Valid Concerns about Validity
Arbitration is a form of alternative dispute resolution that provides the parties with greater autonomy with regard to cost, time and confidentiality, but rarely is it associated with intellectual property rights (IPR) disputes. Perhaps now is the right time to reassess that old way of thinking?
In 2016, the World Intellectual Property Organization (WIPO) recorded the highest number of alternative dispute resolution cases being referred to them in that year, which is rather unsurprising, given the importance and value being placed on new technology and their accompanying intellectual property rights. Seeking to capitalise on this upward trend, Hong Kong has introduced a new bill that would amend their Arbitration Ordinance with the intention of making their territory more amenable to arbitration of IPR disputes. In particular, they introduced language that specifically provides for intellectual property to be arbitrable subject-matter, allowing for the enforcement of foreign awards within the special administrative region as well as opening the door to the possibility of arbitration on patent validity.
However, the question remains as to how Malaysia will handle this paradigm shift. Currently, we are faced with a situation where the courts and the legislation have yet to definitively set the boundaries of what constitutes arbitrable subject-matter. The need to eliminate this uncertainty was the primary impetus for Hong Kong to introduce their proposed legislation, but how will Malaysia decide to address this lacuna in our law? Historically, issues such as intellectual property disputes, consumer claims, criminal offences, labour law grievances and family law disputes have not been considered arbitrable, but this has never been a hard and fast rule, and in my opinion, it is hardly one that is universally-applicable with regard to today’s global economy.
Arbitration is a creature of contract, and as such, its effect is limited to its contracting parties. As such, the controversy associated with IPR arbitration typically fulminates when the arbitration award affects the rights of third parties such as in disputes involving the validity of patents or infringement proceedings. For example, how could an award that invalidates a patent have an effect erga omnes when the arbitration agreement was made inter partes? This legal conundrum has resulted in a variety of different approaches, and it may be prudent to consider how other jurisdictions have accommodated the rise in IPR arbitration.
The most liberal approach taken has been, rather unarguably, Switzerland. In 1975, the Swiss Federal Office of Intellectual Property released a statement that arbitral tribunals had the power to decide on the validity of intellectual property rights. This meant that an arbitral award for the invalidity of a patent would have an effect erga omnes, a rather unique approach when compared to other countries. To many, this appears to be an erosion of judicial function, by subordinating the power to decide on patent validity to privately-appointed arbitrators. However, in response, a rather cogent argument could be made by pointing out that this comprises the very essence of arbitration in the first place. But regardless, it is certainly not the most popular approach, given that, to my knowledge, no other nation seems to have adopted this form of policy.
As it stands, the more common approach would be to allow arbitration of patent validity, but limit its effect to be binding inter partes only. This approach dovetails rather snugly with the standard jurisprudence of arbitration being a strictly contractual matter. As a result, this is the position taken by other arbitration-friendly countries such as the United Kingdom and the United States of America. Whilst elegant in its simplicity, this does on occasion result in the some degree of legal absurdity, whereby a licensor’s patent may be valid for one licensee, but invalid for another. Nevertheless, this approach would certainly be, in my opinion, the position most likely to be adopted by Malaysia.
Other jurisdictions take a more restrictive approach, with countries like France, Italy and Japan allowing for arbitration of IPR infringement, but not the arbitration of IPR validity. Some take this further still, such as South Africa, which bars any arbitration that involves IPR issues entirely. There is a rather salient point to be made that owing to the dearth in available case law, it may still be necessary to continue encouraging litigation in order to give rise to binding precedent, but for a company that desires an expedient and cost-effective way to settle a dispute and keep its dirty linen out of the public eye, this is not a very convincing argument. Indeed, taking on the mantle of establishing case law is hardly the expected responsibility for a body corporate. This is reflected in a WIPO International Survey on Dispute Resolution in Technology Transactions where setting precedent was scored as the least important consideration for respondents when negotiating dispute resolution clauses.
It will be interesting to see how far Hong Kong is willing to take its expansion of IPR arbitration. Certainly, the bill provides for patent validity to be a triable issue in arbitration proceedings, but as yet, we have yet to see whether the awards from these proceedings would have merely an inter partes effect or the power to bind third parties erga omnes as is the case in Switzerland.
In the face of the changing arbitration landscape, Malaysia will need to decide how it wishes to position itself with respect to the rising need for IPR alternative dispute resolution. Our silent statutes are no longer sufficient to foster real confidence in our local arbitration system and it is imperative to adjust our legislation in order to add clarity to what is arbitrable in our jurisdiction. Indeed, if the intent is to attract companies to select Malaysia as the seat of arbitration, defining the boundaries of arbitrable issues to include patent validity and other IPR disputes would certainly be something to work towards. But we still have to decide as a nation which route would be the most suitable to match our country’s framework. Whichever position Malaysia decides to take, whether it be the erga omnes approach, the inter partes approach, or simply mandating that issues of patent validity and infringement remain solely within the purview of the courts, the fact remains that the law on arbitrability with regard to IPR is in a dire need of being refined.
That much, in my opinion, is patently obvious.
IMADUDDIN SUHAIMI, Associate of Naqiz & Partners – Member of both the Chartered Institute of Arbitrators (CIArb) and the Malaysian Institute of Arbitrators (MIArb), as well as a registered Patent Agent.