March 3 - 4, 1994, Geneva, Switzerland
THE ARBITRABILITY OF INTELLECTUAL PROPERTY DISPUTES IN GERMANY
Dr. Jochen Pagenberg
Bardehle, Pagenberg, Dost, Altenburg,Frohwitter, Geissler & Partner
I. Introductory Remarks
In my presentation of German law and the experience with arbitration in the field of industrial and intellectual property I will refer primarily, as pars pro toto, to patent litigation as a demonstration subject. To a large extent this is due to the fact that the experience in our office in arbitration proceedings has been mainly in the field of patent law. Yet the reason is also that in this field most problems are encountered and the need for an international arbitration is much more urgent than in other fields like trademark or copyright law, where I also have some experience. To my mind, finding good and experienced patent arbitrators is more difficult than in any other field of law.
The special problems which arise in this field under German law concern first of all the separation between validity issues and infringement. In Germany validity issues are handled by the Federal Patent Court in the first instance and by the Federal Supreme Court as the second and final instance, infringement matters by the civil courts with special chambers which are competent at the first, second and third instance.
At this point, as a litigation lawyer who normally pleads before all the specialized patent chambers in Germany - the courts in Munich, Düsseldorf, Mannheim and Frankfurt are those most frequently called upon - one would generally be satisfied with the predictability and thus the quality of the German court system. Therefore, if clients ask whether including an arbitration clause in a purely national license agreement is recommendable, I personally would hesitate to answer in the affirmative.
This would also be the case for an agreement covering the European Union. If litigation becomes necessary, one would seldom attack in eight or ten countries but concentrate on two or three where the markets are most important for the parties. The fate of the license agreement before the courts there will then determine the outcome in the other countries, not by way of res judicata, but by "persuasion" towards reaching a settlement.
At this point you may have the impression that Dr. Bogsch has chosen the wrong speaker, one who undermines the new Arbitration Center before it has even started to function. But do not worry. After having spent a considerable amount of time in the preparatory discussions of the Working Group I am not going to torpedo the whole project.
Patent license agreements often have a much broader geographical scope than Europe, and if the prospect is to litigate on a parallel basis in the major world markets such as USA, Japan and a number of European countries, then arbitration is indeed the only alternative for a reasonable solution of a conflict.
I will later show that this mostly concerns conflicts on the basis of license agreements, not patent infringement litigation in general. If a company owns a strong patent and has worldwide interests and a sufficient turnover and profit margin, it will mostly prefer litigation to voluntary arbitration. We are presently handling a patent litigation case where actions will possibly be filed in 15 or even 30 countries. Although such a complex issue is already difficult to handle from an administrative point of view, the patentee prefers multiple litigation to a centralized arbitration procedure, since he does not want to grant a license under any circumstances. Individual actions avoid being placed at the mercy of one single, perhaps "arbitrary," view of an arbitration tribunal on questions of infringement and validity, with hundreds of millions of dollars of turnover or even profit at stake. Furthermore, with arbitration, one always needs two parties to renounce litigation, whereas there may be dozens of infringers worldwide who could only seldom be persuaded to agree voluntarily to come to Geneva.
II. Special Issues and Problems Under German law
1. Procedural Questions
a) Application of Code of Civil Procedure
In Germany the rules applying to arbitration are contained in the last part of the Code of Civil Procedure (ZPO), regulating formal requirements concerning the conclusion of an arbitration agreement, the appointment of arbitrators and the enforcement provisions of arbitration awards (§§ 1025 to 1048 ZPO).
An arbitration agreement can only cover subject matter which is at the disposal of the parties, i.e., which can be settled by the parties in a private settlement agreement (§ 1025 ZPO), and with respect to future disputes it must clearly define the legal relationship to which it shall apply (§ 1026 ZPO). The arbitration agreement must be concluded in writing, if it is outside a commercial relationship (§ 1027 ZPO). It is expressly laid down that a Court must dismiss a complaint as inadmissible in a dispute for which an arbitration clause has been concluded (§ 1027(a) ZPO). The Code also sets out rules for the appointment of arbitrators (§§ 1028 to 1032 ZPO) and in addition contains subsidiary rules for arbitration proceedings (§§ 1034 to 1039 ZPO).
