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Are there any restrictions on the establishment of a business entity by a foreign licensor or a joint venture involving a foreign licensor and are there any restrictions against a foreign licensor entering into a licence agreement without establishing a subsidiary or branch office? Whether or not any such restrictions exist, is there any filing or regulatory review process required before a foreign licensor can establish a business entity or joint venture in your jurisdiction?
A foreign licensor can establish business in India either by way of a joint venture or foreign direct investment (FDI) or by establishing a liaison office in India. There are no restrictions on the establishment of a business entity by a foreign licensor or a joint venture involving a foreign licensor.
For the foreign licensor interested in conducting business through FDI, the government has opened some sectors to automatic foreign participation while in others approval is required and in certain other sectors, equity participation is capped. Similarly the foreign licensor can establish a liaison office in India subject to meeting the guidelines issued by the Ministry of Commerce. Approvals are required from the government for the reserved industries such as the chemical industry, defence, etc.
Some businesses in India are given automatic approval, for example, businesses where technology is required to set up the business.
Any inflow and outflow of funds between an international franchisor and an Indian franchisee is regulated by the Foreign Exchange Management Act 1999 (FEMA) and the rules set out thereunder. As per the Foreign Exchange Management (Current Account Transaction) Rules 2000 the prior approval of the Reserve Bank of India (RBI) is required for making remittance outside India for use or purchase of a trademark (rule 5 read with Schedule III(16)).
Some businesses are barred in India as being illegal, including casino businesses or businesses relating to religion, counterfeiting businesses, and the business of trafficking of human beings, prostitution, etc.
There is no requirement for a foreign licensor to have a branch office or subsidiary in India for the purpose of entering into a licence agreement. If the foreign licensor wishes to establish a business entity in India, it may submit a request to the Registrar of Companies within a stipulated time frame.
Filing for a licence at the Patent Office or at the Copyright Office is not necessary before a foreign licensor can establish a business entity or joint venture.
Foreign companies may appoint licensees in India to sell their products as per the terms of the licence agreement. Licensees typically pay fees to the licensor by way of royalty and technical know-how fees. Until 2009, as per the guidelines of the government of India, royalty payments at the rate of 8 per cent on exports and 5 per cent on domestic sales (without any restriction on the duration of payment) and a lump sum payment not exceeding US$2 million (in the case of technology transfer) could be paid directly through an authorised dealer. In addition, where there was no technology transfer involved, a royalty up to 2 per cent for exports and 1 per cent for domestic sales was allowed under an automatic route on the use of trademarks and brand names of the foreign collaborator. In cases where the payment exceeded the above-mentioned thresholds, prior approval of the government of India was required.
However, the government of India (Press Note No. 8 (2009 Series), 16 December 2009) has liberalised the policy on foreign technology collaboration agreements and the financial upper limits on payment of lump sums and royalty fees for the import of technology and the use of the trademark and brand name has been removed.
At present, no approvals are required for such appointment of a licensee in India. The licensor and licensee relationship is a contractual relationship governed by the terms of the licence agreement.
Kinds of licences
Forms of licence arrangement
Identify the different forms of licence arrangements that exist in your jurisdiction.
There are various types of licensing arrangements depending on the nature of the business and the extent to which such licences are to be granted. The most notable agreements, the terms of which differ considerably, are:
- software licence agreements (eg, end-user licence agreements, master agreements, shrink wrap agreements, click wrap agreements, browse wrap agreements);
- trademark licence agreements;
- patent licence agreements;
- copyright licence agreements;
- technology licence agreements;
- research collaboration agreements;
- brand licensing;
- compulsory licences and statutory licences;
- service licences;
- cross-licensing (agreements whereby owners of different intellectual property (IP) such as patents or know-how, license rights to one another, for example, Apple’s and Microsoft’s cross-licensing agreement);
- music licensing;
- character and entertainment licensing;
- corporate trademark and brand licensing (eg, ABC launches its products in a co-venture with Reliance in India, Tata Starbucks);
- patent, trademark, copyright and design licences with and without goodwill; and
- exclusive and non-exclusive licences.
