitration was accepted. 

Licensing of trademarks and the essence of a trademark licensing agreement 

Licensing of Trademarks allows the proprietor of the mark to grant certain permission to another party for use of the mark which may or may not is coupled with restrictions and conditions. This licensing plays an important role in enhancing the reach of the proprietor’s business and helps in the transfer of technology. 

Under the Indian Trade Marks Act, only registered trademarks can be licensed by a proprietor. However, there is no express bar on the licensing of an unregistered trademark and such licensing is deemed lawful as under common law.  Sections 48 to 56 of the Trademarks Act, 1999 provide for “permitted use” of the trademarks. The same is defined in Section 2(1)(r) of the Trademarks Act, 1999 – which permits the use of a registered trademark by a person other than the registered proprietor via a written agreement containing the consent of the registered proprietor.

A trademark license agreement not only provides for the consent of the licensor to the licensee but also incorporates clauses for quality check and lawful use. It consists of the terms and conditions guiding such licensing. Such a contractual mechanism also consists of specific terms with regard to term and termination, severability, ownership rights, conditions of use, confidentiality, force majeure, and dispute resolution. 

Thus, the essence of a trademark licensing agreement is sharing the use of a trademark without foregoing the ownership, typically for greater spread and reach of the business, followed by a royalty that is paid by the third party which uses the assigned trademark for business benefit and profit. 

Arbitration

Arbitration is a dispute resolution mechanism that provides for an alternate means of resolving disputes “out of court”. Traditional litigation can be complex, expensive and time-consuming, which can be detrimental in light of the ever-evolving and fast-paced business environment that constantly aims for greater economic growth. The parties voluntarily opt for Arbitration either by previously mandating the same in an agreement or by mutual agreement after a dispute arises.  

The Arbitration and Conciliation Act, 1996 (“Act”) does not exclude or oust disputes resulting from a licensing agreement. Disputes pertaining to such agreements range from not only infringement, breach of agreement and non-adherence of quality standards, but also pertain to the arbitrability of such disputes. 

An Arbitration clause in a Trademark licensing agreement stipulates that the parties refer to the dispute for arbitration. In the presence of such a clause, the courts will guide the parties to follow the Arbitration method of dispute resolution instead of the court proceeding, except where a sole arbitrator or arbitration tribunal has not been appointed as under Section 11 of the Act or where a party seeks an interim measure, as under Section 9 of the Act.

Section 7 of the Arbitration and Conciliation Act

The arbitration agreement between the parties is a critical document for the initiation of arbitral proceedings and sometimes even to enumerate the jurisdiction of the Arbitrator or Arbitral tribunal as the case may be. Its valid existence is crucial for the reference of the dispute to arbitration.

Section 7 defines an arbitration agreement and its requisites. It means an agreement entered into by the parties who agree to submit their disputes, existing or potential, to the arbitration with respect to their defined legal relationship. Such an agreement may exist in the form of a separate agreement or an arbitration clause. However, it is exclusively provided under this section that such an agreement shall be in writing. Such a written arbitration agreement may be contained as:

1. A document which is signed by the parties,
2. An exchange of letters, telex, telegrams or any other telecommunication means which can provide the record of this agreement,
3. An exchange of statement of claim and defence wherein the existence of the agreement has been alleged by one party and not denied by the other party.

This provision also provides that a contract entered into between the parties that makes a reference to another such document wherein an arbitration clause is contained, indicating the very intention of the parties to include the arbitration clause from such document into the contract between them, is also included to be an arbitration agreement.

Section 8 of the Arbitration and Conciliation Act

For the purposes of this article, Section 8 of the Arbitration and Conciliation Act also comes up for consideration. Under this section, where the parties have an arbitration agreement and any dispute between them is referred to as a judicial authority by either party, such judicial authority shall direct the parties to the arbitration. This, thus, paves the way for limited judicial intervention wherein the parties have mutually agreed to refer any dispute to arbitration. 

In the case P. Anand Gajapathi Raju & Ors. v. P.V.G. Raju (Died) & Ors., the parties had entered into an arbitration agreement during the pendency of an appeal, and this arbitration agreement was in the form of an application, signed by all the parties and aligned with Section 7 of the Arbitration and Conciliation Act. The question here was whether, with regard to these facts, the Court during an appeal, can refer the parties to Arbitration.

In the aforementioned case, Section 5 was taken into consideration, which provides the extent of intervention by a judicial authority. A reading of the same helped decipher the objective of the Act which encourages such alternate dispute resolution, expeditely and less expensively, wherein an arbitration agreement is in place. Therefore, intervention by judicial authorities pursuant to this should be minimal. The Supreme Court, thus, observed that in order to uphold and execute this legislative intent, there are certain conditions which must be fulfilled as under sub-section (1) and (2) of section 8 of the Arbitration and Conciliation Act, 1996. These are as follows:

1. That there is an arbitration agreement between the parties.
2. That a party to such an agreement brings an action against the other party in the court.
3. That the subject matter that is in question or in dispute is the same as the subject matter as enumerated in such arbitration agreement. 
4. That the other party moves the Court for referring the parties to arbitration before the submission of the first statement with respect to such dispute.