A particularity under German law is the provision according to which, if the parties did not include a clause on the appointment of arbitrators, § 1028 ZPO applies by virtue of which each party can appoint one arbitrator, yet they have no right to appoint a chairman. If the two arbitrators cannot agree on a common proposal the arbitration contract will become invalid pursuant to § 1033 (2) ZPO, an early form of statutory mediation.
b) Execution Procedure
The most important provisions concern the effect of an award, which is described as being equivalent to a final court decision (§ 1040), and the possibilities of challenging the arbitration award and of enforcing the arbitration award (§§ 1041 and 1042). Any arbitration award, whether conducted in Germany under German law or issued as a so-called international award, needs an execution clause from a Court as a formal requirement for its enforcement (§§ 1042 and 1044 ZPO). In such an execution procedure the award has to pass screening under § 1041 ZPO by which the losing party can challenge its validity.
A barrier exists if the claim is blocked by issues of public order. An arbitration agreement is, e.g., regarded as invalid if it was entered into after the exercise of pressure or economic power by one of the parties, § 1025(2) ZPO. But antitrust law can also exclude an enforcement (1).
The challenge of an award issued under German law is slightly different from an international award. The invalidity reasons for German awards contained in § 1041 ZPO are the following:
1. If there was no valid arbitration clause or the arbitration process was inadmissible.
2. If the recognition of the award would be contrary to good morals or the public order.
3. If the party was not legally represented and did not consent to the proceedings.
4. If the right to be heard was violated.
5. If the award is not motivated.
6. If there are reasons under which a State court judgement could be challenged (action of restitution under § 580 ZPO based on newly discovered evidence).
With respect to international awards their execution can be challenged for the following reasons:
1. If the award is invalid, which must be decided under the rules applicable to the arbitration proceedings notwithstanding international treaties.
2. If the execution of the award would be contrary to good morals and public order, in particular, if one of the parties is ordered to execute in a manner which would be unlawful under German law.
3. If the party was not legally represented and did not consent to the proceedings.
4. If the right to be heard was violated.
The ground most frequently cited is § 1041(1) no. 2 or, in case of foreign awards, § 1044(2) no. 2 Code of Civil Procedure, namely that the award violates the public order. In such a case the execution of the award is refused.
German Courts are generally rather liberal with respect to the application of the execution rules. However, the mere existence of the legal possibility to challenge an award might constitute a hurdle for its enforcement and is often felt to hang over the heads of both the arbitrators and the parties, like the sword of Damocles.
Generally speaking, the view is that except for agreements between private parties, the invalidity of the main agreement does not lead to the invalidity of the arbitration clause or any jurisdiction clause, since one must assume from the intention of the parties that any conflict resulting from the agreement should fall under precisely this clause (2).
c) General Sales Conditions
The situation could be different if the clause is contained in general sales conditions of one party.
The Law on General Sales Conditions (AGBG) contains in § 9 a clause which protects the contract partner against unfair treatment. This provision is regarded as belonging to the public order. The reason behind this is that general sales conditions are not the result of negotiations between the parties, but are normally unilaterally forced upon the other side, often without appreciation of all legal consequences.
If arbitration clauses are applied in non-commercial relationships the Courts examine the details of the intended proceedings and require that:
- the choice of arbitrators ensures that they will be neutral;
- the right to be heard will not be or has not been violated;
- it remains the right of the parties to challenge the award in a case of evident errors (3).
This could then lead to time-consuming and costly litigation like in a recent case decided by the Federal Supreme Court (4). The arbitration tribunal had overlooked that a clause in the general sales conditions constituted a violation of § 9 AGBG, and the arbitration award was challenged by the losing party. It took three instances up to the Federal Supreme Court until it was decided that the arbitration clause was invalid. This meant that, in addition to the certainly not inexpensive arbitration proceedings and the three court instances concerning the enforcement of the award, the parties were faced with the possibility of another three instances before the ordinary Courts to decide the case on its merits.