Law affecting international licensing
Creation of international licensing relationship
Does legislation directly govern the creation, or otherwise regulate the terms, of an international licensing relationship? Describe any such requirements.
There is no specific legislation in India that describes licensing. However, it is dealt with within the ambit of various intellectual property laws and other legislation including the Trade Marks Act 1999 (registered users - sections 48 to 54 of the Copyright Act 1957 (sections 30 to 32) and the Patents Act 1970 (Chapter XVI).
Some key laws that come into play when trademarks are licensed include:
- the Indian Contract Act 1872;
- the Sale of Goods Act 1930;
- banking and forex laws;
- the Specific Relief Act 1973;
- the Competition Act 2002;
- the Trademarks Act 1999;
- the Patents Act 1970;
- the Copyright Act 1957;
- the Designs Act 2000;
- the Geographical Indication of Goods Act 1999;
- common laws including trade secret laws;
- the Consumer Protection Act 1986;
- labour laws;
- taxation laws (including excise laws, income tax laws, VAT);
- the Foreign Exchange Management Act 2000;
- the Indian Stamp Act 1899;
- the Registration Act 1908;
- the Indian Easement Act 1882;
- environmental laws;
- the Indian Penal Code 1860;
- immigration laws;
- legal metrology laws (laws relating to weights and measures);
- insolvency laws;
- liquidation laws;
- land laws;
- factory laws;
- the Information Technology Act 2000;
- the Code of Civil Procedure 1908;
- the Arbitration and Conciliation Act 1996; and
- various international treaties.
What pre-contractual disclosure must a licensor make to prospective licensees? Are there any requirements to register a grant of international licensing rights with authorities in your jurisdiction?
There are no statutory provisions governing disclosure pertaining to international licensing in India. However, the licensor has a duty towards the licensee to transfer to him or her a clear title and not to make any misrepresentations. Misrepresentation by the parties to the contract renders the contract voidable under the Indian Contract Act 1872 and is punishable under the Indian Penal Code 1860.
It is advisable for the licensor to protect its know-how, including trademarks, trade secrets and other proprietary information, by entering into a non-disclosure agreement or memorandum of understanding with the prospective licensee. When drafting such agreements, it is imperative to ensure their enforceability under Indian contract law and the relevant intellectual property laws, and to ensure they are watertight. It may also be wise to seek to enter into such agreements with employees and other third parties or consultants of the licensee who might come across the protected information.
There is a requirement to register the grant of international licensing rights for patents with authorities in India. Section 69 of the Patent Act 1970 states that where any person becomes entitled by assignment, transmission or operation of law to a patent or to a share in a patent or becomes entitled as a mortgagee, licensee or otherwise to any other interest in a patent, he or she shall apply in writing in the prescribed manner to the Controller for the registration of his or her title or, as the case may be, of notice of his or her interest in the register.
Under the Trade Marks Act 1999, it is not compulsory or obligatory to record trademark licences in India. Where the parties desire to record the licence agreement under the Trade Marks Act, the licensor can apply to the Registrar of Trademarks to record the licensee as the ‘registered user’. For recordal of the licence agreement under the Trade Marks Act, the licensor and the licensee are required to jointly apply to the Registrar along with the following particulars:
- the licence agreement in writing and duly authenticated copy thereof, entered into between the licensor and the licensee; and
- an affidavit by the licensor giving the following particulars:
- the particulars of the relationship between the licensor and the licensee and whether the licence agreement is exclusive or non-exclusive;
- a statement of the goods and services in respect of which the licence is granted;
- a statement of any conditions or restrictions under the agreement including restrictions on territory; and
- whether the licence is to be for a period and, if so, the duration thereof or if it is to be without limit of period.
