Whose invention is it? - On the arbitrability of IP-related disputes

In a judgment of 5 May 2021, the Landgericht München I (docket number 21 O 8717/20) dismissed a claim brought by a French manufacturer of blow molds against a German business partner in relation to a patent application, requesting the assignment of such application and compensation for damages. The court held that the subject-matter fell within the scope of an arbitration clause contained in a non-disclosure agreement between the parties and, therefore, declined jurisdiction.

In the decision, the court addresses several fundamental questions regularly arising in IP-related disputes, including the validity and the scope of the arbitration clause, the arbitrability of the subject-matter and the law applicable to those issues. In view of the increasing number of IP-related arbitrations and the rise of ADR in this field, the judgment is of considerable practical relevance.

Facts of the case

The claimant is a company seated in France specialising in the production of blow molds for use in the production of PET bottles. The defendant, a company seated in Germany, is a supplier of production lines for use in the food & beverage industry.

In July 2013, the parties ran a comparative test on one of the defendant's German production lines in which they compared base molds of the claimant with a corresponding product of the defendant. The aim of the test was to verify possible reductions of blowing pressure and to assess the influence on overall bottle quality. Before this test, the parties entered into a Confidential Information Non-Disclosure Agreement (NDA). The NDA contained an arbitration clause, which reads in its relevant part as follows:

"All disputes arising out of or in connection with this Agreement and any amending agreements and subsequent agreements shall be exclusively and finally settled under the Rules of Arbitration of the International Chamber of Commerce (ICC) by three arbitrators appointed in accordance with the said ICC Rules. The place of arbitration shall be Zurich, Switzerland. This Agreement shall be governed by and construed in accordance with the Laws of Switzerland and the Arbitration Tribunal shall apply the Laws of Switzerland including the International Law of Switzerland. The language of the proceedings shall be English."

Following the test, the defendant filed a patent application in September 2013 for a certain base mold with the German Patent and Trade Mark Office. The defendant also filed an application for a European Patent with the same priority.

In July 2020, the claimant initiated court proceedings against the defendant before the Landgericht München I, alleging that the patent applications corresponded to the technical doctrine underlying the base molds used by the claimant during the comparative test on the defendant’s production line in July 2013.

While the defendant denied any wrongdoing, it objected to the jurisdiction of the Munich court based on the arbitration clause in the NDA. The claimant, in return, took the position that the arbitration clause was invalid, the subject-matter did not fall within the scope of the arbitration clause and the dispute was not arbitrable.

Decision of the court

In a thoroughly reasoned decision, the court rejected the claimant’s arguments and held that the arbitration clause in the NDA was valid, covered the subject-matter of the dispute and that the dispute was arbitrable. It therefore declined jurisdiction and dismissed the claim as inadmissible.

Validity and scope of the arbitration clause

As a first step, the court analysed the validity and scope of the arbitration clause.

Referring to Article V(1)(a) of the New York Convention (NYC), the court noted that, in respect of the law applicable to the arbitration clause, priority had to be given to any choice of law by the parties and that the parties had chosen Swiss law. Reasoning that from a strictly legal perspective the arbitration clause was to be considered an agreement separate from the main contract, the court was convinced that in the NDA the parties had wanted to provide for a comprehensive choice of law also covering the arbitration clause. This is an approach regularly followed by German courts.

However, somewhat surprisingly, the court did not stop here. Rather, the court construed the choice of law as a reference to the "International Law of Switzerland" and, therefore, looked into the private international law of Switzerland as codified in the Private International Law Act (PILA). Referring to Articles 116 and 187 PILA, the court concluded, pursuant to these provisions, that the parties’ choice of law is valid also from a Swiss perspective and, therefore, the arbitration clause was governed by Swiss law.

This reasoning is not convincing for the following reasons:

Firstly, the choice of law provides that "[t]his Agreement shall be governed by and construed in accordance with the Laws of Switzerland". This choice of law directly concerning the NDA is to be understood as a reference to substantive Swiss law. Consequently, it would not have been necessary to ask whether Swiss private international law accepts or returns the parties’ choice of law (renvoi). Insofar as the clause provides that "the Arbitration Tribunal shall apply the Laws of Switzerland including the International Law of Switzerland", this part of the clause, which is addressed to the arbitral tribunal, can be understood as a determination of the conflict of law rules to be applied when determining the law applicable to aspects other than the NDA (e.g. the law applicable to IP issues). While such indirect choices of law mechanisms are excluded under Article 20 of the Rome I Regulation and Article 24 of the Rome II Regulation, they are not uncommon and their validity is generally accepted in arbitration.

Secondly, if one were to assume that the parties had chosen the application of Swiss international private law rules to determine the law applicable to the arbitration clause, the pertinent rule would have been Article 178(2) PILA, according to which an arbitration agreement is valid if it conforms either to the law chosen by the parties, to the law governing the subject-matter of the dispute (in particular the law governing the main contract) or to Swiss law. All these connecting factors would have led to the applicability of Swiss law in the present case.

Several German courts have taken a different approach when determining the law applicable to arbitration agreements and applied the Rome I Regulation by analogy. Since arbitration agreements are expressly excluded from the scope of application (Article 1(2)(e) Rome I Regulation), it cannot be applied directly. Like Article V(1)(a) NYC, the Rome I Regulation gives priority to the parties’ choice of law (Article 3(1)), but expressly excludes any renvoi (Article 20). Assuming that parties’ choice of law had been invalid, an objective determination of the applicable law based on Article 4(4) Rome I Regulation would also have led to the application of Swiss law considering that the arbitration clause has the closest connection to Switzerland, notably in view of the selection of Zurich as the place of arbitration under the arbitration clause.

