Introduction
The Group of Companies doctrine is in the limelight again with the recent Supreme Court ruling in Cox and Kings v. SAP India Ltd. The doctrine has been given significant consideration when impleading non-signatory parties in international commercial arbitration. Different courts under different jurisdictions have developed their varieties of interpretation. While French courts have whole-heartedly welcomed this doctrine with open arms, the USA chose to interpret the same in the light of other doctrines such as third-party beneficiary theory and piercing the corporate veil, and the English legal system has firmly rejected the application of the doctrine.
For non-signatory parties to be impleaded within an arbitration proceeding, certain requirements have to be fulfilled, as was first laid down in the case of Dow Chemicals v Isover Saint-Gobain[i] (“Dow Chemicals”).One of the reasons as elaborated in the judgment for impleading Dow Chemical Company along with its subsidiaries in the arbitration proceedings was – the use of trademarks of the former by the latter. Trademarks, or intellectual property (“IP”) in general, have important economic value. Licensing of IP ensures diffusion of innovation and economic cooperation, but at the same time serves to cartelize the industry and create an exclusive brand name and economy for a complex company structure. This role of IP in determining such company structures, and creating close-knit relations between a parent company and its subsidiaries, has proved useful in ascertaining the single economic reality shared by the signatories and non-signatories in an arbitration proceeding, and subsequently binding the non-signatories to an arbitration agreement.
This article aims to analyze this intersection between intellectual property law and arbitration law. The authors seek to determine how IP, more specifically trademark, can play a vital role in determining the fate of non-signatories in an arbitration proceeding, especially international commercial arbitration. The essay is divided into five parts. The second part of this essay will first provide an overview of the group of companies doctrine, its genesis, and how it has been applied nationally and internationally. The third part of the essay will cite certain precedents wherein IP was used as a determinant in proving and disproving the mutual intent of the parties when binding non-signatories to arbitrable disputes. The fourth part will examine how IP creates these economic relations which help determine the mutual intent and control and exclusivity among the parties, and thereafter implead them, and also provide a perspective as to what lies ahead concerning this intersection of arbitration and IP.
An Overview Of Group Of Companies Doctrine
The process of arbitration encompasses certain prerequisites before the procedure starts. The consent theory is a major requirement for any arbitral proceeding. Consent theory talks about the consent of the parties agreeing to arbitrate their disputes in an appropriate forum of choice instead of a drawn-out court proceeding, and is contained in the arbitration agreement which later on takes the form of a binding contract. However, there happen to be certain exceptions. This is where the discussion on the group of companies’ doctrine is sparked because it is antithetical to the theory of consent.
Group of Companies Doctrine
In the context of a corporate structure, the doctrine of a group of companies—a mechanism often used to bind third parties—was first laid out in an arbitral award of the International Chamber of Commerce (“ICC”) tribunal in the Dow Chemicals v. Isover Saint Gobain case. In this particular case, Isover Saint Gobain and two Dow Chemical Company (parent company) subsidiaries, Dow Chemical A.G., and Dow Chemical Europe entered into two contracts for the supply of thermal insulation products. The contracts’ terms provided that either of the subsidiaries might carry out the supply. During the parties’ economic cooperation, Dow Chemical France—an extra subsidiary of the Dow Chemical Company—was not a party to the agreement. The arbitration claim was brought by Dow Chemical A.G., Dow Chemical Europe, Dow Chemical France, and Dow Chemical Company together, before the ICC tribunal. Isover Saint Gobain challenged the jurisdiction of the ICC tribunal and contended that the parent company and Dow Chemicals France was not a party to the contract between Dow Chemicals AG and Isover Saint Gobain. However, the tribunal rejected the claim in its interim award and held that even though they were not a party to the contract, the tribunal would have to consider the kind of relation that the sister company had with the subsidiary regarding business cooperation between the parties. This was later challenged by Isover Saint Gobain in the Court of Appeals in Paris. Rejecting the appeal, the court upheld the award of the arbitral tribunal.
This is how the group of companies’ doctrine made its way to arbitration. Since then, many tribunals and courts of law have ruled in favour of and even against this doctrine which sparked a conversation in arbitral jurisprudence all over the world.
