The Arbitration Practitioner’s Series by MKBAC: Arbitrability of Trademark Disputes - Part I

‘To be arbitrable or not to be arbitrable, that is the question’ and this has been a lingering question for quite some time surrounding not just trademark law but intellectual property laws in general. In a nutshell, this controversy emanates from the premise that, since only those disputes are arbitrable where the rights at issue flow from an agreement validly entered into by parties and the parties agree to the consequences flowing from an arbitration proceeding, can trademark disputes, which concern statutory rights and possible consequences to third parties, be categorized as arbitrable?

The law surrounding this controversy has undergone considerable development overtime. Though fairly settled, the practical application of the same in the field of trademark law is still not as straightforward as it seems to be theoretically. The aim of this article is to exemplify a few different trademark disputes where such question regarding their arbitrability may arise and to analyse if the same are segregable as arbitrable disputes or not.

Booz Allen Principles

The issue regarding arbitrability of disputes has been considered and decided by Hon’ble Courts from time to time. One landmark judgment in this landscape was Booz Allen and Hamilton Inc v. SBI Home Finance Limited & Ors. where the Supreme Court provided three facets of ‘arbitrability’ that relate to the jurisdiction of an arbitral tribunal:

1. Assessment of Nature of Dispute

Whether the disputes are capable of adjudication and settlement by arbitration? – Assessing if the disputes by their very nature are capable of adjudication by a private forum or exclusively fall within the domain of public fora.

2. Excepted Matter Assessment

Whether the disputes are covered by the arbitration agreement or is the subject matter excepted? – Assessing whether the dispute so arisen is covered within the ambit of the arbitration agreement or falls outside its purview as an excepted matter. 

3. Scope Assessment

Whether the parties have referred the dispute to arbitration? – Assessing whether or not the dispute is covered within the claim and counterclaim.

In order to distinguish whether a dispute is arbitrable or not, the Supreme Court held that the same can, broadly, be determined by assessing whether the action pertains to rights in rem or rights in personam. It was held that, generally, the latter are amenable to arbitration whereas the former are not.

The Third Category in Booz Allen

If the principle of demarcation based on rights in rem and rights in personam would be applied strictly literally, then IP disputes, emanating from rights in rem, would have automatically fallen outside the purview of arbitration. In fact, in the decision of A. Ayyasamy v. A. Paramasivam & Ors., the Supreme Court observed that there are six categories of disputes that are generally seen as non-arbitrable and these included patent, trademark and copyright. 

However, while providing the in rem and in personam basis of bifurcation, the Supreme Court, in Booz Allen, held that the demarcation based on rights in rem and rights in personam was not to be seen as an inflexible rule. Interestingly, the Supreme Court also underscored another category of cases which it held to be arbitrable viz., disputes concerning subordinate rights in personam emanating from rights in rem. The relevant portion of the judgment is reproduced as under:

“38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”

Vidya Drolia: Expansion on the third category in Booz Allen

The fundamental concept provided in Booz Allen regarding deciphering arbitrability of disputes again came up for elaborate consideration, after almost 9 years, in a batch of cases with the lead case being Vidya Drolia & Ors. v. Durga Trading Corporation. Here the Supreme Court, inter alia, built on the principle of arbitrability of subordinate rights in personam emanating from rights in rem, provided in Booz Allen. The Apex Court, in Vidya Drolia, held that it may not always be accurate to use the phrases “rights in rem” and “rights in personam” per se for assessing non-arbitrability of a dispute as subordinate rights in personam derived from rights in rem may be arbitrable. In this light, it was observed that a claim for infringement of copyright against a defendant (subordinate right in personam) would be arbitrable though there is a possibility that the arbitrator would in some manner be examining the right to copyright (right in rem) in itself. This interplay was further illustrated by the observation that the rights under a patent licence may be arbitrable (subordinate right in personam) but the validity of the underlying patent may not (right in rem). At the same time, it was observed that “Arbitration by necessary implication excludes actions in rem.”

