AGREEMENT ON INTERNATIONAL JURISDICTION IN PATENT LICENSE AGREEMENTS

05/01/2012

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On 29 March 2012, the Supreme Court made a ruling (2012-TaiKan-259) in a lawsuit filed by the licensee of a patent license agreement, wherein the plaintiff requested the court to "confirm the non-existence of royalty liabilities." The Supreme Court sustained the opinion of the IP Court, stating that Taiwan shall still have jurisdiction despite an agreement on international jurisdiction in the license agreement.

The plaintiff of this case is a Taiwanese company (Company A) that had signed a patent license agreement with a Japanese patent owner (Company B) in July 2007. Company B agreed to waive liability for patent infringement by Company A and granted Company A non-exclusive licenses in the U.S., Germany, and Japan with respect to certain patents. They also agreed that Company A was to make royalty payments shortly after the agreement took effect and on 31 December of 2007, 2008, and 2009. Company A initially paid royalties in accordance with the agreement. However, after transferring related business and assets to another Taiwanese company (Company C) in April 2008, it notified Company B, the patent owner, that it was no longer obligated to pay royalties as of 2009 due to transfer of its rights and obligations. Later, a Company D registered in Luxemburg filed a case against Company A with the US District Court for the Northern District of California in May 2010 to claim a US$ 5.4 million royalty on the ground that Company B had transferred to it all the rights under the said patent license agreement. Company A then filed with the Taiwan IP Court a case against Company D in September 2010 for confirmation of non-existence of Company D's royalty claim for US$ 5.4 million.

Company D referred to Article 9.6 of the patent license agreement between Company A and Company B, which reads: "Any United States District Court will have jurisdiction over any claim or controversy arising under or in relation to this Agreement." It argued that there was an agreement on international jurisdiction between the parties to appoint a district court in the U.S. as the competent court and hence the IP Court had no jurisdiction over the case.

In Company D's actions against Company A filed in the U.S., Company A counter-argued that the federal district court had no jurisdiction; Company D responded by withdrawing the case from the United States District Court for the Northern District of California in September 2010 and filed the same case with the Superior Court of the State of California, County of San Francisco on the same day. In January 2011, the aforementioned state court approved a request from Company A for suspension of action and stated that "California has little interest in this case which involves foreign companies. The evidence shows there are numerous witnesses and almost all of them are out of State. Taiwan is a suitable alternative forum." Given the above, if the Taiwan IP Court lacked jurisdiction as well, the case would be left in limbo with no court having jurisdiction.

In respect of this issue, the opinions of the IP Court were varied.

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The first instance: Ruling 2010-MinZhuanSu-212 (24 August 2011)

The first instance of the IP Court ruled that Taiwanese courts had no jurisdiction over Company A's case and accordingly declined to hear it. This ruling was made mainly based on Paragraph b, Article 3 of the Convention on Choice of Court Agreements established by the Hague Conference on Private International Law on 30 June 2005 and Article 2: 301 (1) of the Principles on Conflict of Laws in Intellectual Property drafted by the European Max-Planck Group for Conflict of Laws in Intellectual Property on 25 March 2011 (Note: The final text was completed 1 December 2011), holding that unless the parties agreed expressly otherwise in the international jurisdiction clause, the agreed competent court shall be deemed as having exclusive jurisdiction. Since the relevant license agreement did not expressly stipulate whether the courts of the U.S. have exclusive jurisdiction, the U.S. courts shall be deemed to have exclusive jurisdiction. Consequently, Taiwanese courts shall have no jurisdiction over the disputes that arose over the license agreement at issue.

Furthermore, the IP Court stated in the aforementioned ruling that: Taiwan is not the location of performance of the license agreement at issue, and the plaintiff also denied its alleged status as debtor to the defendant; hence, Article 12 (Court of the location of performance shall have jurisdiction) and Article 3 (Court of the location of the debtor's residence shall have jurisdiction) of the Code of Civil Procedure are not viable grounds to determine that Taiwanese courts have jurisdiction over this case.

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The second instance: Ruling 2011-MinZhuanKan-10 (26 December 2011)

In respect of the jurisdiction issue, the IP Court took a completely different position in the second instance by ruling that Taiwanese courts shall have jurisdiction over the case.

