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Foreign companies are dramatically increasing their investments in Asia. For years, the People’s Republic of China and India have ranked as the first and third most popular destinations in the world for foreign direct investment. The Global Business Policy Council, FDI Confidence Index, at 1-3 (October 2004, Vol. 7), www.atkearney.com. More recently, the availability of financing and world-class scientific resources has encouraged companies not only to “outsource” manufacturing and processes in these markets, but also to research and develop cutting-edge technologies “from the ground up.” Id. at 16. This has led to cross-border flows of intellectual property (IP) on an unprecedented scale. The problem for the investor, however, is that the IP protection offered by the local courts can be uneven at best. Parties often face long delays, rural judges with little knowledge of IP or sophisticated scientific processes and, occasionally, outright corruption and protectionism. To ameliorate this situation, foreign companies are increasingly attempting to use carefully tailored agreements � containing international arbitration clauses � to supplement court-based methods of IP protection. This article will outline some of the perils and pitfalls one may encounter in these regions and identify various strategies that might be employed to overcome them. Traditionally, foreign companies have protected their IP rights by registering their patents and trademarks in the relevant jurisdiction. They have then relied on the local courts to apply the appropriate criminal or civil statutes against transgressors. The situation becomes more complex when the enforcement of “private” IP rights is sought. In a typical scenario, companies draft IP-related rights and obligations in contracts between two or more parties. For instance, joint venture or marketing agreements can require the local partner to pursue any infringements of trademarks or patents by resellers quickly, and to reimburse the IP owner for any damages resulting from the failure to do so. Similarly, the local partner in a license or franchise agreement can warrant that it will not “reverse engineer” a key process or software code. Companies then pursue any breaches of these rights and obligations through arbitration. However, there are a number of important limitations to this type of private IP enforcement. First, “private” IP rights and obligations are based on a contract. Therefore, they are only enforceable as between the parties to that contract. For example, if a local joint venture partner reverse-engineers and resells software in violation of the parties’ agreement, the foreign company could bring a breach of contract action against the other party. However, the foreign company would have to rely on traditional criminal and civil remedies against the purchasers of the software. Rights reserved to local courts In addition, parties must ensure that their contracts are drafted carefully: Any IP-related rights must be set out in detail, and must conform to the law of the contract. In particular, parties must ensure that they do not seek to arbitrate any rights that are reserved to local courts. For instance, the arbitration act of India provides that disputes relating to the validity of patents under the Patents Act, 1970; the infringement and rectification of trademarks under the Trade and Merchandise Marks Act, 1958; and infringement of copyrights under the Copyrights Act, 1957 are reserved to specialist courts. The Arbitration and Conciliation Act, 1996, Art. 2(3). While this does not mean that “soft IP” issues cannot be arbitrated, parties wishing to arbitrate these matters will have to be careful to distinguish arbitrable claims from those reserved to the courts. In addition, available remedies are limited to damages (or specific performance, if permitted by contract or law). There is no ability to obtain fines or to impose criminal sanctions or penalties on other parties without resorting to the court system and the traditional means of IP protection. In addition to ensuring that all relevant substantive issues will be encompassed by the clause, parties must also tailor their arbitration agreements to protect their procedural rights. Both the venue (lex fori) of the arbitration and the applicable institutional rules will have implications for the procedural law applicable to the arbitration. For instance, one of the most important requirements in an IP-related arbitration is the ability to obtain interim relief (such as an injunction) quickly � often before arbitration proceedings have been initiated. Local statutes, such as the one applicable in India, may make it possible for parties to apply to the court in the place where the arbitration is being held for interim remedies and for assistance in discovery. This is potentially helpful, if the proceedings do not get bogged down. See, e.g., The Arbitration and Conciliation Act, 1996, arts. 9 and 27. However, other jurisdictions � such as the People’s Republic of China � do not allow parties to obtain interim remedies in arbitrations held in China, except for orders to protect property (in circumstances where it otherwise could become difficult to implement an award), or to preserve evidence. See Arbitration Law of the People’s Republic of China (promulgated by the Standing Comm. Nat’l People’s Cong., Oct. 31, 1994, effective Oct. 31, 1994)), arts. 28 and 46. Likewise, the rules of various institutions, such as the International Chamber of Commerce and the London Court of International Arbitration, generally allow parties a wide range of potential interim or provisional remedies. See Rules of the International Chamber of Commerce Court of Arbitration, in force as from 1 January 1998, Art. 23; London Court of International Arbitration Rules, Art. 9 (expedited formation of tribunal on notice to other party). Specific provisions Other elements that may have a dramatic impact on the proceedings include issues such as the selection and qualifications of arbitrators, time limits for submissions and the scope and nature of discovery to be allowed. For instance, companies concerned about potential reverse engineering of software by a local partner may want to ensure that they are permitted to obtain draft copies of the other parties’ software, as well as documents relating to the development of the rival product during discovery. While the rules of the various institutions make suggestions with respect to some of these issues, parties can use their arbitration clause to create bespoke solutions in respect of key items. Finally, companies must take steps to ensure that any potential arbitration award is enforceable. This usually involves looking at where the assets of the local party are located, and tailoring the arbitration clause to ensure that the relevant local courts will enforce the award quickly. In theory, arbitration awards are enforceable in approximately 135 countries through the U.N. Convention on the Recognition and Enforcement of Arbitral Awards of 1958, effective June 7, 1959. China (1987) and India (1960) are both signatories to the convention. However, despite the fact that a country is a signatory to the U.N. Convention, the practical ability to enforce an award can vary by jurisdiction. It is critical that there be significant due diligence on a potential venue before