In, Darius Rutton Kavasmaneck v Gharda Chemicals Limited, Keki Hormusji Gharda, Aban Keki Gharda, Almitra Patel, & D.T Desai, the High Court of Bombay (Court) has in its interim order, dismissed the Notice of Motion (interim application) of Darius Rutton Kavasmaneck (Darius) in his suit  (in the nature of derivative action) to inter alia restrain Keki Hormusji Gharda (Dr Gharda), the Managing Director of Gharda Chemicals Limited (Company),  from selling , transferring or creating any third party rights on patents which Dr Gharda had obtained in his individual name.

A minority shareholder of the Company, Darius’ grievance was that Dr Gharda (who was also his uncle) had obtained and/or applied for the patents in his own name whereas the patents ought to have been obtained/applied in the name of the Company. Darius contended the following:-

  1. The derivative action is not for his personal benefit but for the benefit/ on behalf of the Company. The Company cannot file the suit as it is not in position to do so as Darius does not own the majority shareholding and the management of the Company is in the control of Dr Gharda and Aban Keki Gharda (Dr Gharda’s wife);
  2. Dr Gharda is in fiduciary relationship as the promoter, director, majority shareholder and the Research Head of the Company and by registering the patents in his individual name has breached his fiduciary duties;
  3. Under Section 88 of the Indian Trust Act, 1882 (Trust Act), where a Director of a company bound in a fiduciary character to protect the interest of the company gains himself any pecuniary advantage adverse to the company, he must hold for the benefit of the company the advantage so gained; and
  4. Dr Gharda cannot take advantage of the Company’s employees’ efforts and resources.

In their defence, Dr Gharda, the Company and other defendants contended the following:-

  1. Issues raised by Darius have already been decided against Darius in other litigations under Sections 397 and 398 of the (Indian) Companies Act 1956;
  2. Derivative action can be only filed in exceptional cases and the present action was merely for personal interest and part of family dispute and not in interest of the Company or collective interest of other shareholders;
  3. Dr Gharda is entitled to apply for the patents in his name under Section 6 (1) (a) of the (Indian) Patents Act, 1970 (Patents Act) (as agreed and approved by other defendants and shareholders) and there is no law which provides that the employee generated patents should belong to the employer;
  4. Under the terms of employment/appointment as Management Director, Dr Gharda was only entrusted with powers of management and he was not required to do any research and development or make inventions;
  5. Dr Gharda has not used the resources of the Company for conceiving/devising patents. Only some resources have been used for implementation of the inventions. In any event, Dr Gharda has granted a royalty free license to the Company to use these inventions;
  6. If it is to be held that Dr Gharda is not entitled to the patents, then the patents may stand revoked under Section 64 (1) (b) of the Patents Act which may not be in Company’s interest. In any event, the (Indian) Patent Office is a specialised forum equipped to handle such issues;
  7. The conduct of Darius is tainted, against the interest of the Company and he has approached the Court with unclean hands. Darius has suppressed the fact that he had earlier worked as per the directions of Godrej, a Company’s competitor; and
  8. Darius carries on competing business through a company named Western Chemical Industries Private Limited whose business is getting affected by the superior patented process licensed by Dr Gharda to the Company.

After hearing the parties, the Court dismissed the Notice of Motion with costs of INR 10 Lakhs on the following basis:-

  1. With Darius owning only 12% of the shareholding of the Company and other minority shareholders owning 13% (that too being against Darius’ action), Darius’ derivative action was not maintainable as it is not in the interest of the Company;
  2. Allowing the derivative action would mean revoking the patents under Section 64 (1) (b) of the Patents Act and encouraging other persons (especially like Darius who are competitors) to do so which was not in the interest of the Company (since it is using the patents under a royalty free license);
  3. Darius is a competitor of the Company and the so called derivative action was to stifle competition;
  4. A derivative action is not maintainable if the plaintiff had an ulterior motive to drive the competitor’s objectives or was prompted by family hostilities;
  5. Darius had approached the Court with unclean hands and was in the habit of re-agitating the same issues once one of the actions failed;
  6. Darius had failed to prove that Dr Gharda had a duty to invent in his capacity as a Managing Director and therefore there was no question of breach of fiduciary duty;
  7. Section 88 of the Trust Act  is not applicable as the patents are not devised by Dr Gharda in his role as a Managing Director;
  8. There is nothing to indicate that the inventions conceived by Dr Gharda were done by using funds of the Company; and
  9. Some of the patents admittedly, do not relate to the business of the Company.

This decision is important from the aspect of ownership of intellectual property (IP) in case of employer-employee relationship. With the (Indian) Copyright Act, 1957 (Copyright Act) allowing deemed employer ownership in case of works created by employees during the course of employment, companies often tend to misunderstand this applicability towards other IP statutes like Patents Act, the (Indian) Designs Act 2000 and the (Indian) Trade Marks Act, 1999. Therefore companies need to be cautious whilst preparing their employment contracts in case the IP created by the employees does not fall under the purview of the Copyright Act. If the intention is to own the IP, companies need to include specific assignment clauses in the employment contracts.