Arbitrability of related claims concerning alleged patent infringement and breach of license agreement / Interaction of Japanese law governing contract and West German law applicable to patent issues / Application of Japanese legal principle favouring arbitration, resulting in broad interpretation of parties' arbitration clause / Ability of parties to define scope of Arbitral Tribunal's jurisdiction / Patent infringement claims held arbitrable inter partes / Inapplicability of arbitrators' decision to third parties' rights; inability of arbitrators to declare patent invalid erga omnes under German law / Patent holder's rights to enter into agreements concerning exploitation of the patent

The dispute between Claimant (a Japanese company) and Defendant (a company incorporated in the FRG) arose in connection with two licensing contracts for the exploitation of industrial patents owned by Defendant. The arbitration clause relating to these contracts provided that:

'All disputes, controversies or differences which may arise between the parties hereto, out of or in relations to or in connection with this Agreement, or for the breach thereof, shall be finally settled by arbitration pursuant to the Rules of Conciliation and Arbitration of the International Chamber of Commerce in Paris. The award of the Court of Arbitration shall be final and binding.'

In the Terms of Reference, the parties affirmed that the arbitrators had been nominated and confirmed according to the ICC Rules. They also affirmed that they had drafted a valid arbitration clause and selected Zurich as the seat of the arbitration and the site of any hearings. Furthermore, they agreed that their contract should be interpreted according to Japanese law, and that the laws in force in the Federal Republic of Germany should be applied with respect to the alleged infringement of industrial property rights and any resulting legal and contractual consequences. They also agreed that the arbitral procedure would be governed by the Swiss Concordat.

'The Arbitral Tribunal also has jurisdiction to rule on claims based on the infringement of patents since these are grounded in facts alleged by Claimant and already set out above. As already mentioned, the parties did not restrict the jurisdiction of the Arbitral Tribunal to certain limited questions of law, but rather submitted for decision their respective positions as to certain facts underlying their dispute, as listed in the arbitration clause. Thus, as regards a factual situation alleged by Claimant which presents itself as a dispute arising directly or indirectly from the contract, the intent of the parties is that such a case be considered in its entirety by the Arbitral Tribunal. The question of determining the precise legal grounds on which claims arising from such a situation can be based does not affect the jurisdiction of the Arbitral Tribunal. It would be contrary to the meaning and purpose of these arbitral proceedings to divide jurisdiction according to the different legal aspects of a single alleged factual situation and to declare that the Arbitral Tribunal would only have jurisdiction over claims based on breach of contract while national courts would have jurisdiction over claims grounded in law (such as those alleging patent infringement).

Such a bifurcation of jurisdiction would, in particular, contradict the common intent expressed by both parties in the arbitration clause. In listing the disputes to be submitted to the Arbitral Tribunal, the parties indicated that they wished it to consider a very wide range of claims. They even went so far as to call upon the Arbitral Tribunal to settle not only actual disputes but also "controversies" and other "differences", even if these are only indirectly related to the contract. The arbitration clause thus has a very broad scope. This being so, any causal link between the dispute or the difference alleged and the 1981 and 1986 contracts is a sufficient basis for the Arbitral Tribunal's jurisdiction. This very broad provision has its origin in a principle of Japanese law, which favours arbitration over recourse to the national courts in the settlement of disputes (see Raidl, "Vertragsrecht und Vertragswirklichkeit in Japan", Zeitschrift für Rechtsvergleichung, 1977, 180, 1985 s). Takeyoshi Kawashima expresses this concept in the following words: ". . . when problems arise, it is far better to discuss the problem in good faith, to calm overheated spirits and to seek a harmonious solution" . . . "the parties prefer to reach an amicable settlement, a solution that is also recognized in Japanese law and frequently made use of". ("Vertragliches Rechtsbewusstsein in Japan", Schriftenreihe Grundprobleme des Privatrechts, a Japanese publication in German, published by Gottfried Baumgürtel, Ed. Carl Heymanns, 1985, pp. 119 to 122). On the law and legal principles in Japan, Rahn writes (GRUR Int. 1979, 491, 497): "Thus, even if they scrupulously comply with legal formalities, the Japanese currently have a tendency to leave the law aside and to settle their private problems personally. Even in business, legal relations are often merged into broader personal relations. . . . The merging of business contracts with private relationships makes it possible for the parties not to be tied by rigid rules and to adapt flexibly to changes in circumstances." In his expert opinion, relied upon by Claimant, X reaches the conclusion that, given the presence of an arbitration clause, a division of legal claims between national courts and arbitral tribunals based on a distinction between those allegations flowing from a licensing agreement and those claims related to possible patent infringement "would only lead to the devaluation and rejection of the social function of arbitral proceedings and would be contrary to the fundamental purpose of the law, which is to promote, wherever possible, the settlement of disputes by means of a procedure based on an agreement between the parties concerned. The law clearly states that even if a party invokes such a division of jurisdiction, the arbitrators are authorised to proceed with the arbitration and to render an award (Code of Civil Procedure, Art. 797)."