The aforesaid observations clarified the following aspects relating to arbitrability of IP disputes:

1. Disputes pertaining to licence of an IP would be arbitrable

2. Infringement cases would be arbitrable.

3. Dispute regarding validity of an IP would not be arbitrable.

After providing an in-depth understanding of the issue of arbitrability and the method to assess the same while analysing various judgments, the Supreme Court, in Vidya Drolia, held as follows:

“76. In view of the above discussion, we would like to propound a fourfold test for determining when the subject-matter of a dispute in an arbitration agreement is not arbitrable:

76.1 (1) When cause of action and subject-matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

76.2 (2) When cause of action and subject-matter of the dispute affects third-party rights; having erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable

76.3 (3) When cause of action and subject-matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable.

76.4 (4) When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).”

The decisions in Booz Allen and Vidya Drolia laid down and explained the fundamental principles of arbitrability of disputes that were applied in various cases concerning the controversy of arbitrability of IP disputes. One of the recent decisions in this regard is of the Supreme Court in K. Mangayarkarasi & Anr. v. N.J. Sundaresan & Anr. The Plaintiffs, inter alia, sought an injunction against the Defendants from using their trademarks. The Defendants filed an application under Section 8 of the Arbitration & Conciliation Act, 1996 (‘the Act’) stating that the matter should be referred to arbitration as they were governed by the assignment agreements which provided for arbitration. The Plaintiffs sought rejection of the Defendants’ Application as they disputed the execution of the agreement itself on the ground of fraud. The District Court and High Court both held that the dispute should be resolved by arbitration. Agreeing with the High Court and District Court, the Supreme Court dismissed the SLP, inter alia, observing the following:

“12. In Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, this Court held that the grant and issue of patents and registration of trademarks are matters that fall within the sovereign or government functions and have erga omnes effect. Prima facie, the nature of disputes sought to be raised by the petitioners cannot be considered as actions in rem. The assumption that all matters relating to trademarks are outside the scope of arbitration is plainly erroneous. There may be disputes that may arise from subordinate rights such as licences granted by the proprietor of a registered trademark. Undisputedly, these disputes, although, involving the right to use trademarks, are arbitrable as they relate to rights and obligations inter se the parties to a licence agreement.”

The aforementioned decisions clearly establish that trademark disputes are arbitrable. The question then is - why the lingering conundrum?

In Booz Allen and Vidya Drolia, the Supreme Court culled out and explained the following three categories of disputes:

Category 1 -  Disputes concerning rights in rem

Category 2 -  Disputes concerning rights in personam

Category 3 - Disputes concerning subordinate rights in personam emanating from rights in rem.

The second and third categories of disputes have been held to be arbitrable. Therefore, wherever Trademark disputes fall squarely into categories 2 and / or 3, the same would be undoubtedly arbitrable.

However, trademark disputes do not always squarely fall under any one of the categories. Though the disputes concerning trademark related agreements would mostly fall in category 3, the same may also have colour of category 1 disputes. For example, in a dispute where a registered proprietor / licensor alleges infringement by a licensee ,which is in also violation of the trademark license agreement which provides for arbitration, if the licensee challenges the validity of the rights of the registered proprietor / licensor in the registered trademark itself, this would fall in the grey area as it would have arbitrable elements (violation of the representation / warranty given by licensee in the license agreement) and non-arbitrable elements (grant of registration to licensor which provides statutory right in rem to the licensor and which is challenged by the licensee). Bifurcation of such disputes into arbitrable and non-arbitrable elements, and undertaking arbitration for the former and litigation in respect of the latter would be detrimental to the interest of the parties as it would neither be cost-effective nor expeditious, which will also be a cause for harassment of the parties. The same would, further, be against the fundamental principle of achieving finality in decisions and to avoid contrary decisions through multiplicity of proceedings. Therefore, such disputes would have to be resolved by way of litigation instead of arbitration for effective adjudication.

Applying the aforesaid principles, the attempt, in the second part of this article, would be to gauge the arbitrability of trademark disputes in various possible situations for a more practical understanding. 

Manmeet Kaur Sareen completed the LL.M. course in intellectual property law from University of Cambridge and currently runs her independent law practice in New Delhi.