the arbitration clause is drafted, and that local requirements are taken into account. This is particularly true with respect to the jurisdictions of China and India, as their local laws can create traps for the unwary. The China conundrum The China International Economic and Trade Arbitration Commission (CIETAC), founded in 1956, has a virtual monopoly over international arbitration proceedings in China. Chinese law does not recognize the validity of “ad hoc” arbitration, and none of the international arbitral institutions has permission to hold proceedings under its rules within China. See 1994 Arbitration Act, Art. 16(3). Companies must be careful in drafting a CIETAC arbitration clause, to ensure that the resulting arbitration will adequately protect their position. For example, the chairman of the tribunal is not required to be from a country “neutral” to the parties. See China International Economic and Trade Arbitration Commission Rules (revised and adopted by the China Council for the Promotion of Int’l Trade/China Chamber of Int’l Commerce, Jan. 11, 2005, effective May 1, 2005), available at www.cietac.org.cn/english/rules/rules.htm, at Art. 22. Although parties can choose a foreign arbitrator, both sides must agree to the appointment, and the CIETAC chairman must confirm it. Id. at Art. 21(2). The rules also provide that hearings will be held in Chinese unless another language is specified. Id. at art. 67. In addition, CIETAC proceedings are informal, and hearings generally last for only two or three days. Moreover, as noted above, parties in China cannot obtain court assistance for interim injunctions, except for orders to protect property (in circumstances where it otherwise could become difficult to implement an award), or to preserve evidence. See 1994 Arbitration Act, arts. 28 and 46. Arbitration outside of China can provide parties with a potentially superior procedural regime. This is an ideal solution if the opposing party has assets that can be enforced against outside of China. It is more problematic if (as is often the case) the only assets of the local partner or licensee are local. Finally, there is a significant problem with enforcing foreign arbitration awards in China. In theory, China is a signatory to the U.N. Convention, and Art. 269 of the Civil Procedural Law provides for awards to be enforced on the basis of reciprocity (i.e., where other countries enforce arbitral awards made in China). In practice, however, parties may encounter delays and protectionism � just as if they were utilizing the local courts as the primary means of IP protection. Currently, the best route to enforcement of a foreign arbitral award may be to hold arbitration proceedings under the CIETAC rules, or those of another recognized arbitral institution (such as the International Chamber of Commerce, the London Court of International Arbitration and the World Intellectual Property Organization) in Hong Kong or another international venue. Hong Kong, in particular, has a long tradition of hosting disputes relating to mainland China. Its court is experienced in IP matters, and the arbitration act offers interim injunctions and other remedies. See Hong Kong Arbitration Ordinance (Chapter 341 of the Laws of Hong Kong), Sched. 5 (June 16, 2000), available at www.legislation.gov.hk/eng/home.htm. There is also recent legislation that makes Hong Kong arbitration awards and court judgements enforceable in China. See Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (June, 1999), available at www.legislation.gov.hk/intracountry/eng/pdf/mainlandmutual2e.pdf; Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and the Hong Kong Special Administrative Region (July 14, 2006). It remains to be seen, however, how effective this legislation will be in practice. Constraints in India While the problems encountered in China are significant and complex, India presents a host of issues for the unwary as well. India has a strong and effective arbitration law, as drafted. There are, however, a number of potentially significant constraints to effective arbitration of IP in India. Although international arbitrations can be decided under foreign law, arbitrations between two Indian parties must be decided pursuant to Indian law. See Arbitration and Conciliation Act, 1996, at Art. 28. Thus, if an international company establishes a local subsidiary to manage its investment in India, it may be forced to arbitrate any disputes under Indian law. In addition, there have been several notable instances when the courts of India have intervened in arbitration proceedings to an extent far beyond what is usual in the United States. In Bhatia International v. Bulk Trading S.A., (2002) 4 S.C.C. 105, the Supreme Court of India considered a party’s request for interim measures in India with respect to an International Chamber of Commerce arbitration in Paris. The court considered the relevant provision of the 1996 arbitration act, which, by its terms, was to apply only in circumstances when the place of arbitration was India. The court, nevertheless, decided that the provisions of Part I would apply to international arbitrations outside of India � unless the parties specifically agreed to exclude any or all of its provisions. Likewise, in Oil and Natural Gas Corp. v. SAW Pipes Ltd., (2003) 5 S.C.C. 705, the Supreme Court of India considered an arbitral award that disallowed liquidated damages. The court was concerned because this award appeared contrary to Indian statutory law. The court found that, as a matter of law, an arbitral award can be challenged on the grounds that it contravenes any substantive law governing the parties or is against the terms of the contract. It also expanded the concept of public policy to add that an award would be contrary to public policy if it was “patently illegal.” In theory, this expands the grounds to challenge an arbitration award beyond those provided by the U.N. Convention. It is also problematic in the IP context, where a number of potential statutory provisions may govern a parties’ relationship. As a result, parties in arbitration proceedings will have to take care to ensure that arbitrators carefully follow (and are seen to follow) any applicable local laws that might pertain to the arbitration, to ensure that any decision is not open to challenge in the local courts. While imperfect, IP arbitration provides a “complementary” method of bolstering IP protections in Asia. However, effective agreements will need to overcome some unique issues in these jurisdictions to ensure that any arbitration agreement is effective and the resulting award is enforceable. From a practitioner’s standpoint, it is critical to closely monitor the continued development of international arbitration in these jurisdictions, in order that one’s client may be fully aware of the risks and challenges of conducting business in these regions. Mary O’Connor is a partner in the litigation group in the London office of Atlanta-based Kilpatrick Stockton. She specializes in international arbitration and litigation and has represented multinational corporations, governments and government-owned entities in numerous international arbitration cases pursuant to the rules of various arbitration institutions. Lorraine M. Brennan and Chris Woods, partners in the firm’s New York office, contributed to this article.

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