By adding to these considerations the principle of good faith and fair dealing which appears in § 1 subpara. 2 of the Japanese Civil Code and exhibits a close resemblance to German law (see Masamichi Okuda, "Civil Law and Civil Case Law in Japan since the Introduction of European Legal Principles in the 19th Century", Schriftenreihe Grundprobleme des Privatrechts, op.cit., pp. 1 et seq.), it follows that in the present case, keeping in mind the Japanese legal principle described above, the parties have given the Arbitral Tribunal broad jurisdiction, as the very wording of the arbitration clause clearly shows. The parties have thus agreed that the Arbitral Tribunal is equally competent to rule on claims based on alleged patent infringements brought by the Claimant on the basis of the same facts, and which, in the Claimant's eyes, also amount to a breach of contract. This is a dispute arising out of or, at very least, linked to the contract ("in connection with the Agreements"). The intent of the parties to resolve disputes concerning alleged infringement of the patents through arbitration is apparent in the obligation undertaken by Defendant in the 1981 Contract cited above, in which it agreed to use Claimant's patents only within a framework defined by the Claimant and not to involve itself in areas beyond those covered by the license agreement. Such a provision can be explained by Claimant's commitments visà;vis other licensees, and noncompliance with this clause gives rise to a typical dispute between contract partners. However, given that a violation of the subject matter and territorial restrictions on the right to exploit a patent may be construed as a patent infringement as well as a breach of contract, according to accepted patent law principles (as provided in the German law of 1981 on patents, § 15 subpara. 2, 2nd sentence), it should be accepted that the Arbitral Tribunal has jurisdiction to rule on the validity of purported infringements of patents that are based on the factual situation alleged by Claimant.

The contractual claims which are the subject matter of the present arbitral proceedings, namely those arising from an alleged breach of contract and those based on alleged infringements of Claimant's patents, are objectively capable of submission to arbitration within the meaning of Article 5 of the Swiss Concordat on arbitral jurisdiction. The parties are thus as free to rely on such claims as they would be if a suit based on them had been filed in a national court.

This question should be considered in light of the substantive law applicable to the arbitration clause (Rüede/Hadenfeldt, Schweizerisches Schiedsgerichtsrecht, 1980, § II, 3 a; Pfaff, "Grenzbewegungen der Schiedsfähigkeit - Patentnichtigkeit im Schiedsverfahren", Festschrift für Nagel,1987, pp. 278 et seq., 281). Pursuant to the parties' agreement, Japanese law is applicable to contractual issues and West German law to patent issues. With regard to the disputes covered by the arbitration clause, neither of the two applicable national laws restricts the parties' power to submit such matters to arbitration, nor does either grant sole jurisdiction over such disputes to national courts of law.

Claims based on alleged patent infringements are no exception to this rule. Under German law, the parties are free to decide how such disputes should be resolved, including the possibility of settling such claims by means of a private arrangement, as long as such arrangement does not violate competition law. The validity of arbitral jurisdiction over patent infringement cases is generally accepted under German law (see e.g., BGHZ 3, 193 Tauchpumpe; Chrocziel, "Gewerbliche Schutzrechte als Gegenstand eines Schiedsverfahrens" in Festschrift für Albert Preu, pp. 177-190; Schweyer, "Patentnichtigkeit und Patentverletzung und deren Beurteilung durch internationale private Schiedsgerichte nach dem Recht des Schweiz, Deutschlands, Italiens und Frankreichs" in Rechtswissenschaftliche Forschung und Entwicklung, published by von Lehmann, vol. 15, 1981, p. 114; Benkard, PatG/GebrMG, 8. ed., § 14 Rn. 133; Reimer, PatG GebrMG, 33. ed., § 51, no. 96, 104).

