It is common practice in China that the parties to an international IP-related contract can choose a foreign dispute resolution forum. However, such clauses are not always unshakeable before the Chinese courts. This article explores two cases where the jurisdiction clause in an international IP contract was held invalid, and sheds some light on avoiding such scenarios.
Requirement on actual connection
According to the statutory provisions and the judicial interpretations of the Supreme People's Court (SPC), the dispute resolution forum chosen by the parties must have actual connections with the dispute, such as one of the following localities:
- The domicile of the plaintiff or the defendant
- Place where the contract is performed or signed, which can be designated by the parties' written agreement
- Location of the properties subject to the dispute
SPC reiterated this rule in its ruling on the case Min San Zhong Zi No. 4 in 2009, where the parties signed a licensing agreement, stipulating that related disputes shall be referred to Singaporean judicial authorities and governed by Chinese laws. However, the plaintiff did not file legal actions in Singapore in accordance with the agreement but chose to sue in China. When the defendant raised objections to the Chinese court's jurisdiction, SPC ruled that the validity of the jurisdiction clause shall be determined based on the laws of China, where the case was heard. Because of this, and the fact that Singapore did not meet the requirements on actual connections, SPC held the jurisdiction clause in this case invalid.
How to ensure better protection for parties
Occasionally, there are instances where the jurisdiction clause meets the above requirements but is held invalid due to practical reasons, resulting in stalemates when enforcing the foreign dispute resolutions in China. In the IP field, this kind of stalemate is particularly noteworthy because of the territorial nature of IP rights.
Under Chinese law, disputes over IP ownership or infringement can only be governed by the laws of the country where the IP protection is sought, but the parties may choose the laws applicable to the assignment of IP by agreement. If foreign laws were chosen in the latter case, the changing of IP ownership must still be presented before the China National Intellectual Property Administration to take legal effect. This may cause enforcement problems to the parties in practice.
Take the case Jing 73 Min Chu No.1155 in 2016. The parties signed a contract where the defendant agreed to transfer a Chinese patent to the plaintiff, and the parties chose South Korean courts and laws to solve possible disputes. Before this suit, the plaintiff already sued in South Korea for the execution of the contract. Among the different views held by different courts, the Supreme Court of South Korea finally ruled that the suit in question did not involve establishing or granting/invalidating of an IP and upheld the validity of the jurisdiction clause.
Although the Supreme Court of South Korea ordered the defendant to carry out the patent transfer, the defendant did not do so in China. As South Korea and China are not joint participants in an international convention covering the recognition and enforcement of each other's judicial judgments, and have no bilateral treaty or established reciprocal conventions, the South Korean court ruling cannot be enforced in China. The plaintiff had to file another lawsuit in Beijing.
The Beijing IP Court considered the purpose of civil court proceedings to be effectively solving disputes and protecting the parties' interests. The same purpose should apply to disputes on overlapping national jurisdictions. If a court heard a case and rendered a ruling that was practically unenforceable, then such court proceedings would be failing such a purpose. In this sense, the parties' right to choose venues shall also be limited by the same purpose. In the spirit of solving disputes and better protecting the parties' interest, the court ruled that as far as the Chinese patent is concerned, the parties' jurisdiction clause is invalid. The court made an independent decision according to South Korean Law on its own, and finally transferred the Chinese patent.
Most disputes in China over jurisdictions in an IP-related contract concern actual connections, and parties usually wish to solve disputes in a third-party country that can be a neutral forum. To establish connections between that third-party country with the contract and to avoid the risk of the Chinese courts invalidating such an arrangement, parties should state explicitly that the contract was signed in the third-party country.
Another approach—and maybe an easier one—is to stipulate that the disputes arising from a contract be resolved through arbitration rather than court proceedings. This could circumvent the requirement that the selected forum has to have an actual connection with the dispute.
Nonetheless, in addition to international treaties, international practices and general principles of law, arbitration can also apply specific domestic legislation and case law in accordance with the contract provision. This means that once the Chinese law has been chosen to apply, there are still opportunities for the arbitrator to examine the validity of a jurisdiction clause of the contract in accordance with the above requirements of Chinese law.
However—as brilliantly explained by the Beijing IP Court—when the transfer of a Chinese trademark or patent is concerned, it could adversely affect the parties if they choose a foreign dispute resolution forum.
China is party to the New York Convention and the Hague Convention but has made reservations on IP matters when joining the latter. Enforcing a foreign court's judgment in China could be legally impossible unless that country has a bilateral treaty with China or has established reciprocity on recognition and enforcement. To avoid such problems, disputes concerning the transfer of IP ownership should be referred to the Chinese courts.
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.