Further, it was held that it is an obligation of the Court to refer the parties to arbitration in the essence of the arbitration agreement entered into between the parties. 

Arbitrability of disputes has been extensively examined by the courts in various cases. In the case of H. Srinivas Pai and Anr. v. H.V. Pai (D) Thr. L.Rs. and Ors., the Apex court held that it was erroneous to conclude that the Arbitration and Conciliation Act, 1996 did not apply to ‘civil disputes’ and the same was not restricted to ‘commercial disputes’. It was clearly held that the arbitrability of a matter would depend upon whether there exists an arbitration agreement in the said matter, and not upon whether the dispute was of a civil or commercial nature. It was opined that arbitrability extended to the existence of an arbitration agreement, and not upon the nature of the dispute.

A key requirement with regard to the applicability of Section 8 of the Act is the similarity of the subject matter of the dispute with the arbitration agreement so entered between the parties. In Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr., the court observed the specific language used under the provision and was of the view that the parties must be referred to Arbitration wherein the matter referred by the parties is well within the scope of the arbitration agreement. In this case, the particular matter however was not within the scope of the arbitration agreement and was between such parties who were not parties to the said arbitration agreement. Section 8 was therefore not applicable. Another observation of the court to be noted here was that the cause of action could not be bifurcated in order to partly refer the dispute to arbitration, to the extent so applicable. This would inadvertently delay proceedings.

Rights in personam and rights in rem 

Matters pertaining to IPR have often been debated to be either rights in rem or rights in personam. This categorisation of rights and the actions would be dependent upon the circumstances of each case. Owing to this, the arbitrability and reference of IPR disputes by courts remain an ambiguous subject, with various judgments that steer the change to a flexible approach. A stance in this favour is that Intellectual Property laws in India do not expressly exclude or oust Arbitration. 

Contractual arrangements between parties with regard to IPR pose the larger question since the issue and registration of an IPR is a sovereign function. However, it is often ambiguous whether such contractual arrangements create rights in rem or rights in personam. 

The decision of the Apex court in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors. provides an insight into the arbitrability of disputes and the rights pertaining to such actions. The court discussed the scope of Section 8, Arbitration and Conciliation Act, 1996. It was observed that the concerned parties are parties to an agreement, which contained the provision of arbitration for the settlement of disputes. It was observed that the matters pertaining to the dispute were contained specifically in this arbitration clause. It was thus held that the subject matter of the concerned suit was within the ambit of the arbitration clause. However, the court was of the view that despite the existence of an arbitration agreement between the parties, and despite the concerned dispute being within the ambit of the arbitration agreement, the court would refuse the reference to arbitration pursuant to an application under Section 8 of the Act if the concerned subject matter can only be adjudicated by a public forum, a special court or tribunal. The court explored the term “arbitrability” and observed three facets in this respect:

1. Whether, with respect to the nature of disputes, the said subject matter can be arbitrated upon or whether it can only be exclusively adjudicated by a public forum?
2. Whether the disputes have been enumerated in the concerned arbitration agreement?
3. Whether the dispute has been referred to arbitration by the parties?

The court observed “right in rem” is a right that is exercised against the world at large and “right in personam” is exercisable against particular individuals, and generally, disputes relating to rights in personam can be referred to as arbitration. Disputes pertaining to rights in rem have to be adjudicated exclusively by public fora. The court noted that this was a flexible rule.  It is evident from the plain reading of Sections 34 and 48 of the Act that no specific categorisation of disputes has been given as being arbitrable or not. 

In observation of the facts under this case, the court held that an agreement to sell or an agreement to mortgage creates rights in personam and the respective obligations are towards the parties. On the other hand, such agreements lead to a transfer of a right in rem. The court held that disputes pertaining to rights in rem can be referred to arbitration, and disputes pertaining to rights in rem must be under the purview of the courts and tribunals for adjudication. The court made an imperative observation by stating that disputes that were related to subordinate rights in personam that arose from rights in rem would qualify for being referred to arbitration.

Eros International Media Ltd and Telemax Links India Pvt Ltd. is an important decision that has contributed to providing some clarity as to whether IPR disputes qualify to be arbitrated. In the Eros case, Eros claimed that Telemax had infringed the copyright owned by Eros, in violation of the term sheet between the parties. The term sheet constituted an arbitration agreement. Eros argued that the term sheet was inapplicable and that a remedy must be sought from the courts since the said rights did not arise out of a contract. In consequence, Eros contended that the said rights were rights in rem. The Bombay High court did not accept these arguments and laid emphasis on the fact that in the present case, the dispute arose from the contract between the parties and was stipulated in the Arbitration clause of such an Agreement.