Within the framework of its interpretation of the arbitration clause presented, the Arbitral Tribunal decides, that in light of the Japanese legal principle described above, it has also been empowered by the parties to consider the claims concerning the legal validity of the patents referred to by Claimant that the Defendant has put forward within the context of its defence. For the sake of legal certainty, the parties agreed to authorize the Arbitral Tribunal to also settle this issue in this interim award. They had the right to grant such jurisdiction to the Arbitral Tribunal under Article 11 of the ICC Rules of Arbitration and Articles 1 para. 2 and 24 para. 1 of the Swiss Concordat on arbitral jurisdiction.

Given the preponderance of the legal principle discussed above and the general rejection of contentious means of dispute resolution in Japan (See Raidl, Kaweshima and Rahn, previously cited) as well as the opinion of Y [Japanese expert] on the arbitration clause, the Arbitral Tribunal is led to the conclusion that this clause should be interpreted broadly, in accordance with the Japanese legal principle. According to Y (above mentioned opinion), all disputes arising in connection with the contract should be resolved in the arbitral award, as the arbitrators are free "to apply a wide range of logical principles". The Arbitral Tribunal infers from Y's analysis, and in light of the abovementioned doctrine, that the arbitration clause also encompasses the Defendant's defenses, which are directly related to the licensing agreement, and Claimant's allegations that arise "in connection with the agreement". It goes without saying that the Arbitral Tribunal must take into account all of Defendant's allegations insofar as it has jurisdiction to rule on Claimant's claims. But here we are faced with a special case, since Defendant argues that at the time of registration, the technical training on which patent X001 was based could not be validly be protected because of its insufficient novelty, and that Claimant cannot therefore assert any claim for that patent's infringement. Under German law, which is applicable to this question, a patent must be recognized as valid unless it has been declared null and void by the Federal Patent Court or the Federal Supreme Court. In the absence of such a declaration, no party can assert the invalidity of a patent. Even a court called upon to resolve claims arising from such a patent must assume its validity. Given this West German legal doctrine, the defense advanced by the Defendant would not be considered in a lawsuit on patent infringement before an ordinary West German court; in such a case the court would advise the Defendant to bring a separate action seeking to declare the patent invalid.

Nevertheless, the situation in this case is different. In light of the Japanese legal principle discussed above, which is decisive for the interpretation of the arbitration clause, the parties sought to confer broad jurisdiction upon the Arbitral Tribunal. Their common intent was, as stated in the clause, that the Arbitral Award should be "final and binding" (see also Art. 24(1) of the ICC Rules of Arbitration). By using these words they meant not only that the decision should be formally definitive, but also and above all, keeping in mind the Japanese legal principle, that all disputes in connection with the 1981 and 1986 contracts should be resolved in the arbitral proceeding, to the exclusion of any litigation. This interpretation implies that the parties intended to exclude the possibility that the Arbitral Tribunal would have to stay its proceedings to allow the Defendant to bring an action to declare the patent invalid before the Federal Patent Court in Munich. Such parallel proceedings before arbitral and judicial tribunals would be contrary to both the intent of the parties, as expressed in the arbitration clause, and the Japanese legal principle favouring arbitration, since experience tells us that they would delay the outcome of the arbitral proceedings by five years or more. It would be unacceptable to leave the parties in a state of uncertainty with regard to the outcome of the dispute for that long and such a delay would prejudice their legal rights. Such a result would be in obvious contradiction with the meaning and the purpose of these arbitral proceedings and arbitration generally. . . .

That is why the Arbitral Tribunal is convinced that the parties, in light of circumstances and of the Japanese conception of arbitration clauses and arbitral proceedings, have clearly given it complete jurisdiction to rule on Defendant's objections to the legal validity of Claimant's patents. In order to eliminate any remaining doubt, it should be specified that this power to decide does not affect the formal validity of the patent registered in West Germany by means of a sovereign governmental act, and that it will carry no consequences visà;vis third parties.

By allocating it this jurisdiction, the parties wanted to give the Arbitral Tribunal, in accordance with the meaning and purpose of arbitral proceedings, the possibility to settle this dispute inter partes in a simple, quick and definitive way.

