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Article: June 2015: EU Litigation Update

June 01, 2015
Business Litigation Reports

Recognition and Enforcement of Arbitral Awards in Russia: Recent Developments. Recent decisions concerning the enforcement of international arbitration awards in Russian courts have yielded mixed results. Russian courts have limited arbitrability by determining that disputes pertaining to two different types of contracts with a public element were not arbitrable. It is hoped that these new concepts of arbitrability do not begin to influence the attitudes of Russian courts to foreign arbitration awards. More encouraging, however, is the flexible treatment shown by a Russian court towards enforcement of an LCIA award.

The Russian Federation is a party to The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. International commercial arbitration is also governed by the Law of the Russian Federation “On the International Commercial Arbitration” No. 5338-1 dated July 7, 1993, which is predicated upon the UNCITRAL Model Law. The rules on domestic arbitration set out in the Federal Law of the Russian Federation “On the Arbitration Tribunals in the Russian Federation” No. 102-FZ dated July 24, 2002.

Arbitrability of Disputes Arising out of Public Procurement Agreements (case No. A40-148581/12-25-702). This dispute arose out of an agreement between a state owned enterprise of the Moscow Health Department and the company ArbatStroy LLC over a contract for the modification of fire escapes in Moscow hospitals. The agreement contained an arbitration clause referring disputes to the Domestic Arbitration Institution located at the law firm Peresvet. The enterprise filed a claim against ArbatStroy LLC for breach of the agreement and the tribunal sustained the claim.

The enterprise then applied to the state court for recognition and enforcement of the award, and ArbatStroy LLC simultaneously sought annulment of the same award. By its Resolution dated January 28, 2014 the Presidium of the Supreme Arbitrazh Court (the “SAC”) annulled the award.

The SAC held that the agreement between the enterprise and ArbatStroy LLC was a public procurement agreement executed pursuant to a public bidding process conducted by the enterprise under the Federal Law “On Placing Orders for the Delivery of Goods, Works and Services for the State and Municipal Needs” No. 94-FZ dated July 21, 2005 (the “2005 Procurement Law”).

The SAC determined that disputes arising out of agreements concluded under the 2005 Procurement Law are not arbitrable. It reasoned, inter alia, that such agreements have a number of public elements as they are executed in the public interest by a public authority or entity for governmental or municipal needs and these needs are financed from the budget. According to the SAC, the principles of arbitration, including confidentiality requirements, are inconsistent with the publicly-driven principles underlying public procurement policies and procedures, such as transparency, facilitation of competition, prevention of corruption and so on.

The SAC’s decision raises questions as to whether its findings concerning public procurement contracts may also apply to international commercial arbitration awards issued by Russian-seated tribunals or the enforcement of international arbitration awards in Russia. Many public procurement agreements, including those between foreign companies, contain arbitration clauses. The SAC decision in this case puts these arbitration clauses at risk and could possibly lead to Russian courts refusing recognition of arbitral awards where the award emanates from a public procurement contract dispute.

Arbitrability of Disputes Arising out of the Agreements for the Lease of Forest Plots (case No. A26-9592/2012). In early 2014 the courts also considered the arbitrability of a dispute arising from forest plot lease agreements. On February 11, 2014, the SAC ruled that this dispute was not arbitrable because the forest plot lease agreement was of a public nature. It based this decision on, inter alia, the fact that such agreements are concluded by special state or municipal authorities; the leased property is a forest plot owned by the state or municipalities; the purpose of the agreement is to procure forest conservation; lease payments are payable to the public budget.

This case has clear parallels with the case discussed above, where Russian courts refused to give force to arbitration agreements in public procurement contracts. Taken together, these decisions raise questions as to whether Russian courts will continue to rely on public interest considerations when dealing with arbitration clauses in other contracts with private parties, particularly in the context of enforcing a foreign arbitral award in Russia.

Proper Notification of a Party to the Arbitral Proceedings (case No. A65-30438/2012). There has also been good news coming out of Russia as regards enforcement of arbitration awards. On April 24, 2012 a sole LCIA arbitrator issued an award in favor of Autorobot-Strefa Sp. Z o.o. in its dispute with Sollers-Elabuga LLC.

Autorobot-Strefa Sp. Z o.o. sought recognition and enforcement of this award in Russia. The first instance court as well as the first appellate court to hear the case refused recognition and enforcement. They found that the notification of appointment of the sole arbitrator and the notification on the resumption of the arbitral proceedings were handed over to persons who were not employees or authorized representatives of Sollers-Elabuga LLC.

