Patent licence agreement for making soft drink bottles in Italy / Decree from Italian Ministry of Industry granting licensee a royalty-free licence for five years / Licensor claims payment of royalties / Arbitrability of licensor's claims, yes

'Claimant is the registered owner in Italy of the entire right, title and interests in patents and patents' application directed to a polyethylene bottle used in particular for the packaging of carbonated soft drinks.

In 1979, Claimant and Company X entered into a "soft drink (SDK) bottle patent license agreement".

In Italy, the SDK bottle itself is covered by patent no. . . . This patent is listed in schedule A to the Contract. Claimant is also the owner of five additional Italian patents, listed in schedule B to the Agreement, relating more narrowly to particular kinds of SDK bottles or processes or equipment for their manufacture.

. . . . . . . . .

In 1984, with Claimant's previous consent, Company X assigned the contract to Defendant its subsidiary.

In 1985, Defendant sent to Claimant a telex referring to an Italian Government Ordinance ("Decreto") dated 22.06.1979 and published in the Official Gazette of August 7, 1979 (hereinafter the "Ordinance").

This Ordinance provided (Art. 4) that the life of the Italian patents was extended from 15 to 20 years and stated (Art. 84) that "the licensees and those who have made serious and effective investments for the use of the invention in view of the approaching expiry date, are entitled to obtain a non-exclusive compulsory license free of charge for the extended period. This right is not available to infringers of patents which have not yet expired".

Referring to these provisions, Defendant informed Claimant that they would stop to pay the royalties at the end of 1985 for the sales in Italy, i.e. 15 years after the patent registration. Claimant objected and took the view that Defendant was not entitled to discontinue the payment of royalties.

By telex dated July 3, 1986, Defendant requested from Claimant the granting of "a non-exclusive free license under Claimant's Italian patent, such license to last until December 16, 1990". It added that "if this formal request is not accepted within 15 days from today's date, Defendant reserves the right to apply to the Italian Patent Office to be formally granted a compulsory license in accordance with the relevant provisions of Italian Patent Law".

At the request of Defendant, the Italian Ministry of Industry issued a Decree granting Defendant a royalty-free and non exclusive compulsory licence for five years as from December 16, 1985 to December 15, 1990. Claimant thereafter filed an arbitration requesting damages for breach of contract and payment of all amounts due under the contract until the expiration of the patent (i.e. December 16, 1990).

The arbitrability of Claimant's claims

Defendant contends that the Decree has completely disposed of Claimant's claim, leaving nothing for decision in this case. It therefore asks that the case be dismissed. Defendant is of the opinion that Article 84 of the Ordinance has vested in an administrative authority (the Ministry of Industry) the power of deciding whether a person is entitled to use the patent and in the affirmative, of issuing an administrative act in the form of a royalty-free license. No Court and a fortiori no arbitrator could replace the Ministry in the exercise of his administrative power.

Defendant adds that the Arbitral Tribunal has been requested to order Defendant to pay damages for breach of contract and to pay the amounts due under the agreement entered into with Claimant. Defendant states that if it has a valid free license, there is no breach; if not the breach is automatic. This means that the issue on the breach of the Agreement coincides, on the opinion of Defendant, with the determination of the rights of Defendants under Article 84 of the Ordinance, a subject which is not arbitrable. The right to use the patented invention arises from the Decree of the Ministry which has granted a free compulsory license. The dispute submitted to the Arbitral Tribunal therefore relates to rights of Defendant which do not originate from the Agreement nor concern its interpretation or performance nor "arise thereunder" (as provided in the arbitration clause).

The arbitrators have consequently no authority to decide that legal effects may derive from the existence or non-existence of the rights granted to Defendant by Article 84 of the Ordinance (right to obtain a license) or by Decree of the Ministry (right to use the patent under the license).

Defendant stresses in particular that in no event an Arbitral Tribunal could disregard the Decree of the Ministry of May 16, 1988. All that the Arbitral Tribunal could do is to take notice of the Decree of the Ministry and after having ascertained that the license is free of charge to state that Defendant cannot be in breach of contract. It is within these strict limits only that, according to Defendant, the dispute is arbitrable.