A key part of the decision in this judgment by the Bombay High Court was the consideration of Section 62 of the Copyright Act, 1957 and Section 134 of the Trade Marks Act, 1999. The court opined that both these provisions corresponded to one another, stating that infringement actions cannot be brought up in a court which is lower than a District court with competent jurisdiction and one wherein the plaintiff resides or works for gain within that competent court’s limits. In this regard, it was held that these words did not oust arbitration. In this respect, the court opined that numerous transactions concerning Intellectual Property take place on a routine basis and disputes relating to trademark and copyright were often confronted with written agreements. The non-acceptance of Arbitration as a method for dispute resolution in IPR transfer cases might in fact hamper domestic and international commerce. 

It was elaborated that registration of a mark or copyright (any artistic work) establishes a right against the world, however, it is only the opposition to such registration application that would be an action under the right in rem. An action that arises as a result of infringement or passing off is an action against a particular party and the same cannot be claimed against another party, and therefore, such action of infringement and passing off is a right in personam. 

In Centre For Development of Telematics vs. Xalted Information Systems Pvt. Ltd., the parties had entered a Memorandum of Understanding (MoU). This MoU also contained an arbitration clause for the resolution of disputes. The petitioner sought to restrain the respondent from using the source code and SRS of software. This software was developed in connection to the MoU between the parties. The arbitral tribunal passed an order declaring that the said relief as was claimed was not within the ambit of arbitration. The Hon’ble High court of Delhi set this order aside and granted the relief sought by the petitioner by restraining the respondent. It was held by the court that the relief was only sought against the respondent and thus it would be a right in personam for the copyright of the concerned software, hence arbitration would not be ousted. 

Conclusion

Commercial transactions and contracts form a key part of our day to day life. Intellectual Property is at a centre stage here and is being dealt with at a larger scale by individuals and corporations. In light of this growth and universal nature of Intellectual Property, the adoption of arbitration as a mechanism for dispute resolution can help sustain business relations and curb the delay in adjudication. The Indian Judiciary has been proactive with this approach and has favoured arbitration for dispute resolution and settlement of IPR infringement wherein an agreement is involved and wherein the requisites are satisfied. 

The position with regard to the arbitrability of IPR disputes remains ambiguous but favourable. It is manifest from various judgments that where the IPR dispute between the parties arises with respect to a contract or agreement between them, then such dispute can be referred to arbitration if such dispute is within the scope of the arbitration agreement and if such dispute has not been outrightly ousted. A settled position of the courts is that IPR infringements that arise from an agreement between the parties lead to an action in personam. Such rights can be claimed against a particular party. This position will be distinct where any IPR is infringed and there was no contract between the parties for the use of the concerned IPR. Therefore, whether a particular dispute would qualify for arbitration would be dependent on the facts of each case.  

The support for arbitration can be noted in the distinction between the grant and issue of IPR, and the assignment of Intellectual Property Rights, where the former gives rise to a right in rem and the latter gives rise to a right in personam, as these emanate from an agreement. In light of the Booz Allen case, actions involving right in personam will qualify for arbitration. However, this case does leave an open ground for proving whether the subject matter of a dispute would be a right in rem or right in personam. The Delhi High Court’s decision in the Golden Tobie case clarifies this position and emphasizes that no absolute bar exists on such disputes since these matters are distinct from the garnet and issue of the trademark. It is pertinent to note that there is no rigid formula for such categorisation, often leading to uncertainty. 

It is important to note, in light of the growing transactions with regard to IPR, that IP disputes do not solely arise from the violation of an IP statute. These disputes can also be contractual, and hence, this opens the possibility for arbitration. 

References

1. Notice of Motion No. 886 of 2013 in Suit No. 331 of 2013 in Suit No 331 of 2013.
2. Eros International Media Ltd. v. Telemax [Notice of Motion No. 886 of 2013 in Suit No. 331 of 2013 in Suit No 331 of 2013].
3. Vidya Drolia and Ors. v. Durga Trading Corporation [(2021) 2 SCC 1]
4. 2021 SCC OnLine Del 1058
5. P. Anand Gajapathi Raju & Ors. v. P.V.G. Raju (Died) & Ors. (2000)4SCC539.
6. Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors.[ AIR 2011 SC 2507]
7. LSI-1123-HC-2016-(BOM)
8. Eros International Media Ltd and Telemax Links India Pvt Ltd.[ LSI-1123-HC-2016-(BOM)]
9. ARB. A. (COMM.) 6/2018and O.M.P.(I) (COMM.) 82/2018

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