However, the SAC overturned the decisions of the lower courts on June 24, 2014. The SAC found that the general counsel of Sollers OJSC, the sole shareholder of Sollers-Elabuga LLC had sent a letter to the LCIA Court on behalf of Sollers-Elabuga LLC. In those circumstances, notifications by the LCIA Court addressed and delivered to that person were deemed to be validly served on Sollers-Elabuga LLC. The SAC further held that when representing a subsidiary in the arbitration, a lawyer of the parent company was performing his employee’s duties and his authority was apparent. The SAC resolved that the LCIA award should be recognized and enforced.

This decision stands as an example of the Russian courts refusing to take an overly formal approach to the notification of a party in the arbitration. Instead, it enforced an award against a company relying on employee’s duties and apparent authority. This decision therefore provides encouragement for foreign enforcement efforts in Russia.

German Federal Supreme Court Establishes New Rules for Enforcement of Potentially Invalid Patents. In a recent decision (case no. X ZR 61/13, order dated September 16, 2014) the German Federal Supreme Court ruled in favor of the defendant represented by Quinn Emanuel in a patent infringement proceeding, that enforcement of a judgment finding infringement should generally be stayed if the patent in suit was found invalid at trial level by the Federal Patent Court. This decision is remarkable not only in that it represents a departure from standing case law of the Supreme Court. The Supreme Court even changed its opinion expressed in a published order made in the same proceeding a few weeks earlier (case no. X ZR 61/13, order dated July 8, 2014).

Background. Germany is the European country where by far the most patent litigation cases are brought. The German patent litigation system is characterized by the principle of bifurcation, which means that infringement and validity of patents are tried in separate proceedings before different courts. Infringement suits are tried before civil courts (District Courts and Higher Regional Courts) whereas nullity suits are tried before the Federal Patent Court. The two proceedings are only united in a sense that the Federal Supreme Court is the ultimate court of appeal. The infringement courts will consider validity issues merely in a limited way, i.e. by staying the infringement case if they consider it highly likely that a pending parallel nullity action will eventually lead to revocation of the patent in suit. Infringement cases are being adjudged considerably quicker (typically within 10 to 12 months from filing) than nullity cases (typically within 24 to 30 months from filing). The different standards applied by infringement and nullity courts when testing validity of the patent and the different durations of the proceedings can be disadvantageous for the defendant: It is possible that the infringement courts will find the patent infringed, but do not find it sufficiently likely that the patent will be revoked. In such case, the defendant can be enjoined for a considerable period of time without a ruling on validity being made by the Federal Patent Court.

The Facts of the Instant Matter. In the instant matter, the patent proprietor was able to enforce an injunction for 18 months before the Federal Patent Court found the patent in suit invalid. In fact, the nullity proceeding took such a long time that the finding of infringement had been confirmed on appeal by the Higher Regional Court in the meantime. The finding of invalidity by the Federal Patent Court did not formally affect the injunction because only a final revocation confirmed by the Supreme Court will render existing injunctions void. The patent proprietor, however, appealed the nullity judgment to the Supreme Court so that the patent formally remained in force. The only possibility to align the bifurcated proceedings in this situation is to request a stay of enforcement of the injunction based on the preliminary revocation of the patent in suit. The pertinent procedural rules of the German Code of Civil Procedure, which are applied to all civil matters including patent cases, however, provide for an extremely high threshold for staying judgments by the Higher Regional Court, thus rendering it practically impossible to obtain a stay of enforcement.

The Ruling of the Supreme Court. Quinn Emanuel filed a stay motion with the Supreme Court arguing that revocation of the patent in suit by the Federal Patent Court is an exceptional circumstance that warrants a stay of enforcement. This motion was dismissed by the Supreme Court with reference to established case law. The firm then filed a further motion with the Supreme Court arguing that the defendant’s right to be heard had been violated. This further motion focused on the argument that application of the general rules of the Code of Civil Procedure would result in an unacceptable disadvantage to the defendant in patent infringement proceedings, as it cannot influence the timing of the nullity proceedings so that it is a mere matter of luck whether or not the Federal Patent Court’s ruling issues before or after the Higher Regional Court has made its ruling on infringement. Following this further motion, the same panel at the Supreme Court reversed its previous decision and ordered a stay of enforcement. In this unprecedented decision, the Supreme Court held that for the purpose of requesting a stay of enforcement based on a not final revocation of the patent in suit, judgments entering an injunction in patent infringement proceedings that have been reviewed and confirmed on appeal are nevertheless to be treated like District Court judgments that have not yet undergone such a review. The Supreme Court reasoned its decision in that the rationale behind the general rules of the Code of Civil Procedure does not fit in a situation where the infringement courts do not review the validity of the patent in suit due to the bifurcated litigation system. To this extent, the judgment cannot be assumed to have the same high degree of correctness as it is assumed by law with respect to the infringement finding. The Supreme Court’s ruling will be published in the court’s official journal as the judges consider the decision to be of particular importance for the development of the law.