Are there any statutorily- or court-imposed implicit obligations in your jurisdiction that may affect an international licensing relationship, such as good faith or fair dealing obligations, the obligation to act reasonably in the exercise of rights or requiring good cause for termination or non-renewal?
Obligations relating to good faith, fair dealing, the obligation to act reasonably in the exercise of rights or requiring good cause for termination or non-renewal that may affect an international licensing relationship are implicit in much of India’s legislation.
Indian law requires that the patent must be used in India, failing which, anybody may apply for the grant of a compulsory licence. There may be a situation where a patented product is available in India but at a very high price or it is not easily available. In such a situation, a compulsory licence may also be granted. Section 84(1) of the Patents Act 1970 states that any person interested (at any time after the expiration of three years from the date of the sealing of a patent) may apply for grant of a compulsory licence alleging that the reasonable requirements of the public with respect to the patented invention have not been satisfied or that the patented invention is not available to the public at a reasonable price. Similarly, section 31 of the Copyright Act 1957 contains provisions for the compulsory licence of copyrighted work.
Section 110 of the Patents Act 1970 states that licensee shall be entitled to call upon the patentee to take proceedings to prevent any infringement of the patent, and, if the patentee refuses or neglects to do so within two months after being so called upon, the licensee may institute proceedings for the infringement in his or her own name as though he or she were the patentee, making the patentee a defendant; but a patentee so added as defendant shall not be liable for any costs unless he or she is present at and takes part in the proceedings. Section 61 of the Copyright Act 1957 states that in every civil suit or other proceeding regarding infringement of copyright instituted by an exclusive licensee, the owner of the copyright shall be made a defendant. Section 52 of the Trade Marks Act 1999 states that the registered user may institute proceedings for infringement in his or her own name as if he or she were the registered proprietor making the registered proprietor a defendant.
The good faith terms are covered under the Sale of Goods Act 1930 under the heading ‘Conditions and warranties’ under section 12, which lays down obligations for due care in terms of quality and description of the goods of the seller. In cases where the licence agreement involves a licence to manufacture the product along with use of the brand, the courts carefully scrutinise the quality control provisions of the agreement to ascertain liability under the consumer protection laws. It is thus essential that the applicable indemnity clauses be drafted with extreme caution and foresight to provide for such contingencies. In cases of food adulteration, the courts have explicitly stated that the act of adulteration is dangerous and that liability cannot be avoided owing to lack of knowledge and good faith of the seller. In such cases, liability is imposed on the licensor, the licensee and in some cases the vendor. As such matters might involve press attention and may affect the goodwill and reputation of the business, it is imperative that utmost care be taken to ensure compliance with the standards established by the Indian government.
The court-imposed obligation related to good faith or fair dealing includes common law rights as well as moral considerations. To take an example, if the licensor terminates the licence for the licensee to distribute medicines for AIDS free of charge for the benefit of the general public, the court may hold that free distribution of medicine is not a good cause for termination of the licence. To take another example, in the case of non-renewal of the licence, the court may allow a licensee to use the trademark for a specific period (say six months or so) even after the termination or expiry of the period of the licence to enable the licensee to exhaust its inventory. Similarly, where the interest of the shareholders is involved or where the licensee in good faith sets up a factory, makes substantial investments in labour and technology and takes steps to improve the business, the court may hold non-renewal or termination of the licence to be unreasonable and may order the licensor to pay reasonable compensation to licensee. Also, the court may grant the licensee right to first refusal even if the licence is silent on the same.
Intellectual property issues
Is your jurisdiction party to the Paris Convention for the Protection of Industrial Property? The Patent Cooperation Treaty (PCT)? The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)?
No specific statute defines the difference between licensing and franchising. However, the two words are different for all practical purposes. The franchisor gives the franchisee everything needed to conduct the franchise business (the trademark, trade dress, look and feel, products, etc) whereas the licensor usually licenses only its trademark or technology or both to be used by the licensee in the manufacture of its goods or rendering of services.
