Whether the Golden’s case settles the norm for arbitrability of IPR disputes in India?

Introduction

In India, the case for arbitrability of IP disputes has been in muddy waters.  This is because the provisions like Section 62 of the Copyright Act, 1957, Section 134 of the Trademarks Act, and Section 104 of the Patents Act, 1970 restricts a party from filing an infringement suit in a court inferior to the District Court.  

The Booz Allen Case opened the gateway for arbitrability of IP disputes in India. The Supreme Court, in this case, noted that “disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.” The case laid down the arbitrability test to determine what forms part of the arbitrable subject-matter. As per this test, the following categories of disputes are non-arbitrable:

1. Disputes involving the adjudication of actions in rem as opposed to actions in personam.
2. Disputes arising out of a special statute, which is reserved for the exclusive jurisdiction of special courts.

Further, in the EROS Case, the Bombay High Court held that Section 62 did not restrain arbitration as IPR disputes involving private matters. Following these principles, various Indian courts rendered some IP disputes as arbitrable (see: EROS Case, Impact Metals Case) and others as non-arbitrable (see: Mundipharma Case, SAIL Case [Suit No. 673/2014]).  However, the SC further ambiguated the arbitrability of IP disputes in the case of Ayyasamy v. A. Paramasivam & Ors. by contending the subject as non-arbitrable in its obiter.

Facts of the Case

In the present case, Golden Tobie Pvt. Ltd. entered into an exclusive supply agreement dated 16.08.2019 and a trademark license agreement dated 12.02.2020 with Golden Tobacco Ltd. As per the agreement, Golden Tobie was to supply its cigarettes under brands’ “Golden’s Gold Flake”, “Golden Classic”, “Taj Chhap”, & “Panama and Chancellor” to Golden Tobacco. Further, Golden Tobacco who owns the brand is also engaged in the distribution and sale of the products in domestic and international markets. Exclusive rights were assigned to Golden Tobie to manufacture the products at Golden Tobacco’s Noida, Delhi NCR factory. Later on, owing to the pandemic and other issues the parties entered into an amendment agreement dated 29.08.2020.

After the contract and the exclusive rights, Golden Tobie invested heavily in the capital and operational expenditure on promotions and advertisements but, because of the disputes that came about between the parties their license was cancelled and the right to manufacture the exclusive brands were taken away with immediate effect by Golden Tobacco. Golden Tobie approached the Delhi High Court for wrongful termination where Golden Tobacco contended that the dispute was subject to arbitration.

The case pertains to an arbitration matter, where section 8 of the Arbitration and Conciliation Act of 1996 factors in. Section 8 discusses the “power to refer parties to arbitration where there is an arbitration agreement.”

Analysis:

The Supreme Court and the Delhi High Court provided clarity on the above issue in 2021. In the present case, the bench referred to the Supreme Court’s Vidya Drolia Case and the Delhi High Court’s Hero v. Lectro Case to reach a conclusion.

In the case of Vidya Drolia v. Durga Trading Company, the Supreme Court clarified what disputes are considered arbitrable. The court devised a four-part test to determine arbitrability and established the following criteria for a non-arbitrable dispute:

1. “When the cause of action and subject matter of the dispute relates to actions in rem.
2. When the cause of action and subject matter of the dispute affects third-party rights and has erga omnes (towards all) implication.
3. When the cause of action and subject matter of the dispute relates to inalienable sovereign functions of the state.
4. When the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statutes.”

About the arbitrability of IP disputes, the court mentioned that “grant and issue of patents and registration of trademarks are exclusive matters falling within the sovereign or government functions and have erga omnes effect, which means that rights and obligations arising from this decision shall be generally applicable on all. Further, such grants confer monopoly rights, and hence they are non-arbitrable.”  

However, the court cautioned this test should not be strictly applied and due regards to a dispute should be given. Later, the Delhi High Court in Hero Electric Vehicles Pvt. Ltd. & Anr. v. Lectro E-Mobility Pvt. Ltd. & Anr., rejected a party’s argument that IP disputes are not arbitrable based on the precedent and test laid down in the Vidya Drolia Case.  This case pertained to a suit filed by the plaintiff seeking a decree of permanent injunction restraining the defendants from dealing in any manner in electric bikes having a throttle using “Hero” or any other mark deceptively similar thereto as a trademark, brand name, trade name or in any other manner. The court in this regard held that:

“The dispute in the matter does not relate to grant, or registration, of trademarks. The trademarks already stood, granted, and registered. The dispute arose on the ground that the right to use the trademark in connection with electric cycles and e-cycles was conferred by a particular agreement on a group different than the one using it. This assignment is by contractual terms, not by statutory ones. The dispute has arisen through a violation of the contractual terms, not of the Trade Mark Act. It does not involve any exercise of sovereign functions. In any event, no inalienable exercise of sovereign governmental functions can be said to be involved in the assignment of the right to use the existing trademarks to the various groups.”

The above two cases clarify and settle the boundary for arbitrability of IP disputes in India. The first case rejects IP as an arbitrable subject matter claiming it to be a sovereign function having erga omnes effect. Based on this decision, the co-ordinate bench in the Hero Case expanded scope where disputes in IP rights arising through contractual relations are rights arising in personam and are arbitrable. The bench also mentioned that the disputes primarily relate to disputes regarding the terms of agreement and are suitable for arbitration.

The court, while discussing its authority under Section 8 and Section 11 of the Arbitration and Conciliation Act, considered it to be judicial and not ministerial. As discussed in the Hero Case, under this, the court is only to examine whether the dispute is prima facie arbitrable under a valid arbitration agreement. The Court needs to evaluate only two things:

1. Whether a valid arbitration agreement exists.
2. Whether the subject matter of the dispute is arbitrable.

Based on this background, the Court considered that the dispute primarily relates to the interpretation of the terms of the Agreement. Further, the Court held that the right asserted by the plaintiff is not a right that emanates from the Trademark Act but is out of the contractual relationship between the parties. This judgment of Delhi High Court, following the principles laid down by the Vidya Drolia Case and Hero Case, resolves some clarity and a consistent principle that “IP disputes arising outright in personam are arbitrable”. The clarity has now been provided but the court did not delve into the issue that such contractual agreements can also have a right in rem effect (The Delhi High Court did not discuss this in the Hero Case too.)

Conclusion

India’s position on arbitrability will maintain a balance of rights between inventors/authors and the general public. With this norm, inventors/authors retain the right to arbitrate contractual rights and courts retain the jurisdiction over claims which may affect the general public. Further, Inventors would be encouraged by the option of easy and efficient dispute resolution. Additionally, the Courts’ jurisdiction over matters affecting the public right will also help to maintain a strong public domain and protect the public’s interests.