This is not a totally exceptional situation, since in any important case where a lot of money is at stake, the parties will do everything to challenge from the outset the jurisdiction and arbitrability, the scope of the arbitration clause and, at a later stage, the enforcement of the award. The chances gained by investing slightly more money in litigation and to prevail thereby because a formality has been overlooked are often very tempting.
One conclusion which can be drawn from this situation is, therefore, that mistakes can be made long before any arbitration proceedings which cannot be solved even by the best arbitration institution, but they could at least partly be cured by good arbitrators who are familiar with such traps. This means that in the end an adept and efficient arbitration institution may still have some influence on a satisfactory outcome if it can offer experienced arbitrators.
d) Seat of the Arbitration Tribunal
Under German law the parties are free to chose the seat of the arbitration tribunal. If the arbitration procedure takes place in Germany, German procedural law is applicable. However, in contrast to many other laws, under German law, arbitration is regarded as being of a contractual nature, so that the parties are free to choose a law different from the seat of the tribunal. The choice of the applicable law then determines whether the arbitration award will be regarded as a German or an international award (5).
Although in theory the Courts are not competent to examine an award on its merits, in practice, through the possibility of challenging an award on the ground of a violation of public order, Courts have to examine the compatibility of the award with at least those laws considered to belong to the public order.
2. Special Considerations in the Field of Industrial Property
In spite of the special jurisdiction entrusted in Germany to the Patent Court in nullity proceedings, on the one hand, and to the patent chambers of the District Courts in patent infringement matters, it is undisputed that within certain limits, which will be discussed afterwards, an arbitration clause with respect to patent litigation is enforceable (6). Patent rights as such are assignable and can therefore be the subject of arbitration, and they can also be licensed (§ 15, Patent Act). It also goes without saying that a patentee can renounce his patent (§ 20, Patent Act). It is, therefore, the prevailing opinion that there are no limitations to the arbitrability of patent infringement matters (7).
Limitations exist however with respect to nullity proceedings (8). A typical case of violation of public order in patent law would be the declaration of nullity of a German patent. The jurisdiction of the Federal Patent Court concerning the invalidation of German patents is exclusive in the strict sense, since the granting act by the Patent Office constitutes an act of public authority, based on a substantive examination for patent validity. An arbitration award cannot replace a nullity decision of the Federal Patent Court, since the decision on the validity of patents is not at the disposal of the parties. However, this does not mean that the parties are bound and have to assume the validity of the patent claims, or more importantly, the wording and scope of the claims as they have been granted. Consequently, the parties could agree on a limitation of the patent claims and they could also agree that certain embodiments do not fall under the scope of patent protection.
Yet not only the invalidation of a patent would be a violation of the public order, but also the enforcement of a patent which in the common understanding of all parties must be regarded as invalid. Here antitrust rules would be violated, as already mentioned, another very powerful part of the German public order.
Some authors argue that the German courts cannot at their discretion declare a certain rule as being part of the public order. The rule should be that they can only refuse the enforcement of an arbitration award if they could also refuse an enforcement with respect to a foreign court judgement. In view of the territorial limitation of a patent monopoly, it is obvious that also a foreign court decision finding a German patent invalid would not be enforceable in Germany.
The arbitrators must be presumed to have a similar power as German infringement judges under the previous law, namely to treat the patent in suit as valid but, in view of a very close prior art reference not considered by the Patent Office, to limit the scope of protection of the claim to its very wording. The opposite constellation is also possible, namely that the invention is interpreted as a pioneer invention with considerably broadened protection beyond the terms of the claim.
If one draws a conclusion with respect to the outcome of patent litigation decided by arbitration, there is indeed inter partes no difference between the effect of an arbitration award and a decision handed down by the national courts. Although patent invalidation erga omnes is not possible, an alleged infringer can also prevail if the arbitration tribunal declares the patent as unenforceable or limited to the exact wording of the claims in view of identical prior art, so that the infringement must be denied.
3. Arbitration vs. Litigation in Industrial Property Law
What are in fact the advantages of arbitration proceedings where a plurality of patent laws would normally have to be taken into consideration, both with respect to the rules governing validity and to infringement and the scope of protection?