The second instance ruling stated that the effect of the agreement on international jurisdiction has bearing on a nation's exercise of its judicial power and the protection of its people's right of action, in regard to which no universally recognized international convention exists and few bilateral or multilateral agreements apply. Consequently, such effect shall be determined based on the judicial practices developed by each country and through the quasi or analogous application of the principles of jurisdiction stipulated in the civil procedure law of the nation. The IP Court further set forth the following opinions:

Agreement on international jurisdiction is not necessarily exclusive:

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To reconcile the most basic principle of jurisdiction, i.e., the court of the defendant's residence shall be the competent court, and to allow expedient evidence investigation and litigation, there are other provisions in the civil procedure law of every country for the plaintiff to choose the competent court, such as the U.S. principle of minimum contacts. Hence, in respect of the provisions regarding jurisdiction, the "coexistence of jurisdiction" principle applies to both domestic and international civil actions.

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While the agreement on international jurisdiction has become a basic clause of international contracts, it would be irrational if an international action lacking the most basic contact factor of jurisdiction were allowed to be subject to agreed international jurisdiction. Hence, the clause of agreement on international jurisdiction is not necessarily exclusive, and consequently is not binding on the agreed court.

Whether the agreement on international jurisdiction is for an exclusive or coexisting jurisdiction shall be interpreted case-by-case and the true intention of the parties shall be sought:

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If the wording on jurisdiction in a contract has clearly expressed the true intention of the parties, or a clear consent on international jurisdiction exists according to the explanation of the true intention of the parties, unless the contract states otherwise, the agreement on international jurisdiction shall be exclusive. On the other hand, if the wording in the contract does not clearly state an agreement on international jurisdiction, since the jurisdiction of international civil actions, like that of domestic civil actions, is governed by the principle of coexistence, it shall have the effect of "coexistence." This is compatible with the spirit of the Convention on Choice of Court Agreements and the Principles on Conflict of Laws in Intellectual Property referred to by the IP Court in the first instance.

The international jurisdiction of this dispute belongs to the Taiwanese courts:

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The "United States District Court" stipulated in Article 9.6 of the patent license agreement at issue shall deemed as referring to U.S. federal district courts, not state district courts. This is because the term "District Court" is not necessarily part of the name of a U.S. state court of the first instance, which commonly identifies itself by reference to the particular state, whereas "United States" is always included in the name of a federal court. Hence, the court that is indicated in Article 9.6 can only be construed as a federal district court of the United States. Company A and Company B did not agree that "any court of the U.S." shall have jurisdiction.

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According to the U.S. law, the federal judicial system has jurisdiction only for cases related to federal law or involving a federal question, such as patent related cases (28 U.S.C.§1295 (a)(1), §1338(a).) As for ordinary civil actions, only those involving a federal question are eligible for filing with federal courts (28 U.S.C. §1331.)

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The agreement on international jurisdiction in the patent license agreement at issue shall apply only for disputes of patent infringement, and shall not apply to the contractual dispute in this case which resulted from transferring business and assets. This is because a simple contractual dispute does not involve any federal question and is not under the jurisdiction of a U.S. federal district court. Hence, even if the range of the said international jurisdiction agreement is extended to cover this case, such agreement will still be deemed invalid due to impossibility of performance. U.S. federal district courts are not bound by the said agreement.

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Since no exclusive agreement on international jurisdiction applies to this dispute, then the issue of whether Taiwanese courts have international jurisdiction over this case shall be determined by the provisions of the Code of Civil Procedure of Taiwan on the basis of application by analogy. According to Article 3 of the Code, the court of the location of the debtor's residence may be deemed as the competent court. Thus, if the defendant Company D's right to claim royalties against the plaintiff Company A does exist, then the plaintiff will be Company D's debtor. Since the business office of Company A is in the territory of Taiwan, Taiwanese courts shall have jurisdiction.

As mentioned earlier, in the appeal procedure initiated by Company D, the Supreme Court had maintained the ruling of the IP Court made in the second instance and determined that Taiwanese courts have jurisdiction over the action of the plaintiff.