China: Arbitrability Of Disputes For Technology License Agreement

Introduction

Many technology license agreements include an arbitration clause which typically uses language such as "any dispute arising out of or relating to this agreement are subject to arbitration" or alike. Will this clause cover all the disputes, or must some be tried in court? And who decides such questions: an arbitrator or a court?

1. Trade Secret disputes

Chinese courts have found trade secret claims were arbitrable under the above general arbitration clause where the alleged trade secret theft was related to the license agreement.

In Dalian Institute of Chemical Physics (DICP), Chinese Academy of Sciences v. Chia Tai Energy Materials (Dalian) Co., Ltd. (Supreme People's Court, 2021), the agreement involved a license from DICP to Chia Tai for use of DICP's trade secrets and patents. After the agreement was terminated, Chia Tai continued to use the trade secrets and confidential information obtained from DICP under the terms of the parties' licensing agreement. DICP then filed a lawsuit claiming misappropriation of trade secrets. Chia Tai moved to dismiss, contending that the agreement compels arbitration.

The arbitration clause in the parties' licensing agreement provides that "disputes arising out of the performance of this contract shall be settled by arbitration." The court considered two key factors in determining whether the dispute was subject to arbitration. First, it found that the alleged trade secret theft would not have arisen but for the parties' licensing agreement, as both parties agreed that the licensee obtained the trade secrets via the license agreement. Second, it noted that the defendant's continuing use of DICP's trade secrets after termination of the agreement would constitute a breach of the licensing and nondisclosure agreements.

Therefore, the court held that both factors favor finding the dispute to be covered by the "arising out of" language, and accordingly, dismissed DICP's trade secret assertion.

Similarly, in IWNComm v. Apple (Beijing High Court, 2022), a trade secret claim was found to be arbitrable under the arbitration clause in a patent license agreement. IWNComm sued Apple for violation of trade secrets protection by providing its license agreement with IWNComm to Sony. There, the court concluded that both the "but for" and "breach of contract" elements were met. It found that the claimed trade secret was the license agreement itself, which was disclosed by Apple to Sony pursuant to a U.S. court's discovery order. It further found that the agreement provides that "any dispute arising out of or relating to this Agreement shall be referred to the Hong Kong International Arbitration Center (HKIAC) for arbitration" and that "any breach of the confidentiality clause shall constitute a material breach of the license agreement." Hence, the court ruled that such a dispute shall be subject to arbitration and therefore dismissed the plaintiff's lawsuit.

2. Patent Infringement claims

Two companies entered into a patent license agreement and the license agreement was terminated or expired, and the licensee refused to pay royalty fee or renew the license for further use of the patent, so the patentee sued for patent infringement. Is the patent infringement dispute arbitrable based on a general arbitration provision?

There are no reported decisions in China addressing whether this issue arises out of a license agreement. If a court takes the same approach-considering the "but for" and "breach of contract" factors as the DICP and IWNComm cases did, it would likely conclude that the scope and infringement of underlying patents do not arise out of or relate to the license agreement because the accused infringer could obtain the patented technology from public access, not necessarily via the license agreement, and patent infringement is generally not regarded as a breach of the license agreement. In IWNComm v. Apple (Shan'xi High Court), after the patent license agreement with Apple expired in 2014 and no renewal was agreed upon, IWNComm sued Apple for patent infringement in 2016. This lawsuit is currently pending trial, indicating that neither party had argued that the patent infringement claim was within the scope of the arbitration clause in the parties' license agreement.

3. Antitrust claims

As to antitrust claims, Chinese courts have found that antitrust claims were not arbitrable given the public law nature of China's Antimonopoly Law (AML) and the public interests implications.

The Supreme People's Court (SPC) in Huili v. Shell (2019) and Yoozoo v. Disney (2022) ruled that arbitration clauses cannot preclude the courts' jurisdiction over antitrust disputes involving monopoly agreements. It reasoned that:

As such, the SPC denied the defendant's request for arbitration.

4. FRAND Rate

It is generally agreed among Chinese scholars that disputes as to the determination of fair, reasonable and non- discriminatory (FRAND) terms for the licensing of standard-essential patents (SEP) can be resolved through arbitration, if both sides agree to arbitrate disputes about what the FRAND rate should be. There are, however, no published decisions in China addressing whether FRAND disputes in SEP licensing are covered under a general clause "arising out of" or "relating to".

We have identified an article from "China Intellectual Property News" which reported that the Beijing High Court in 2020 had allowed arbitration of FRAND disputes under a clause using "arising out of or relating to" language. According to the report, IWNComm owned a WLAN Authentication and Privacy Infrastructure (WAPI)-related SEP, and in 2016 Apple brought an action on its WAPI SEP royalty dispute with IWNComm in the Beijing IP Court, asking the court to determine a FRAND royalty rate of the WAPI SEP. On appeal, this action was dismissed by the Beijing High Court on the ground that the FRAND dispute-in-suit was covered by the broadly worded arbitration clause "arising out of or relating to" which required the parties to refer the FRAND claims to the arbitrators.

Conclusion

Our observations are summarized as follows:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.