The normal situation for an arbitration clause in patent licensing agreements would be that a uniform law is made applicable to the entire license agreement, both with respect to the issue of inter partes validity and to infringement, and the result will bind the parties for all jurisdictions throughout the world. This sounds practical, but might turn out to be a two-sided coin. Those who have participated in the now almost ten-year battle for worldwide patent harmonization know how divergent validity rules and interpretation rules are all over the world. And probably they will remain different, even if the harmonization treaty will one day enter into force.
Such divergence gives both sides a chance if they litigate in a number of countries, to prevail in some and perhaps to lose in others. If the parties entrust an infringement case to arbitration, with the application of one uniform law on validity and infringement, the decision will be a clear "yes" or "no" as to validity, on the one hand, and as to infringement, on the other. A patentee, but also an infringer, will seldom take this risk. Arbitration will therefore be preferred in a case of patent infringement only with respect to the question of damages.
However, the impact of the applicable law is also evident with respect to a dispute between license partners, the primary field where arbitration occurs in patent matters. This explains why the question of jurisdiction and applicable law is often the subject of long debates in the conclusion of a license agreement, since a patentee would certainly be happy with a moderate standard of patentability and a broad scope of protection, whereas the licensee would certainly like to challenge the validity of the patent under the rules, for example, of the German Federal Patent Court.
To leave the choice of law in this field totally to the discretion of arbitrators may not always be a good idea, since this would make the outcome of arbitration proceedings unpredictable to a great extent; on the one hand, the level of patentability and the scope of protection could differ considerably between, for example, Japan and the United States or even Germany, and then the still unknown arbitrator, depending on his or her cultural background and patent law education, may apply the standard very subjectively which on the whole could lead to a surprise for both parties.
Again, this depends on the arbitration clause and the discretion that the arbitrators have under the arbitration agreement. I do not agree - as some authors seem to propose - that today, under a nearly worldwide common standard of prior art and the trend for harmonized requirements of novelty and inventive step, arbitrators have to decide the question of validity on the basis of each individual country where the patent is in force. The validity standard is much less divergent than the scope of protection. In my opinion, therefore, it would not be contrary to public order if the parties have agreed on a national law which should govern both issues, the question of infringement and the question of validity as well. I would even go so far as to argue that, if no clause on the applicable law is contained in the licensing agreement or the arbitration clause, the arbitrators would also be free to determine the applicable law, not only for infringement but also for validity questions.
It should not be forgotten, although I am speaking on behalf of the German practice, that EC rules, here the Group Exemption Regulations of the European Commission, have some monitoring effect, since the exemption granted for example for patent license agreements may be withdrawn under Article 9 of Regulation No. 2349/84, if the Commission finds that effects which are incompatible with Article 85(3) EEC Treaty arise from an arbitration award.
4. Experience with Arbitration in Germany
a) Advantages of Arbitration
One reason why arbitration and mediation clauses are included in important license agreements is the common interest of the parties not to endanger their long-term cooperation. It is often a safeguard for good faith behavior to know that, in case of disagreement, the parties need not go to court, which is generally regarded as a hostile act, but to a more peaceful type of dispute negotiation.
The additional advantage of arbitration clauses is that trade secrets can be sheltered against third parties. Finally, the parties can expect, and this applies primarily to a three-person Tribunal, but also to one single chairman, to have at least one judge on the bench whom they trust with respect to his competence, skill and, in most cases, neutrality.
In this context it must be noted that non-lawyers in particular always fear that, if they have to litigate in foreign countries, the judges will be biased against foreigners. Although I have never seen statistics in this respect, and especially not international statistics, I regard this fear to be totally unfounded, although I can only speak here for the patent chambers in Germany which I know.
b) Predictability and the Role of Arbitrators
In spite of the advantages of choosing at least one of the judges on the arbitration bench, it cannot be overlooked, as already mentioned, that the predictability for the parties with respect to the general attitude as to the standard of patentability or the scope of protection in a patent litigation case may be much less than if, with the help of their local attorneys, they choose litigation in a particular country and before a particular court.
An attorney with sufficient litigation experience knows whether his local court or any other court in his country generally has a positive attitude towards patents, which means validity and scope of protection, or whether the court is hostile and good for negative surprises. In arbitration proceedings none of the parties knows in advance the panel which will finally be established. In particular, with respect to the chairman, it can never be anticipated who will finally be chosen.