In Cox and Kings v. SAP India Ltd, the Supreme Court of India held, that an exchange of communication could form the basis for determining the relation with non-signatory to the agreement. This is not a process of extending the arbitration agreement to the non-signatory, rather it determines the actual parties in dispute.
Impleadment of Non-signatories in the Arbitration proceedings
In Clayton Brokerage Co. v. Teleswitcher Corp. The US Court of Appeals upheld the decision of the Missouri district court that the fact that the parent company had total control over the daily operations of the subsidiary company[ii], formed a clear basis for impleadment of a non-signatory to the proceedings.
In its decision in Sponsor A.B. v. Lestrade,[iii] the French e Cour d’ appel of Pau held that Sponsor AB had a role in the conclusion of the purchase undertaking and had partaken in the non-execution of the contract. What appeared to be a third party, was the heart and soul of the contracting party. Hence, the agreement would be extended to include Sponsor A.B.
In ICC Case No. 5103[iv], three European companies – AZ, BZ, and CZ entered into a contract with a group of Tunisian companies EFGH. In the event of a dispute, the three European companies started an arbitration proceeding against the Tunisian companies. The court invoked the group of companies’ doctrine and held that the collective interest of the company is preferred over the individual interests of the single entities, which form part of the parent company. Hence, all of them were held jointly and severally liable for the debts from which they had directly or indirectly profited.
However, a blanket application of this doctrine without the consent of non-signatories in every case that involves a subsidiary and a parent company is unjust and would be antithetical to principles of natural justice. It needs to be carefully applied taking into account the multiplicity of factors such as the involvement of the parent company in the day-to-day operations of the subsidiary company, the nature of the composite transaction that takes place between them, business cooperation, and sharing of IP for furtherance of a common objective.
Precedents Guiding Impleadment Through Intellectual Property
As already stated before, the first case of implementation of group of companies doctrine, that is the Dow Chemicals case, itself mentioned trademark as a characteristic to ascertain the status of non-signatories before the arbitral tribunal. The Tribunal, while assessing various reasons as to why Dow Chemical Company should be made a signatory to the arbitration agreement, also ascertained its involvement in the contract, because the trademark under which Dow Chemical France marketed the products to Isover Saint Gobain, was owned by Dow Chemical Company. Dow Company France, as a subsidiary, was using the trademark owned by its parent Dow Chemical Company. Hence, there was reason enough to establish the single economic reality under which both the parent and the subsidiary company operated.
A. Where Trademark was accepted as a ground to bind a Non-Signatory
In the case of Yingzhifu Training v. EF Consulting[v], a non-signatory was bound by an arbitration agreement by the Shanghai Intermediate People’s Court due to common trademarks. The facts are that Botao Education and EF Consulting entered into a contract with each other, where the former would establish a school to be managed under the unified model of EF Consulting’s other schools. The school was Nanjing Yingzhifu Language Training Centre (“Yingzhifu Training”). The main consulting agreement also included a trademark license agreement, for the usage of Yingzhifu Training. Thereafter disputes arose between Botao Education and EF Consulting, and EF Consulting invoked arbitration proceedings against both Botao Education and Yingzhifu Training at CIETAC Shanghai. Yingzhifu Training filed an application to Shanghai N° 2. Intermediate People’s Court, claiming that it was not a signatory to the arbitration agreement, and did not even exist when the agreement was enacted. However, the court concluded that even if the applicant did not exist during the signing of the agreement, usage of the trademark under the agreement, fulfilment of obligations under the consulting agreement, and subsequent business activities showed that the applicant had bound itself by the agreement.[vi]
In ICC Case No. 15116 of 2008[vii], the Sole Arbitrator determined that the second respondent could not be impleaded within the proceedings as the parent company of the first respondent. The first respondent did not use the trademark seal of the second respondent, and rather used its own seal incorporating a different trademark.
B. Where Trademark was not accepted as a ground to bind a Non-Signatory
While some courts have agreed that the usage of the IP of the parent company by the subsidiary is reason enough to bind either of them to the arbitration agreement, many others would beg to differ.