This agreement between the parties can also be submitted to arbitration within the meaning of Article 5 of the Swiss Concordat on arbitral proceedings, since Claimant, as owner of the patents, is free to make use of its material rights to the patents and thus to enter into agreements in this regard, including those involving a commercial exchange. Confirmation of the protectability of the material covered by the patents, insofar as this is being questioned by Defendant, is a necessary first step in the process in light of the above-mentioned considerations, insofar as the legal underpinnings of Claimant's allegations must be determined before a decision on their merits can be made. The existence of the rights on which Claimant has based its allegations should thus be confirmed by the Arbitral Tribunal, either on its own motion or in response to Defendant's reasoned request. It is true that in the case of patents one must keep in mind the principle noted above, by which only a national court having jurisdiction over the matter can invalidate a patent erga omnes. Nonetheless, this principle cannot be relied on to allow a defendant in arbitral proceedings to challenge the underlying validity of the patent asserted by a claimant, without having to bring an action seeking to declare the patent invalid before a competent national court. That is why in some countries, such as Switzerland and the United States, arbitrators are allowed to rule, even explicitly, on the possible invalidity of a patent. But the Arbitral Tribunal in this case does not claim such jurisdiction for itself.

As we have noted, it is well established under German substantive law (cf. Pfaff, op. cit.; Schweyer, op. cit. pp. 116-137 et seq.; Schlosser op. cit. no. 318; Chrocziel op. cit. p. 191) that it is not possible for the parties to empower an Arbitral Tribunal to invalidate a patent. However, a growing number of leading scholars have challenged this restrictive principle in the literature, arguing that it can no longer be supported and that it is therefore acceptable for an Arbitral Tribunal to rule on the validity, as between the parties to an arbitration, of a patent invoked by a claimant (Pfaff, op. cit. pp.186 et seq.; Schlosser, op. cit. no. 319; also Festschrift für Bühlow, pp. 192-193 and Festschrift für Fasching, p. 432 and sources cited therein; Chrocziel, op. cit. pp. 192 et seq.; Schweyer, op. cit. pp. 116, 117, 192 et seq.). The Arbitral Tribunal in this case shares this view, but as already made clear, it in no way claims such jurisdiction; it merely believes itself to be entitled to confirm whether the Claimant can substantiate the allegations based on its patents despite Defendant's objections, or whether Defendant can prove that the material covered by the patents in question was not in fact patentable (for a similar argument, see Stauder, "Gerichtliche Zustständigkeit für Klagen aus ausländischen Patenten", in Gewerblicher Rechtsschutz Urheberrecht Wirtschaftsrecht, Mitarbeiterschrift für Eugen Ulmer, Cologne, pp. 197, 509 et seq., 514 and sources cited therein). The Arbitral Tribunal believes that the parties have entrusted it with the task of examining this issue by using their right to enter into an agreement as to the extent of the protection provided by a patent. In West Germany, The Federal Supreme Court has recognized (cf. BGH GRUR 1962, 294 Hafendrehkran; cf. also BGH GRUR 1979, 309 et seq. Auspuffkanal für Schaltgase with note by Eisenführ pp. 312-313 Benkard op. cit. § 81 p. 333, and sources cited therein) that the rights flowing from a patent can be the subject of a commercial transaction and thus of a contract. In a dispute concerning the infringement or invalidity of a patent, the owner of the patent at issue may wholly or partially waive its rights against the other party; it may also undertake to make this waiver or restriction known to the Patent Office; transfer the right to exploit the patent to the other party either in exchange for payment or free of charge; commit itself not to exercise all or part of its rights; sell the patent in whole or in part; assign its total or partial rights to the patents exploitation to a third party, or give it as security. The patent holder is thus free to transfer his material rights under a patent to the same degree as those to any other property. Under German law, only decisions concerning the formal validity of a patent are subject to the jurisdiction of a specific national court. Consequently, the right to contractually transfer (a commercial transaction is also a contract) legal rights under a patent can be used by the parties to an arbitration, in that they may decide to assign this contractual power to the Arbitral Tribunal. In principle, therefore, there is no legal obstacle that bars an Arbitral Tribunal, thus empowered by the parties, to rule, as a preliminary matter, on the material validity of a patent.

Consequently, the Arbitral Tribunal is of the opinion that, pursuant to the agreement by which it has been given jurisdiction, it can arbitrate the issue raised by Defendant's challenge to the material validity of intellectual property rights invoked by Claimant, and issue a ruling on this question that is binding inter partes.'