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I’ll See You in Court…?

Issued: April 19 2018

Coming into effect on January 1, 2018, Hong Kong’s Arbitration (Amendment) Bill sets out that intellectual property rights are arbitrable, and that enforcing an award that involves solely an IPR dispute is not contrary to public policy. Prior to the amendment, the arbitrability of IPR has not been clearly addressed as there hadn’t been an authoritative judgement nor express provision in the Arbitration Ordinanceon the issue.

 

 

Key Clarifications at A Glance

 

Defining IPR. The new Sections 103A to 103C of the Ordinance elaborates on the terms “IPR” and “IPR dispute.” “IPR” is defined in a relatively broader scope than many jurisdictions that place limited scope on IP, including rights from patent and trademark to plant variety, know-how and “any other IPR of whatever nature.”This means the new provisions apply to any type of dispute relating to any IPR, regardless of whether the right is protected by registration or whether it subsists in Hong Kong.

 

“IPR” are defined as disputes over a) the enforceability, infringement, validity, ownership, scope, or duration of an IPR; b) a transaction in respect of an IPR; and c) any compensation payable for an IP.

 

The new Section 103D(1) of the Ordinance clarifies that an IPR dispute is capable of settlement by arbitration, and Section 103D(4) further authorizes arbitrability by stating that a Hong Kong law or law elsewhere giving jurisdiction to a specified entity to decide the IP dispute need not mention possible settlement by arbitration for the dispute to be arbitrable in Hong Kong.

 

Defining Enforceability. Section 103F clarifies that an arbitral award may not be set aside under section 81 of the Ordinanceonly because the award involves an IPR; while 103G states that the enforcement may not be refused under Part 10 of the Ordinance for the sole reason that it involves an IPR.

 

Limiting impact to third parties. Consistent with Section 73 of the Ordinance, Section 103E clarifies that third-party licensees (exclusive and non-exclusive) don’t directly benefit from, nor are they bound by, an arbitral award. The finality and binding effect of an arbitral award apply only to “the parties” and “any person claiming through or under any of the parties.”

 

Due to this limited effect of an award, an award cannot be registered or recorded by the registries of the Intellectual Property Department in Hong Kong, meaning the verdict of an arbitral tribunal of whether a registered IPR is valid or not is held only between its owner and the other party. On the other hand, the courts or the IP Registrar may reach a different conclusion as between the owner and a third party.

 

Outlining technical provisions. Sections 103I and 103J include the technical provisions concerning arbitral proceedings related to patents. It is clarified that Section 101(2) of the Patents Ordinance (Cap.514) does not prevent the validity of a patent in question in an arbitration, and that the prerequisites for commencing court proceedings for the enforcement of short-term patents as set out in the Patents Ordinance do not apply to arbitral proceedings unless otherwise agreed by the parties, even though the holder of the short-term patent will still be required to establish validity of the patent in arbitral proceedings.

 

 

Implications

 

Arbitration has been held up as a simpler, cheaper and faster option to settle a dispute than going to court. Upon the agreement of the disputing parties, there is greater autonomy to specify which aspects of the dispute is to be arbitrated, the remedies and reliefs of the reward, and the procedures of the arbitral proceedings. And instead of having to initiate legal proceedings in multiple jurisdictions over the dispute, IP arbitration provides a single forum for resolution.In cases involving multi-regional dispute or infringement, arbitration could save significant time and legal fees, unless the issue at stake involves a European registered IPR that has similar single-forum effect.

 

For those preferring a higher level of protection in terms of confidentiality, arbitration may appeal further with the Ordinance’s provision in confidentiality in arbitration proceedings as well as court hearings by limiting such hearings from being heard in open court unless otherwise agreed by the parties.

 

The lack of litigation-style procedures also levels the playing ground between parties, reducing the administrative burden such as expansive discovery and excessive motion practice on parties with less financial prowess, and enabling both parties to focus on the presentation of evidence and argument at a final hearing.

 

On the other hand, despite its less restrictive procedures, an arbitral award has final and binding effect on the parties and can be enforced in over 150 countries under the New York Convention and in China and Macau under arrangements with the jurisdictions, respectively.

 

“Given the lack of an IP list or a specialist IP Court in Hong Kong, parties may be persuaded to arbitrate by the possibility to have their disputes adjudicated by persons with an appropriate legal background and the right technical expertise,” says Serena Lim, counsel at Hogan Lovells in Hong Kong.

 

Will arbitration cases increase following the clarification? Legal experts Asia IP spoke to agree the development will encourage arbitration cases, although impact may only be felt in the long run.