In ICC case no. 6673 of 1992[viii], Claimant 1, and the defendant entered into a contract. Claimant 2 was the owner of the IP let out by Claimant 1 to the defendant. Disputes arose and both the parties invoked arbitration. Claimant 2 wanted to be made a signatory as the parent company and owner of the IP. Herein, the tribunal held that mere ownership of IP let out by Claimant 1 did not give Claimant 2 the same status as a contracting party, and therefore, could not be made a signatory to the proceedings.
In ICC Case No. 7604 and 7610 of 2003[ix], the ICC held that mere common ownership of IP, such as logos, trademarks, brands, patents, etc cannot be a conclusive factor when binding non-signatory companies through doctrine of alter ego.[x]
Further in the case of Sarhank Group v. Oracle Corporation[xi], Sarhank, an Egyptian Company had won an arbitral award against both Oracle Systems and its parent Oracle Corporation at Cairo Regional Centre for International Commercial Arbitration, the latter being a non-signatory. Thereafter Sarhank sought to enforce the award by filing a petition under the Southern District Court of New York. Oracle Corporation appealed against the same before the US Court of Appeals, Second Circuit. Herein, the finding by the arbitral tribunal, that contractual relations couldn’t ensue, without the authorization of the parent company who owned the trademark “by and upon which transactions proceed”, was rejected. Overall, the decision stated that a non-signatory cannot be forced to arbitrate under US law if there is insufficient proof that the specifications under American contract law or agency law have been met.
The Economy Of Trademarks And Other Intellectual Property
Intellectual Property is a driver of innovation and economic development. For any form of corporation, IP happens to be a valuable asset and can even acquire the status of a “crown jewel.” Therefore, to increase efficiency and performance, companies create their IP assets such as logos, trademarks, patents, etc, and diffuse them within their subsidiaries for increased efficiency.
Several conglomerates engage in the formation of IP holding companies. If a company has a significant amount of IP, setting up an IP holding company would help manage the assets and taxation better. The parent firm, which is the original owner of the IP, forms a holding company by creating a wholly-owned subsidiary, which gets the ultimate ownership. Thereafter, the IP holding company will diffuse the license to use such IP.
Although diffusion of innovation through IP is an ideal scenario, this can prove itself tricky when it comes to the question of trademarks. Trademark laws require that the holder of the trademark is made responsible for the quality of the goods. A trademark denotes the origin and source of the goods upon which the mark is put. [xii] It is therefore advisable that trademarks as such are held by the parent company instead.
In the case of Noble House Home Furnishings, LLC v. Floorco Enterprises, LLC[xiii], the Trademark Trial and Appeal Board of the US, held that in the absence of a license and other agreements, the parent company’s inherent general control over the operations of a subsidiary would be sufficient to assume that the parent is adequately exercising control over the kind and calibre of goods and services sold by the subsidiary under a parent-owned mark. A valid trademark license agreement between the parent and its subsidiaries may clarify matters in case of any ambiguity.
The general assumption, when a subsidiary uses the trademark held by the parent company is, that the parent company is in control of the subsidiary. Trademark licensing has been important in establishing unity of control among a corporation and its subsidiaries. It denotes that the goods and services are sourced from a single entity. If the parent company does not have control over the quality of goods and services offered under its trademark, it symbolizes the loss of control and the absence of a single source.
This economic significance of trademark and their licensing agreements clearly shows how important they are for the tribunal to establish mutual intent and a single economic reality of such a group of companies while impleading non-signatories to arbitration proceedings.