Licences are expressly covered under the Patents Act 1974 and the Copyright Act 1957. The Trade Marks Act 1999 does not expressly use the term ‘licence’. However, the Trade Marks Act states that a person other than the registered proprietor of a trademark may be registered as a registered user (section 48 of the Trade Marks Act 1999).
Licensees and franchisees fall under the definition of a permitted user under the Trade Marks Act 1999. Under section 48 of the Trade Marks Act, the permitted use covers use of a registered trademark by a registered user or any other authorised third party. Under section 52 of the Act, only the registered user can institute infringement proceedings in his or her own name. It can also implead the licensor as a defendant in the proceedings; however, the licensor is liable for costs in such a case only if he or she makes an appearance and takes part in the proceedings.
The Trade Marks Act is silent on the licensing of unregistered trademarks. The licensing of unregistered trademarks is covered under common law. Common law principles are also applicable for unregistered trademarks.
Section 64 clause (47) of the Finance Act 1994 defines franchise as:
an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trademark, service mark, trade name or logo or any such symbol, as the case may be, is involved.
There is no single comprehensive regulation governing licensing and franchising activities. The following laws govern licensing and franchising in India:
- the Indian Contract Act 1872;
- the Trade Marks Act 1999;
- the Patents Act 1970;
- the Copyright Act 1957;
- the Designs Act 2000;
- the Geographical Indication of Goods Act 1999;
- the Consumer Protection Act 1986;
- labour laws;
- taxation laws;
- the Foreign Exchange Management Act 2000;
- the Specific Relief Act 1963;
- the Sale of Goods Act 1930;
- the Stamp Act 1899;
- the Registration Act 1908;
- the Easement Act 1882; and
- the Competition Act 2002. In Gujarat Bottling Company Limited v The Coca-Cola Company (AIR 1995 SC 237), the Supreme Court held that a clause restricting the franchisee’s right to deal with competing goods in the franchise agreement is intended to facilitate sale of the franchisee’s goods and thus cannot be regarded as restraint of trade. However, a clause in the franchise agreement restraining a franchisee from operating a similar business under any name after termination of the agreement was held to be void in IEC School of Art & Fashion v Gursharan Goyal (1998 PTC 493 (Del));
- common law rights; and
- environmental law.
Can the licensee be contractually prohibited from contesting the validity of a foreign licensor’s intellectual property rights or registrations in your jurisdiction?
The licensee can be contractually prohibited from contesting the validity of a foreign licensor’s intellectual property rights or registrations unless the licensor has committed misrepresentation or fraud on the licensee. The licensee is also prohibited under the law of estoppel to contest the validity of a foreign licensor’s intellectual property rights, once contracted as a licensee.
Invalidity or expiry
What is the effect of the invalidity or expiry of registration of an intellectual property right on a related licence agreement in your jurisdiction? If the licence remains in effect, can royalties continue to be levied? If the licence does not remain in effect, can the licensee freely compete?
Invalidity or expiry of registration of a trademark does not have any effect on a related licence agreement since the trademark rights can also be acquired through use under common law, but invalidity or expiry of registration of a patent or design renders the licence on that patent or design invalid. The invalidity or expiry of registration of a copyright would also render the licence invalid since the work would go into the public domain, unless protected otherwise, such as by a trademark.
Requirements specific to foreigners
Is an original registration or evidence of use in the jurisdiction of origin, or any other requirements unique to foreigners, necessary prior to the registration of intellectual property in your jurisdiction?
No. India is a ‘first to use’ country and thus original registration or evidence of use in the jurisdiction of origin is not necessary prior to the registration of intellectual property.
Can unregistered trademarks, or other intellectual property rights that are not registered, be licensed in your jurisdiction?