Hence, irrespective of whether one takes guidance from the NYC or the Rome I Regulation, the arbitration clause in the present case was governed by Swiss law.

Due to the easy accessibility of the relevant statutory provisions and Swiss jurisprudence and case law, the Munich court applied Swiss law based on its own knowledge without drawing on expert advice, which is possible pursuant to § 293 of the German Code of Civil Procedure (ZPO).

Based on the broad wording of the arbitration clause ("arising out of or in connection"), the court concluded that the dispute fell within the scope of the clause, irrespective of the law applicable to the merits of the case. The court opined that, while the claimant did not raise contractual claims under the NDA, the statutory claims raised by the claimant were directly connected with the NDA and therefore squarely fell within the scope of the arbitration clause. The court took comfort in the fact that the Swiss Federal Court had come to the same conclusion in a comparable case (SFT, judgment of 19 May 2003, 4C.40/2003, para. 5.2).

Regarding the form of the arbitration clause, the court applied Swiss law as the law chosen by the parties, concluding that the clause met the requirements of Article 178(1) PILA. By contrast, the court did not mention Article II(1) NYC, pursuant to which an arbitration agreement has to be "in writing". If this form requirement had not been met, it would have been necessary to assess whether the arbitration clause could be upheld under a national law. In Germany, courts are prepared to do so based on the most favourable treatment principle in Article VII(1) NYC and in accordance with the form requirements applicable according to the German conflict of law provisions. Pursuant to Article 11 of the German Introductory Code to the Civil Code (EGBGB), an agreement has to meet the form requirements of the law of the place where the agreement was made or the law applicable to the substance of the agreement, the latter being Swiss law, as applied by the court.

Arbitrability of the dispute

Having determined that the dispute is covered by a valid arbitration agreement, the court, as a second step, addressed the arbitrability of the dispute.

Regarding the applicable law, the court followed a cumulative approach and based its analysis on German law as the lex fori and Swiss law as the law of the place of arbitration. The court opined that, in addition to the limits set by the German legislator, any additional limits chosen by the parties through the selection of the place of arbitration must be respected. This means that, where the dispute was not arbitrable from a Swiss perspective, the court would have accepted jurisdiction even though, from a German perspective, the dispute was arbitrable and covered by a valid arbitration agreement. In this regard, the court reasoned that the arbitral award would be subject to a review under Article V(2)(a) NYC at the enforcement stage in which the competent court would assess the arbitrability from its perspective. While it is not clear whether an enforcement of the arbitral award in Switzerland was to be expected between parties seated in France in Germany, the arbitral award was subject to possible set-aside proceedings in Switzerland. In such proceedings, Swiss courts will also assess whether the dispute is arbitrable from a Swiss perspective. This approach has been criticised under the view that courts should limit their assessment of the arbitrability to lex fori since a cumulative approach would result in overly restrictive and incoherent decisions.

As far as German law is concerned, the court held that the dispute was arbitrable pursuant to § 1030(1) ZPO since the claim raised was of monetary nature. According to the court, this is also the case for the claim for assignment of the patent application, since a patent not only protects a personal right of the inventor, but also a financial interest in the invention.

The court clarified that this conclusion is unaffected by the fact that patents are granted by public authorities based on their sovereign power. While the court noted that the granting of patents is excluded from the disposition of private parties and referred to the exclusive jurisdiction of the state courts, it held that the dispute did not concern the existence of a patent but an assignment of a patent application. Parties can agree on an assignment of a patent application at any time. Furthermore, inventors can waive their rights to a patent.

Against this background, the court expressed strong skepticism regarding the view that disputes concerning the validity of patents would be categorically excluded from arbitration. In the courts view, such exclusion is justified only where a decision with an erga omnes effect on the validity of a patent is at stake, since such a decision would conflict with the privity of arbitration. By contrast, the court saw no reason why a tribunal should be prevented from deciding on such a matter with inter partes effect (e.g. by ordering a party to apply for the deletion of a patent).

The court noted that all member states of the European Patent Convention (EPC) are also member states of NYC and that, therefore, an arbitral award rendered by an arbitral tribunal seated in Switzerland in respect of the subject-matter would have to be recognised in all member states of the EPC. On this basis, the court distinguished the present case from a case in which the Board of Appeal of the European Patent Office had refused to stay proceedings in favour of a Canadian state court because it did not consider itself empowered to decide on the recognition of a decision of the court of a non-member state.

Regarding arbitrability under Swiss law, the court observed that Swiss law does not impose any stricter limitations on arbitrability and that the dispute, therefore, was also arbitrable pursuant to Article 177(1) PILA.

Conclusion

While the judgment is not convincing in every regard as far as the determination of the applicable law is concerned, the approach taken by the court in respect of the arbitrability of patent-related disputes is to be welcomed.

With the rise of industry 4.0, the number of arbitrations in which patents and other IP rights are at stake will increase and the boundaries of arbitrability of IP-related issues will be tested. The prevalence of alternative dispute resolution could be accelerated by the implantation of the Unified Patent Court (UPC) system, which has entered the preparatory phase at the beginning of the year following the ratification of the UPC Agreement by Austria. The UPC Agreement provides for a Mediation and Arbitration Centre, the success of which will depend on a policy favouring arbitration in the different member states. In this regard, the liberal approach taken by the Landgericht München I should be welcomed.

The full text of the judgment can be accessed under: LG München I, Endurteil v. 05.05.2021 – 21 O 8717/20 - Bürgerservice (gesetze-bayern.de)

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