Because of the decisive role played by the chairman one remark may be added at this point with respect to the hesitation of unexperienced attorneys to recommend arbitration: experienced attorneys, for the very reasons stated before, are also not especially eager to get trapped by an unforeseeable choice of a chairman.
This somewhat cautious opinion may just be the result of the insufficiency of statistics. Having litigated hundreds of cases before the civil courts in patent, trademark and copyright law over the past 20 years, the number of cases in which arbitration was conducted up to the end is not more than ten. This may be a surprise especially for American practitioners for whom arbitration has for a long time been an alternative more frequently adopted, due to the high costs of patent litigation.
In Germany where one finds a high degree of predictability in patent litigation - if one takes the case law of the German Supreme Court as a basis - the only real uncertainty is an expert opinion which one must expect in 50% of the cases in infringement proceedings and in 100% of the nullity suits before the Supreme Court. This has to be weighed against the uncertainty of the attitude of an as yet unfamiliar arbitration tribunal. My experience is that the degree of unpredictability is higher with arbitration, because, in addition to the unknown attitude of the tribunal, one must often expect an expert opinion there as well.
This general preference for court litigation in cases of "real" disputes is particularly valid with respect to industrial property law, where the plaintiff can usually decide to sue in countries with a large amount of case law which is the basis for legal certainty. The situation is totally different in the case of international construction contracts of which 99% would probably never be concluded if the contractor had to fear calling on a local judge in order to get payment for the work performed.
The past dissatisfaction which has resulted in a certain hesitation on my part to recommend arbitration unconditionally in the field of industrial property litigation is, not surprisingly, the reason why I have welcomed the WIPO initiative, the successful completion of which we inaugurate today.
While we have an internationally reputed number of arbitration experts in Germany in all kinds of commercial disputes, comparable expertise and practical experience is practically non-existent in the field of industrial property law. We certainly have a large number of highly competent patent practitioners, but few of them have arbitration experience, and it is even more complicated to find out about their arbitration qualification. My own conclusion in this respect is that the more satisfactory the court system works in a particular field and in a particular country, the lower the number of arbitration disputes will be and the less experience practitioners will have to conduct arbitration.
c) Legal or Technical Arbitrators
In some particular areas like construction, some chambers of commerce in Germany have started to do what WIPO is also planning, namely to compile lists of arbitrators with special experience in this field. Such lists are often divided into technical experts and lawyers. The only complaints voiced so far have been that such lists were not regularly updated and that some chambers of commerce did not cross-check the experience of those named by neutral institutions. How this problem will be handled by WIPO must still be seen.
Technical arbitrators have however always been regarded with some hesitation, except for a mediation procedure or, in certain cases, as sole arbitrators. In a complex case where a three-person arbitration tribunal is to be appointed, it is usually preferable that the chairman be able do deal with two lawyers and that technical questions be resolved by an expert opinion (9).
A comparison between the working methods of an arbitration tribunal and the working attitude of arbitrators with an ordinary court can often result in a positive view with respect to speed and interest in the case. The two arbitrators appointed by the parties certainly try to compete with each other with respect to their knowledge of the case, whereas in the ordinary courts as a rule only the reporting judge and, to a certain extent, the presiding judge are familiar with the case. However, the fact that an arbitration award will seldom be challenged as to its merits, whereas a court judgement is always subject to appeal, can often influence the attitude of the arbitration tribunal with respect to taking evidence and to the reasoning of their award.
d) Evidence Procedure
German law has a special procedure for securing evidence in urgent matters, pursuant to § 485 ZPO, which can only be ordered by a judge. In the field of industrial property law such a procedure would be appropriate if a very expensive machine is exhibited during a fair, which is regarded as infringing. In such a case one would assume that the arbitration clause would not hinder this evidence being taken through the competent court. The court would appoint a technical expert who would visit the machine and answer specific questions which have been posed by the court.
e) Mediation and Conciliation
It is interesting that the voluntary conciliation procedure which is laid down, for example in the ICC rules, has found very little response in German practice.
