Agreement on International Jurisdiction in Patent Licensing Contracts

The Taiwanese Supreme Court has delivered a ruling (2012-TaiKan-259) in a lawsuit filed by the licensee in a patent licensing agreement, requesting a confirmation of the “non-existence of royalty liabilities”. The Supreme Court upheld the opinion of the Intellectual Property Court, stating in its March 29, 2012 decision that Taiwan would still have jurisdiction despite an agreement on international jurisdiction within the license agreement.

The licensee plaintiff is a Taiwanese company that had signed a patent licensing agreement with a Japanese patent owner in July 2007. The patent owner agreed to waive liability for patent infringement by the licensee and granted it non-exclusive licenses in the US, Germany, and Japan with respect to certain patents. It also agreed that licensee was to make royalty payments shortly after the agreement took effect and on December 31, 2007, 2008, and 2009. The plaintiff initially paid royalties in accordance with the agreement.

However, after transferring related business and assets to another Taiwanese company in April 2008, it notified 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 registered in Luxemburg filed a claim against the original licensee with the US District Court for the Northern District of California in May 2010 for a US$5.4 million royalty on the ground that the patent owner had transferred to it all the rights under the said patent licensing agreement. The licensee plaintiff then filed with the Taiwan IP Court a case in September 2010 seeking confirmation of the non-existence of the Luxemburg company’s claim on royalties.

The Luxemburg company referred to Article 9.6 of the patent license agreement between the original licensee and patent owner, which read:

“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 US as the competent court and hence the Taiwan IP Court had no jurisdiction over the case.

In the actions against the original licensee filed in the US, the licensee counter-argued that the Federal District Court had no jurisdiction. The Luxemburg company responded by withdrawing the case from the US 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 the licensee 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.”

As such, if the Taiwan IP Court also lacked jurisdiction, the case would be left in limbo with no court having jurisdiction.

On this issue, the opinions of the IP Court however, were varied.

First Instance — Ruling 2010-MinZhuanSu-212 (August 24, 2011)

At first instance, the IP Court ruled that Taiwanese courts had no jurisdiction over the licensee’s case and accordingly declined to hear it. This ruling was made mainly based on Article 3(b) of the Convention on Choice of Court Agreements established by the Hague Conference on Private International Law on June 30, 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 March 25, 2011,¹ holding that unless the parties agreed expressly otherwise in the international jurisdiction clause, the agreed competent court should be deemed as having exclusive jurisdiction. Since the relevant licensing agreement did not expressly stipulate whether the courts of the US have exclusive jurisdiction, the US courts should be deemed to have exclusive jurisdiction. Consequently, Taiwanese courts would have no jurisdiction over the disputes that arose over the license agreement in issue.

Furthermore, the IP Court stated in the this ruling that Taiwan is not the location of performance of the licensing 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.

Second Instance — Ruling 2011-MinZhuanKan-10 (December 26, 2011)

In respect of the jurisdiction issue, the court took a completely different position in the second instance by ruling that Taiwanese courts should 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 should 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. To reconcile the most basic principle of jurisdiction, i.e. the court of the defendant’s residence should 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 US 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.

• 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.

• Agreement should be interpreted case-by-case and the true intention of the parties should be sought. This should be the approach whether the agreement on international jurisdiction is for an exclusive or coexisting jurisdiction. 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 will 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 will 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.

• International jurisdiction of this dispute belongs to the Taiwanese courts. The “United States District Court” stipulated in Article 9.6 of the patent licensing agreement in issue should be deemed as referring to US federal district courts, not state district courts. This is because the term “District Court” is not necessarily part of the name of a US 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. The original licensee and patent owner did not agree that “any court of the US” should have jurisdiction.

• According to the US 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 USC §1295 (a)(1), §1338(a)). As for ordinary civil actions, only those involving a federal question are eligible for filing with federal courts (28 USC §1331).

• The agreement on international jurisdiction in the patent licensing contract in issue should apply only for disputes of patent infringement, and should 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 US 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. US federal district courts are not bound by the said agreement.

• 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 Luxemburg company’s right to claim royalties against the licensee plaintiff does exist, then the plaintiff will be the Luxemburg company’s debtor. Since the business office of the licensee is in the territory of Taiwan, Taiwanese courts should have jurisdiction.

As mentioned above, in the appeal procedure initiated by the defendant, the Supreme Court upheld the ruling of the IP Court at second instance and determined that Taiwanese courts indeed have jurisdiction over the action of the plaintiff.