There will be instances of intersection and control of companies with and within each other with regards to licensing of trademarks, and patents which in turn would lead to increased business transactions. Courts have relied upon the shared IP to draw a relation between the signatory and non-signatory, which in turn has helped in the impleadment of non-signatory parties. If dissemination of the portfolio by an IP holding company occurs in such a manner where the parent company and the subsidiary company use the same IP for displaying their identity while conducting their business with the other party, a claim can be brought against the non-signatory impleading them in the arbitration agreement. The process of impeachment, however, is done by carefully assessing the factual circumstances surrounding each case. Mere use of IP is not enough. It is also important that there are other factors in play which can determine the non-signatory’s role in the commercial transaction,
Conclusion
The authors have tried to establish a common link between the role of IP and impleadment of a non-signatory in an arbitration agreement. The growth of commerce and industry has paved the way for arbitration as a method of dispute resolution and corporations often resort to this method as an economical solution. The increased frequency of commercial arbitration gave birth to the group of companies doctrine. This article analyzed the role of IP rights in the same, with special reference to trademarks. The grounds relied upon by the court in their judgments revolve around the role of non-signatories in conclusion, execution, and non-execution of contractual obligations.
With the rise of business cooperation and global commerce and trade, sharing of IP rights has become an important economic transaction between the parent company and the subsidiary companies. It leads to representation of the licensed trademarks by the subsidiary in its day-to-day business operation and it acts as a common link to draw a relation between a subsidiary and its parent. The use of IP explains the level of involvement of a parent company in the operations of the subsidiary company and it can conclusively be said that the quality of impact of performance or non-performance of a contractual obligation is impacted by the use of IPR. Hence it is instrumental in impleading a non-signatory to the agreement
Group of companies doctrine should be explored in the context of IP, where the books of account of parent and subsidiary companies are examined to establish a common link between them, which would include IP licensing agreements. This would further help in laying a bedrock of principles for impleading a non-signatory and substantiate the doctrine further, making its application less cumbersome. This would resolve the existing complications, and a pathway would be paved for deciding cases by application of these principles when a necessary party is trying to benefit from an arbitration contract to which it is not a signatory.
References
[i] Dow Chemical Company and Others v ISOVER Saint Gobain, [1982] Interim Award ICC Case No. 4131, YCA 1984, at 131 et seq. (also published in: Clunet 1983, at 899 et seq.)
[ii] American Pioneer Life Ins. Co. v. Sandlin, [1985] 470 So.2d 657 (Ala. 1985); West v. Costen, [1983] 558 F. Supp. 564 (W.D. Va. 1983).
[iii] Sponsor A.B. v. Lestrade, [1998] Rev. Arb. 153.
[iv] ICC Case No. 5103 [1988], 20 ICC Bull. No. 2 [1991].
[v] Yingzhifu Training v. EF Consulting, [2005] Shanghai N°. 2 Intermediate People’s Court.
[vi] Bernard Hanotiau, ‘May an Arbitration Clause Be Extended to Non-signatories: Individuals, States or Other Companies of the Group?’ (2nd Ed) ‘Complex Arbitrations: Multi-party, Multi-contract, Multi-issue – A comparative Study’? (International Arbitration Law Library, Vol 14).
[vii] Agent (Turkey) v. (1) Principal (Guernsey) and (2) Subsidiary of Principal (UK), [2008] Interim Award, ICC Case No. 15116.
[viii] ICC Case no. 6673 of 1992, 119 J. Droit Int’l (Clunet) 992 (1992); Sigvard Jarvin, Yves Derains, Jean-Jacques Arnaldez & Dominique Hascher ‘Collection of ICC Arbitral Awards 1991-1995’, [ed 1997] 429.
[ix] ICC Case Nos. 7604 & 7610, in J.-J. Arnaldez, Y. Derains & D. Hascher (eds.), ‘Collection of ICC Arbitral Awards 1996-2000’ [2003] 510.
[x] Bernard Hanotiau, ‘Problems Raised by Complex Arbitrations Involving Multiple Contracts-Parties-Issues – An Analysis’, [2001] 18(3) J. Int’l Arb.
[xi] Sarhank Group v. Oracle Corporation, [2005] 404 F.3d 657.
[xii] Arthur L. Nathanson, ‘Licensing Your Trademark’ [1956] 46 Trademark Rep 133.
[xiii] Noble House Home Furnishings, LLC v. Floorco Enterprises, LLC, [T.T.A.B. 2016]118 U.S.P.Q.2d 1413.
Author(s)
Shambhavi
Student at Chanakya National law University
Satyam Raj Kaushik
Student at Chanakya National University