Claimant pointed out that the only issue that the Arbitral Tribunal has to determine is whether in the context of the Decree, Defendant has a continuing obligation under the contract to pay over to Claimant royalties collected from its customers. According to Claimant this question was not decided by the Ministry who only decided that Defendant was entitled to a license under article 84 of the Ordinance. The Ministry refrained from offering any interpretation of the Agreement since that power is expressly conferred on the arbitrators. Therefore Claimant considers that the arbitrators must exercise such power.

The Arbitral Tribunal will have to take into account that the Decree does not relieve Claimant of its contract obligations to pay over to Claimant royalties collected from its customers.

Claimant is further of the opinion that Defendant made a confusion between its entitlement to the Decree which was a matter for the Ministry to decide and Claimant's claim to the royalties provided by contract between the parties. For Claimant, the Arbitral Tribunal must consider how the Decree affects their dispute. The Decree itself requires to be interpreted and applied in the light of the Agreement. Claimant stresses that the questions before the arbitrators, presented in Claimant's Request for arbitration, are issues of contract application and interpretation, questions that the Decree did not address.

The main issue submitted to the Arbitral Tribunal is whether Defendant is entitled to discontinue the payment of the royalties contemplated in the Agreement and, in the negative, whether it should pay damages for breach of contract.

According to the arbitration clause included in the Agreement "any controversy or dispute concerning the interpretation or performance of this Agreement, and any questions arising hereunder which the parties are unable to resolve within a reasonable time, shall be submitted to arbitration under the rules of the International Chamber of Commerce". The payment of the royalties contemplated by the Agreement as well as a potential breach of contract for non-payment are matters which are related to the performance of this Agreement.

The Arbitral Tribunal cannot accept Defendant's contention that the dispute should not be arbitrable because "the issue on the breach of the agreement coincides with the determination of the right of Defendant under Article 84 of the Ordinance, a subject which in the opinion of Defendant is not arbitrable". This is a petitio principii. Defendant's conclusion that the dispute is not arbitrable has no other basis than its own view that the May 16, 1988 Decree has confirmed its right to discontinue the payment of royalties while it is precisely that view that Claimant challenges in front of the Arbitral Tribunal. As rightly stressed by Claimant, the question at stake is "whether, in the context of the Decree, Defendant has a continuing obligation under the contract to pay over to Claimant royalties collected from its customers". This question calls for interpretation of the contract, in light of all relevant elements of law and fact, including the May 16, 1988 Decree and the Arbitral Tribunal is empowered by the arbitration clause of the Agreement to make such an interpretation.

Moreover, as Claimant has expressly stated that it did not intend to take appeal from the Decree, the Arbitral Tribunal is in no way asked by any of the parties to decide whether Defendant was or was not entitled to a free compulsory license within the framework of Article 84 of the Ordinance, a question which would have fallen outside the scope of its jurisdiction. The May 16, 1988 Decree is one of the legal elements that the Arbitral Tribunal has to take into consideration in assessing Defendant's right to discontinue the payment of the contractual royalties but its very existence does not deprive the Arbitral Tribunal of its general power to interpret the Agreement and to decide disputes arising hereunder. As a matter of fact, Defendant does not really object to such conclusion since it recognized that the Arbitral Tribunal can "take notice of the Decree of the Ministry and (after having ascertained that the license is "gratuita", "gratuite", free of charge) states that Defendant cannot be in breach of its agreement with Claimant". This reveals that Defendant's purported objection to the arbitrability of the dispute is in reality an objection to one of the solutions that the Arbitral Tribunal could give to it. If the Arbitral Tribunal has jurisdiction to decide that Defendant cannot be in breach of the Agreement, it has also jurisdiction to take any other decision as to the existence of such breach.

For the above-mentioned reasons, the Arbitral Tribunal decides that the dispute submitted to it is arbitrable and that it has jurisdiction to decide whether Defendant is entitled to discontinue the payment of the contractual royalties and if, by discontinuing it, Defendant has breached the Agreement.'