Unregistered trademarks can be licensed. However, since a patent is required to be compulsorily registered or filed for protection on priority in order to gain protection, the patent licence should be in writing and registered (section 68 of the Patents Act 1970). However, inventions that are not patented can be protected as trade secrets without registration.
Similarly, copyright law requires the licence to be in writing (section 30 of the Copyright Act 1957) although it is not mandatory to register a copyright with the Copyright Office.
Are there particular requirements in your jurisdiction to take a security interest in intellectual property?
According to section 69(1) of the Patents Act 1970, where any person becomes entitled by assignment, transmission or operation of law to a patent or to a share in a patent or becomes entitled as a mortgagee, licensee, or otherwise to any other interest in a patent, he or she shall apply in writing in the prescribed manner to the Controller for the registration of his or her title or of notice of his or her interest in the register.
Trademark law allows the licensee to either be a registered or unregistered user. The licensee of a trademark enjoys the same rights as those enjoyed by a registered trademark proprietor. Thus, the benefit of use of the mark by an unregistered user also accrues to the registered proprietor. The Trade Marks Act also recognises non-registered licensed use. The benefit of recording a licence agreement with the Registrar of Trademarks is that the licensee can institute proceedings for infringement in his or her own name. The licensor can unilaterally apply in writing to the Registrar of Trademarks to cancel the registration of the licence agreement. No consent is required from the licensee for such cancellation.
The owner of a copyright in any existing work or the prospective owner of the copyright in any future work may grant any interest in the right by licence in writing, signed by him or her, or by his or her duly authorised agent, under section 30 of the Copyright Act 1957. Further, licence of copyright in any work shall identify such work, and shall specify the rights assigned and the duration and territorial extent of such assignment. It shall also specify the amount of royalty payable, if any, to the author or his or her legal heirs if the licensee does not exercise the rights licensed to him or her within a period of one year from the date of licence; the licence in respect of such rights shall be deemed to have lapsed after the expiry of the said period unless otherwise specified in the licence agreement. Further, if the licensee fails to make sufficient exercise of the rights assigned to him or her, and such failure is not attributable to any act or omission of the licensor, then the Copyright Board may, on receipt of a complaint from the assignor and after holding such inquiry as it may deem necessary, revoke such assignment (sections 19, 19A and 30A of the Copyright Act 1957).
Opposable to a third party
Third parties may oppose the licence, for example, when the same breaches competition laws or consumer protection laws, or goes against morality, public health and security or public policy. Under the Trade Marks Act, a third party may oppose the grant of trademark licence if it is likely to cause confusion or deception in the minds of consumers as to the origin of the product or service (see section 40).
It is not mandatory to file the document that creates a security over the trademark under the Trade Marks Act 1999. The Act does not set out any procedure or any specific form for recording a security interest, such as a mortgage. If required, however, a document can be filed with the Trade Marks Registry with a simple cover letter more for evidentiary purposes. If there is a change in the proprietor of the trademark under the security or the charge, that change must be recorded with the Trade Marks Registry. However, if no trademark application has been filed or no registration has been obtained for the trademark in India, no documents need be filed. It is usually a better practice to file the documentation with the Registrar of Companies as part of board resolutions empowering the creation of security or vested interests.
It is not mandatory to file a document that creates a security over the copyrighted work (sections 18 and 19, Copyright Act 1957 as amended by the Copyright (Amendment) Act 2012). However, if required, a document that creates a security can be filed with the Copyright Registry, with a simple cover letter more for evidentiary purposes. If there is a change in the proprietor of the copyright under the security or charge being created, the change must be recorded with the Registrar of Copyright. However, if no application has been filed for the registration of copyright, or no registration has been obtained for the copyrighted work in India, no such documents need be filed.
Registration of the agreement that creates a security interest in the patent is compulsory under the Patents Act 1970. Any security interest or a mortgage in a patent is not valid unless it is in writing and registered with the Controller General of Patents within a period of six months (or within a further period not exceeding six months in the aggregate as the controller on the application made allows) under section 68 of the Patents Act 1970. The document must contain all the terms and conditions governing their rights and obligations. The application for registration of the document must be filed in Form 16 with the Controller of Patents.