However, this does not mean that it must be regarded as superfluous, since we have had situations where it was applied quite successfully. Both parties possessed a large patent portfolio and had accused each other of patent infringement. Extensive technical and legal opinions of their counsels and patent attorneys had been exchanged and both sides had made enormous efforts to come to a common understanding about the relevance of the largely contradictory results. What they needed was a neutral view on the validity and infringement issues to pave the way for a satisfactory settlement and the terms of such an agreement.
The alternative, namely a law suit or also a contradictory arbitration procedure, would have taken up both too much time and personal and financial effort so that it would have been counter-productive. In such situations the parties wish to know whether they can start or continue manufacturing their respective products without fearing an injunction and/or vast amounts of damages. They are therefore more interested in a fair estimation of the value of their respective patents than in giving up their own positions for free or at an unreasonable price.
The fact that such an opinion is not binding even facilitates the agreement on such proceedings, since each party can still withdraw if the proposal seems to be totally unbalanced.
Under the general heading of conciliation or mediation, different types of proceedings can be identified which also include the so-called arbitration opinion which is specifically regulated in the German Code as an arbitration without a binding award. It is up to the parties to decide on the tasks of the mediator, whether he should only be a neutral person to further their own negotiations, whether he should prepare an opinion with or without reasons, and whether, in case of disagreement, he later should become the arbitrator whose decision will be binding upon the parties.
Permit me to make some remarks with respect to the expense of arbitration proceedings. Before the ordinary courts the court fees, just as the attorney's fees, are determined by the litigation value, and the same procedure is normally adopted by arbitration tribunals in Germany. Taking into account the calculation practice of the fees awarded to arbitrators, arbitration proceedings normally cost more than two litigation instances before the civil courts.
However, since for court proceedings the two instances for the representing attorneys must also be added, whereas the arbitration proceeding only has one instance, the fees may be equal, whereas three instances before the normal courts are of course considerably more expensive. Cheaper by far is a settlement concluded before a normal court in the second instance after a full first instance, in comparison to a settlement before an arbitration tribunal which normally costs twice that amount, since the arbitrators charge an additional settlement fee.
g) Formalities in Case of Settlement
With respect to a settlement it should be mentioned that under German law the party which has to fulfill the settlement obligation must accept immediate execution into its whole property, otherwise such a settlement, although valid, cannot be executed before the courts and therefore would require an additional action before the civil courts, if it is not fulfilled voluntarily. While before the normal courts a settlement is generally included into the hearing protocol of the Court which can be executed immediately, this additional formality is often forgotten in arbitration proceedings and is therefore mentioned here as a German peculiarity (10).
Another possibility is to draft the settlement in the form of an arbitration award as foreseen in the ICC rules, which means it is enforceable before the German courts. Such an award of course does not need a reasoning.
It may be interesting to know some figures on the practice of arbitration procedures.
Estimations in the literature mention that only two out of 1,000 agreements with arbitration clauses will ever reach the stage of arbitration, which is of course extremely difficult to verify. But it can certainly be assumed that an arbitration clause has a peace-keeping effect if only for the already mentioned reason that not only in the field of industrial property law, but also in other fields of law, attorneys have much more experience in litigation before the courts than in arbitration proceedings. They therefore prefer any pre-trial settlement to a formal arbitration procedure.
Of the two per thousand arbitration proceedings, 50% are settled in negotiations. Of the other 50% in which an award is issued, 90% never reach the stage of enforcement, because the losing party complies with the award (11).
6. See Schweyer, Patentnichtigkeit und Patentverletzung und deren Beurteilung durch internationale private Schiedsgerichte nach dem Recht der Schweiz, Deutschlands, Italiens und Frankreichs, p. 115 with references to case law and literature. Benkard/Rogge, § 143 PatG, note 13, expressly confirm that the agreement to refer a patent litigation to an arbitration Tribunal does not violate § 143 governing the exclusive jurisdiction of special patent chambers in Germany.
8. Schlosser, Das Recht der internationalen privaten Schiedsgerichtsbarkeit, Volume 1 no. 318; Chrociel, Gewerbliche Schutzrechte als Gegenstand eines Schiedsverfahrens, Festschrift für Preu (1988), S. 177, 190.