 

“The surge in global and regional demand for IP, especially in Mainland China in the past two decades, offers huge market potential and trading opportunities in IP,” saysa spokeswoman representing jointly the Hong Kong Department of Justice (DoJ) and the Intellectual Property Department (IPD) to Asia IP.

 

“In a survey conducted by the Queen Mary University of London in 2016 on the resolution of disputes in the technology, media and telecom sectors (in which half of their disputes involve IP), it is revealed that 92 percent of the respondents indicated that international arbitration is well-suited for their disputes,” she adds.

 

Rosita Li, a partner at Hong Kong’s Mayer Brown JSM, expects an increase in arbitration especially for contractual cases where there is likely less need for third-party enforcement, for example, an IP ownership dispute arising out of a R&D collaboration agreement. “Arbitration has not been widely used by parties to resolve intellectual property disputes in Hong Kong. The amendments would therefore be very attractive for parties that value confidentiality and speedy dispute resolution,” she says.

 

“While the amendments may encourage more parties to include arbitration clauses in their IP agreements, we may not see an increase in the number of IP arbitration cases until those new agreements fall into dispute,” says Lim.“Further, I believe some licensors may prefer to exclude certain aspects of IPRs, such as validity, from standard arbitration clauses to make sure that if validity is ever challenged by a licensee, this will be strenuously defended with the assistance of proper discovery and extensive evidence, including expert evidence in court.”

 

Other developments may also float the sail in IP arbitration. A separate amendment to the Ordinance is expected to allow for third-party funding (TPF) of arbitral proceedings in near future, which may further encourage arbitration over litigation, where “a patent suit could easily run up to millions of dollars, not to mention further cost for bringing the case up to trial” according to Dr. Benny Lo, barrister and international arbitrator at the Des Voeux Chambers.

 

“As the ‘icing on the cake,’ TPF could make this exercise more palatable and improve access to justice for parties who are unable to pursue a meritorious claim or defense due to the lack of funds. Given the high stakes often involved in technology disputes, TPF could assist in creating a more level-playing field, and give parties an option to outsource some of the risks to a funder and be relieved from the heavy burden of up-front legal cost,” he says.

 

 

Additional Considerations for Arbitration

 

Apart from the advantages of speed, confidentiality and single-forum resolution, experts highlight aspects that parties considering arbitration should pay special attention to:

 

 

 

 

 

 

Nature and Motivation of Case

 

Cases on large-scale IP projects involving several jurisdictions, such as technology transfer, joint research and development and cross licensing, may be more amendable to arbitration, says the DoJ.

 

Similarly, some IP owners “prefer litigation over arbitration for ease of enforcement–one can enforce a court decision immediately upon default by the defendant– particularly if it is a single jurisdiction dispute and there is no issue of having to enforce the decision in another jurisdiction,” observes Lim.

 

Contractual disputes such as licensing disputes is where arbitration is typically useful. Where there is generally no need to compel third-parties and where licensors and licensees still need to maintain a functional if not amiable business relationship, the statutory duty of confidentiality provided by the amended Ordinance would be especially desirable.

 

For products still under development, or disputes involving trade secrets, arbitration may again provide more confidentiality protection by preventing sensitive information from falling into the public domain. On the other hand, if the intention to litigate is dominated by a wish to establish a public legal precedent, an IP owner may opt for litigation despites other considerations.

 

“Another consideration is neutrality,” says Philipp Hanusch, a senior associate in Baker McKenzie’s international arbitration practice in Hong Kong.

 

“Arbitration allows the parties to choose a neutral seat for their arbitration and to submit their dispute to a tribunal where at least one arbitrator is of neutral nationality. This way parties can avoid to litigate in the home court of their opponent where they may be subjected to bias, proceedings in a foreign language, or be under an unfamiliar or inappropriate procedural law, a restricted choice of representation, or unduly limited or excessive awards for damages or costs,” he says.

 

 

Arbitrator’s Power

 

“[Parties] should consider whether they would like to limit the remedies and reliefs which may be awarded by the arbitrator(s) by agreement with the other party to the IP dispute which is expressly allowed under Section 103D(6) of the amended [Ordinance],” says the Hong Kong IPD spokesperson.

 

For example, some IP owners may wish to limit the arbitrator’s power to award orders that would result in the alterations to the public register of IPR, such as an order requiring the losing party to assign his IPR to another party, or an order requiring the losing party to surrender his IPR.