A licence, mortgage or any other interest in a registered design is not valid unless it is in writing and the agreement between the parties clearly sets out the terms and conditions governing the rights and obligations (section 30, Designs Act 2000). The agreement creating a mortgage or any other interest in the registered design must be filed with the Controller General of Designs on Form 12 within six months of the execution of the instrument or within a further period not exceeding six months in the aggregate as the controller on the application made allows.
Proceedings against third parties
Can a foreign owner or licensor of intellectual property institute proceedings against a third party for infringement in your jurisdiction without joining the licensee from your jurisdiction as a party to the proceedings? Can an intellectual property licensee in your jurisdiction institute proceedings against an infringer of the licensed intellectual property without the consent of the owner or licensor? Can the licensee be contractually prohibited from doing so?
A foreign owner or licensor of intellectual property may institute proceedings against a third party for infringement without joining the licensee as a party to the proceedings.
The licensee of an exclusive patent can, where the subject matter of the patent is a product or process, use the exclusive right to prevent third parties, who do not have his or her consent, from the act of making, using, offering for sale, selling or importing for those purposes that product in India or the product obtained directly by that process in India (section 48).
Thus, the proprietor of the patent has to be included and made a part of the infringement proceedings if being initiated by the licensees as the principle defendant or as co-owner of the patent. Until the licensee has an exclusive right in terms of the patent obtained and registered it with the Patent Office within six months, it cannot initiate or charge infringement proceedings against the third parties.
The exclusive licensee has the right to institute a suit in respect of any infringement of the patent committed after the date of the licence (section 109 of the Patent Act 1970). The non-exclusive licensee also has the right to institute a suit in respect of any infringement of the patent committed after the date of the licence provided the patentee refuses or neglects to institute proceedings within two months after being so called upon (section 110 of the Patent Act 1970).
Section 29(1) of the Trade Marks Act states:
A registered trade mark is infringed by a person who, not being a registered proprietor or a person using by way of permitted use, uses in the course of trade, a mark which is identical with, or deceptively similar to the trade mark in relation to goods or services in respect of which the trade mark is registered and in such manner as to render the use of the mark likely to be taken as being used as a trade mark.
A foreign owner or licensor of a trademark can institute proceedings against a third party for infringement without joining the licensee as a party to the proceedings.
However, a trademark licensee cannot institute a proceeding against an infringer of the licensed intellectual property without the consent of the owner or licensor except when an agreement is entered into to the contrary between the licensor and the licensee.
Section 52 of the Trade Marks Act 1999 states that a registered user may institute proceedings for infringement of a trademark in his or her own name as if he or she was the registered proprietor, making the registered proprietor a defendant.
Further, a passing-off action cannot be filed by the licensee of an unregistered trademark until consented to by the licensor.
Copyright and registered designs
An ‘exclusive licence’ means a licence that confers on the licensee or on the licensee and persons authorised by him or her, to the exclusion of all other persons (including the owner of the copyright), any right comprised in the copyright in a work, and the ‘exclusive licensee’ shall be construed accordingly. Thus, only a person having an exclusive right over the copyright can commence proceedings in the case of infringement of the same.
Section 61 of the Copyright Act 1957 states that in every civil suit or other proceeding regarding infringement of copyright instituted by an exclusive licensee, the owner of the copyright shall be made a defendant.
A non-exclusive licensee does not possess the right to claim for such infringement. This condition is also applicable for registered designs.
The licensee can be contractually prohibited from instituting proceedings against an infringer of the licensed intellectual property without the consent of the owner or licensor.
Can a trademark or service mark licensee in your jurisdiction sub-license use of the mark to a third party? If so, does the right to sub-license exist statutorily or must it be granted contractually? If it exists statutorily, can the licensee validly waive its right to sub-license?
