Authors | Aggie Liu, Hui Cao

It has been generally acknowledged that contractual and infringement disputes relating to intellectual property (IP) are arbitrable in China. The arbitrability of IP ownership disputes is, however, not a simple yes or no issue. The ownership of a registered trademark and patent is subject to the examination of the competent administrative authorities and subsequently by courts, whereas a copyright ownership could be reviewed in an arbitration.

In the event that an IP infringement occurs and the parties have a valid arbitration agreement, will this pre-empt litigation regarding that subject matter? In this article, we offer insights into this issue based on relevant laws, precedents and our experience to help IP owners navigate possible options when forming legal strategies in China.

1.  IP infringement disputes are arbitrable in China and this typically results in those disputes being non-litigable

The legal framework in China allows IP infringement disputes to be resolved through arbitration.

IP infringement disputes are considered to fall into “other disputes over rights and interests in property” under Article 2 of the PRC Arbitration Law and are not regarded as non-arbitrable disputes, such as marital disputes and administrative disputes.

If a valid written arbitration agreement exists and an IP owner incorrectly commences a court proceeding, the court is requested to explain this to the plaintiff and inform them that they should  instead commence arbitration, according to Article 124(2) of the PRC Civil Procedure Law.

This is also the apparent judicial consensus, though not binding[1], that where parties of a foreign-related commercial contract reach a valid arbitration agreement, which specifies that any and all disputes arising from or in connection with the contract shall be settled through arbitration, a court shall not have jurisdiction over a lawsuit lodged by the plaintiff on the grounds of infringement in connection with or arising from the execution or performance of the contract.

2.  Disputes outside the scope of the arbitration agreement

Where the scope of an arbitration agreement is limited to contractual disputes, an IP owner may file a lawsuit with a Chinese court for non-contractual disputes, such as an IP infringement or ownership dispute.

Regarding the definition of “contractual dispute,” Chinese courts sometimes cite Article 2 of the Supreme People’s Court (SPC) Interpretation on Certain Issues Concerning the Application of the PRC Arbitration Law, which provides that if the parties generally agree that disputes arising from a contract shall be referred to arbitration, all disputes arising from the formation, validity, modification, assignment, performance, liability for breach of contract, interpretation, and termination of the contract may be referred to arbitration.

However, in real life, the scope of “contractual disputes” can be controversial.

In Beijing Huayu Tongfang Chemical Technology Development Co., Ltd. (Huayu Tongfang) v. Shandong Kangbao Bio-chemical Technology Co., Ltd. (Kangbao), it took Huayu Tongfang almost two years to have the court confirm jurisdiction over their patent ownership dispute.

Huayu Tongfang and Kangbao entered into a technical service agreement and they agreed that “disputes arising out of the performance of this agreement” had to be referred to arbitration. Kangbao took the technical documents and drawings of Huayu Tongfang, and applied for a patent without Huayu Tongfang’s consent. Huayu Tongfang filed a lawsuit claiming ownership of the patent, but the Qingdao Intermediate People’s Court decided that the dispute had to be referred to arbitration. Huayu Tongfang then filed an application for arbitration, but was rejected by the arbitration tribunal, Dong Ying Arbitration Commission, because it was not the appropriate forum to resolve disputes over patent ownership.

Huayu Tongfang had to file a lawsuit with the Qingdao Intermediate People’s Court again, and eventually, the court confirmed its jurisdiction over the case. In the appeal ((2020) SPC Zhi Min Xia Zhong No. 111), the SPC re-affirmed the court’s jurisdiction, reasoning that:

“Huayu Tongfang is not claiming Kangbao’s liability for breach of contract, but it claims that Kangbao has caused harm to the rights and interests of Huayu Tongfang by taking Huayu Tongfang’s technology to apply for a patent without authorization. The claims and reasons brought by Huayu Tongfang are beyond the scope of their arbitration agreement.”

Whilst the scope of “contractual dispute” is somewhat ambiguous, this is still, to some extent, more manageable. When the parties have a broad arbitration agreement, the scope of the arbitration agreement can be an even more disputed issue where courts have made various different rulings.

3. Case by case analysis required where the arbitration agreement has a broad scope

It is quite common to see arbitration agreements with a broadly defined scope which covers all disputes “arising out of” the contract and all disputes “in connection with”(or “relating to”) the contract.

With such a broad arbitration agreement in place, the IP owner needs to analyse whether an IP infringement dispute arises out of, is connected with, or relates to the contract, and to consider other factors, such as whether there is joint infringement involving at least one non-contracting party, etc., before making a decision on whether to arbitrate or litigate.

Our experience shows that whilst there are no simple and consistent rules regarding whether a court would adjudicate an IP infringement dispute in view of a valid broad arbitration agreement, courts seem to tend to review IP infringement disputes rather than refer them to arbitration.

In some cases, the courts may even conduct a substantive review of a case when making a ruling on jurisdiction, which is uncommon during the jurisdiction objection stage of court proceedings.

In Suzhou Mei En Superconductor Co., Ltd. (Mei En) v. Sinovel Wind Group Co., Ltd. (Sinovel) ((2013) Min Ti Zi No. 54), the SPC held that the contract between Mei En and Sinovel was a procurement contract. Although the parties agreed that “all disputes” arising out of the execution of the contract and in connection with the execution of the contract had to be referred to arbitration. However, the copyright infringement claims brought by Mei En were not covered by the procurement contract. Mei En claimed that Sinovel and a third party, Dalian Guotong, infringed its software copyright by modifying, copying, installing and using the software without authorisation.  Therefore, the dispute was beyond the scope of the broad arbitration agreement between Mei En and Sinovel, and was able to be adjudicated by the court.

In Mei En v. Sinovel, the SPC held that the suit brought by Mei En against the joint copyright infringement by Sinovel and Dalian Guotong was inseparable. Considering that Dalian Guotong was not a party to the procurement contract, the SPC decided that the court had jurisdiction over the entire case. It therefore seems that, in cases of joint IP infringement, if the infringing acts by the contracting party are inseparable from the infringing acts by a non-contracting party, the courts tend to review the joint IP infringement altogether in one court proceeding.

CONCLUSION

There is really no simple answer to the question of whether a valid arbitration agreement would pre-empt an IP infringement litigation in China. It is always wise to seek the opinion of local lawyers before taking any action. Factors to be taken into consideration include but are not limited to the object of the contract, the scope of the arbitration agreement, whether any non-contracting party is involved, and the feasible cause of action, amongst others.

[1] This view has been reached by the Supreme People’s Court (SPC) and High People’s Courts across provinces in China and this is recorded in the Minutes of the Second National Working Conference on the Trial of Foreign-Related Commercial and Maritime Cases (Article 7, Fa-fa [2005] No. 26).