 

 

Enforceability

 

Whether an arbitral award is enforceable in a particular jurisdiction would depend on the law of that jurisdiction and other public policy considerations. The DoJ had conducted research comparing the scopes of IP arbitrability of major jurisdictions; the summary shared by DoJ with Asia IP may serve as a starting point for parties pondering multi-jurisdiction enforcement of a Hong Kong arbitral award:

 

Table 1: The Scopes of IP Arbitrability

 

Jurisdiction

 

 

Arbitrability of disputes over IPRs

 

 

Effect of IPR arbitral award

Mandatory requirement for disclosure/recordal of IPR arbitral awards

Rationale behind the disclosure/non-disclosure treatment (if known)

 

 

Australia

IPR disputes are arbitrable.

Inter partes effect.

 

No.     

Consistency with other arbitration arrangements.

China

Disputes involving copyright are arbitrable.

 

Disputes relating to patents and trademarks (except those concerning their validity) are also arbitrable.

 

Inter partes effect.

No.

Similar treatment as other civil or commercial arbitral awards.

India

 

IPR disputes may be arbitrated by the parties’ agreement or as directed by the court.

 

Inter partes effect.

Generally speaking, no.

 

However, awards relating to specific subject matters (i.e. a license by the patentee, or a license allowing others to use the registered trademark) may be caught by Indian IP law and be required to be disclosed to the IP Registrar. The disclosed information is also published in the official website.

 

Indian patent law currently requires a patentee/licensee to submit information/annual statement to the Patent Office stating the extent to which the patent is being commercially worked.

 

Indian trademark law requires the registered proprietor and the proposed registered user to jointly make an application to the Registrar together with, inter alia, the agreement in writing or a duly authenticated copy thereof, between the registered proprietor and the proposed registered user with respect to the permitted use of the trademark.

 

Japan

 

Civil disputes that can be settled by the parties (such as infringement) are arbitrable.

 

There is literature suggesting that patent validity disputes appear to be arbitrable.

 

Inter partes effect.

No.

Confidentiality of arbitration.

Malaysia

 

All types of IPR disputes are arbitrable.

 

Inter partes effect.

No.

Confidentiality of arbitration.

Singapore

There appears to be no specific law addressing the question. 

 

There is literature suggesting that Section 58(6) of the Patent Act indicates that the question of validity may be arbitrable in limited circumstances and with specific sanction of the court.

 

Inter partes effect.

It appears that there is no disclosure/recordal requirement.

 

Thailand

 

All aspects of IPR disputes are arbitrable.

Inter partes effect.

No.

Importance of confidentiality of arbitration. No disclosure of award unless parties agree.

 

Canada

All IP issues arbitrable.

Inter partes effect.

No.

Confidentiality of arbitration. No disclosure unless parties consent or pursuant to exceptions under the law.

United States

Yes. Specifically, disputes relating to the validity and/or infringement of patents; copyright;trademarks; and infringement dispute relating to a registered vessel hull design, are arbitrable.

 

Inter partes effect.

Yes, for awards concerning a US patent or a registered vessel hull design. Notice of the award to be given to the Director of the US Patent and Trademark Office (USPTO) or the Register of Copyrights (as the case may be).  For patents, a copy of the award has to be filed with the USPTO. The award is unenforceable until notice is given or received by the relevant authority.

 

There appears to be no disclosure/recordal requirement for awards relating to other types of IPRs.

 

The arbitration award will become part of the public record for the patent at issue. The rationale is that the arbitration award is part of the patent’s history. Therefore, like the rest of the patent’s history, it should be made available to the public.

 

Difference in recordal requirements between different types of IPRs - reasons unknown.

 

 

United Kingdom

 

There is no express legislative authority on the arbitrability of IPRs but it is generally believed that the English courts have accepted that IPR disputes are arbitrable. There is literature suggesting that this includes validity of IPRs.

 

Inter partes effect.

No.

Same treatment as other arbitral awards. Confidentiality of arbitration is usually maintained.

           

Table 1. The table has been reproduced with consent of the Hong Kong Department of Justice and edited for presentation; please contact the DoJ for more details of the research.

 

 

Although Hong Kong’s relatively broader scope means some decisions awarded in the city are not enforceable elsewhere, the IPD points out that a wider scope should be an edge Hong Kong has over other jurisdictions in hosting arbitration. Because different natures of an IPR dispute – enforceability, infringement, subsistence, validity, ownership, scope, duration and more –are often inseparable, limiting the scope of arbitration can complicate the resolution and diminish the value of arbitration as a single forum to resolve complex disputes.

 

“Given that IPR in other jurisdictions may be referred to by different names or protected in a different way, and since IP is a developing area, we have adopted a definition of IPR which refers to a non-exhaustive list of examples so as to allow its flexibility to accommodate new types of IPR which may arise in future,” adds the spokeswoman.