In India, no legislation enables a licensee to sub-license the trademark to a third party until it is expressly or impliedly mentioned in the licence agreement entered into between the licensor and the licensee. Where there is a specific condition captured in the licence agreement stating that the licensee has no right to sub-license the trademark then it contractually binds the licensee from such a right.
Jointly owned intellectual property
If intellectual property in your jurisdiction is jointly owned, is each co-owner free to deal with that intellectual property as it wishes without the consent of the other co-owners? Are co-owners of intellectual property rights able to change this position in a contract?
If an intellectual property is jointly owned, each co-owner must deal with that intellectual property with the consent of the other. One co-owner cannot enter into deals, transactions or contracts with respect to the jointly owned intellectual property without the consent of the other. Each co-owner has equal rights in the intellectual property. By way of a contract, the joint or co-owners may mutually carve out their rights/ obligations to take decisions with respect to different aspects involving the intellectual property. For example, by way of a contract, the co-owners may decide that with respect to the commercialisation of the concerned intellectual property, one co-owner has the right to take decisions regarding entering into a licensing or a franchising arrangement with a third party. However, when such a contract is being executed with a third party, both co-owners must jointly execute such a contract.
First to file
Is your jurisdiction a ‘first to file’ or ‘first to invent’ jurisdiction? Can a foreign licensor license the use of an invention subject to a patent application but in respect of which the patent has not been issued in your jurisdiction?
India is a ‘first to file’ jurisdiction for patents. A foreign licensor can license the use of an invention subject to a patent application even though the patent has not been issued yet.
Scope of patent protection
Can the following be protected by patents in your jurisdiction: software; business processes or methods; living organisms?
The basic three-part test of novelty, inventive step (non-obviousness) and industrial application is followed in India in order for a patent to be granted. Further, section 3(k) of the Patents Act 1970 lists non-patentable subject matter. It provides that mathematical or business methods, computer programs per se and algorithms are not patentable.
While the law on the patentability of software in India has not yet been considered by the Indian courts, the Intellectual Property Appellate Board (IPAB) and the Patent Office have issued orders interpreting section 3(k). In Allani v Controller of Patents (27 March 2013) the IPAB upheld the controller’s order refusing an application for a method and device for accessing information sources and services on the web. The applicant’s claim was that the invention reduced the time taken to access searched-for information. While copyright affords adequate protection against software piracy, the protection it provides against the non-literal copying of software falls short, leaving the functional aspect of software unprotected. As per the guidelines by the Draft Manual of Patent Practice and Procedure by the Indian Patent Office, claims to computer programs per se, computer-readable media with programs recorded thereon, methods implemented by software that lack technical effect and methods with a technical effect but lacking hardware support in the specification are not patentable.
However, computer programs operating on specific hardware may be patentable. To be patentable, software must be used in relation to specific hardware or, more precisely, a device or apparatus, and the claim must be for the device or apparatus used in conjunction with the software component. Besides novelty, inventive step and industrial applicability, the applicant must prove that the technical effect of the invention is substantial and that it results from the interoperability of the hardware and software components.
Business processes or methods
In 2008, the Indian Patent Office released a Draft Manual of Patent Practice and Procedure providing guidelines on the types of claim allowed in respect of software-related inventions. The guidelines state that in respect of a method:
the method claim should clearly define the steps involved in carrying out the invention. It should have a technical effect. In other words, it should solve a technical problem [. . .] The claim orienting towards a ‘process/method’ should contain a hardware or machine limitation.
In Yahoo! Inc v Assistant Controller of Patents (8 December 2011) the IPAB rejected an application for a computer-implemented business method. The IPAB observed that the technical advance that was claimed over the existing art was merely an improvement in the method of doing business, and therefore the fact that there was an advance did not improve the case.