 

Among the varying scope of arbitrable IPRs across countries, one often-raised concern relates to the validity of registered IPRs. Because states are substantially involved in granting and regulating certain IPRs such as patents, copyrights and trademark rights, some jurisdictions have declared validity as non-arbitrable to keep the authority exclusively within the state, says Kenny Cheung, a special counsel in Baker McKenzie’s intellectual property practice in Hong Kong. “The position under Hong Kong law is that all IPR disputes can be resolved by arbitration but only in so far as the parties are concerned,” he points out.

 

Dr. Lo agrees that validity is an oft-debated ground in IP arbitration that may not be readily enforceable outside of Hong Kong, but believes the concern is reduced when put into perspective. “More often than not, parties are unable or unwilling to challenge validity by reason of doctrine such as licensee estoppel, non-contest clauses or out of prudence. In other words, such ‘concerns’ do not arise in the majority of IP arbitration cases,” he explains.

 

 

IP Expertise and Finality

 

“Would you want a second bite of the cherry, if the first tribunal ‘got things wrong’?” asks Li. Because arbitral awards are final and normally not subject to appeal, some parties may have concerns with leaving a significant IPR in the hands of a single tribunal, despite the benefits of reduced time and monetary cost in a once-and-for-all resolution.

 

On the other hand, the risk of “getting things wrong” is reduced in arbitration proceedings as parties can choose arbitrator(s) with the right technical expertise and legal background, a factor that may be more valued as Hong Kong doesn’t have dedicated IP courts. By comparison, parties are unable to choose their judge in court, which may result in a judge who is inexperienced in the relevant type of IPR issues.

 

 

 

 

 

 

Back to the Basics

 

Ultimately, multiple factors– time, cost, continuation of relationship between parties, jurisdictions involved, rule of law, legal and technical complexity of IPR involved, strategic significance of the IPR, preference for confidentiality versus publicity, risk appetite and assessment, ease of enforceability of award etc. – affect decisions to mediate, arbitrate or litigate. And whichever means of dispute resolution is chosen, things should always be done right from the beginning.

 

“Effective arbitration always depends on having a well-drafted arbitration clause that provides for all the necessary elements of the arbitration, including the scope, seat, venue, arbitrating institution, arbitrators, governing rules and language of the arbitration. Poorly-drafted clauses may result in disputes as to interpretation that will hamstring the resolution of the dispute,” says Li.

 

“And do not just copy from a model clause,” cautions Dr. Lo. “Other than the usual parameters on seat, qualification of arbitrators and arbitral institution, it is of vital importance that parties think about the precise scope of the dispute that is to be arbitrated…[Parties] should also make sure that the arbitration clause is compatible with other dispute resolution clauses that may be present in the underlying contract.  This is to avoid inconsistent or ‘pathological arbitration clauses’ which can be deemed unworkable and unenforceable either in an initial dispute over jurisdiction or, worse still, at the enforcement stage of the award,” he says.

 

 

Crafting an International Arbitration Centre

 

A major step forward – but by no means the first nor last step – this latest arbitration development traces its roots back to the June 2011 Arbitration Ordinance, which first unified the legislative regimes for domestic and international arbitrations on the basis of the Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law.

 

As early as 1998, the Hong Kong Institute of Arbitrators (HKIA) and the Hong Kong International Arbitration Centre(HKIAC) established the Committee on Hong Kong Arbitration Law to study reforms in the then arbitration law, which laid out separate regimes for domestic arbitration, based largely on the United Kingdom arbitration legislation, and international arbitrations, based on the Model Law. The committee recommended redrafting the old Arbitration Ordinance into a unitary regime based on Model Law in 2003, and the DoJ set up the Departmental Working Group in 2005 to implement the recommendations. After consultation and rounds of LegCo committee hearings, the new Arbitration Ordinance, Cap. 609 was enacted by the LegCo on November 10, 2010, paving way to the internationally-recognized arbitration regime the city has today.

 

Hong Kong is now host to several world-class arbitration institutions, including the home-grown HKIAC. The Paris-based International Court of Arbitration of the International Chamber of Commerce has an Asia-Pacific branch in Hong Kong since 2008, and in 2012, the China International Economic and Trade Arbitration Commission (CIETAC) established its first non-Mainland office, the CIETAC Hong Kong Arbitration Centre, in the city.

 

“Notably, HKIAC maintains a specific panel of arbitrators for IP arbitrations which comprises of around 50 members from various jurisdictions,” says Hanusch. “To be eligible for that panel, arbitrators must have demonstrated extensive experience and strong expertise in resolving IP disputes.”

 

 

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