Up to 2002, as per the prevailing practice in the Patent Office, patents were not granted for inventions relating to:
- living entities of natural or artificial origin;
- biological materials or other materials having replicating properties;
- substances derived from such materials; and
- any processes for the production of living substances or entities including nucleic acids.
However, patents could be granted for processes of producing non-living substances by chemical processes, bioconversion and microbiological processes using microorganisms or biological materials. For instance, claims for processes for the preparation of antibodies or proteins or vaccines consisting of non-living substances were allowable.
In 2002, the Calcutta High Court, in its decision in Dimminaco AG v Controller of Patents and Designs, opened the doors for the grant of patents to inventions where the final product of the claimed process contained living microorganisms. The court concluded that a new and useful art or process is an invention, and where the end product (even if it contains living organism) is a new article, the process leading to its manufacture is an invention.
Trade secrets and know-how
Is there specific legislation in your jurisdiction that governs trade secrets or know-how? If so, is there a legal definition of trade secrets or know-how? In either case, how are trade secrets and know-how treated by the courts?
There is no specific legislation regulating the protection of trade secrets in India. India follows common law principles for protection of confidential information or know-how. It therefore becomes imperative to strengthen the confidentiality around the trade secret by ensuring that contractual obligations are enforced on persons who are allowed to use the trade secret, especially when it is licensed to a third party. So, if the information constituting the trade secret is disclosed without authorisation, legal action can be brought against the party who has disclosed it under the law of contracts and common law. However, in such a case the protection of the trade secret will be lost and it becomes available in the public domain. It is essential to maintain proof of creation of a trade secret either by mailing the information to oneself and retaining postmarked and sealed envelopes or by depositing a copy of the information with a third party that would maintain a dated copy.
Does the law allow a licensor to restrict disclosure or use of trade secrets and know-how by the licensee or third parties in your jurisdiction, both during and after the term of the licence agreement? Is there any distinction to be made with respect to improvements to which the licensee may have contributed?
Yes, the law allows a licensor to restrict disclosure or use of trade secrets and know-how by the licensee or third parties both during and after the term of the licence agreement. Careful restrictions should be placed upon the licensee to protect the IP of the licensor, most importantly strict confidentiality obligations should be imposed on the licensee.
Rights over the improvements to which the licensee may have contributed are part of the subject matter of the contract.
What constitutes copyright in your jurisdiction and how can it be protected?
Copyright is a right given by the law to creators of:
- original literary, dramatic, musical and artistic works;
- cinematograph films; and
- sound recordings (section 13 of the Copyright Act 1957).
Copyright is a bundle of rights including the reproduction rights, the right to issue copies, the right to communicate the work to the public, and make adaptations and translations of the work, and the right to perform the work in public. There could be slight variations in the composition of the rights depending on the kind of work.
Copyright in India is protected automatically as soon as the work is created. The Copyright Act 1957 also provides the provisions for the registration of copyright but registration is not mandatory.
Perpetual software licences
Does the law in your jurisdiction recognise the validity of ‘perpetual’ software licences? If not, or if it is not advisable for other reasons, are there other means of addressing concerns relating to ‘perpetual’ licences?
In India, the Copyright Act 1957 grants protection to original expression and computer software is granted protection as a copyright unless it leads to a technical effect and is not a computer program per se. For a copyright protection, computer software needs to be original and sufficient effort and skill must be put in for it to be considered original. Section 19(5) of the Copyright Act 1957 states that if the period of assignment is not stated, it shall be deemed to be five years from the date of assignment or licence (see section 30A of the Copyright Act 1957). Thus, the question of a perpetual licence for software is negated and in such cases the term of the copyright on software can be renewed by the parties.
Are there any legal requirements to be complied with prior to granting software licences, including import or export restrictions?
According to section 30 of the Copyright Act 1957, no licence of the copyright in any work shall be valid unless it is in writing signed by the licensor or by his or her duly authorised agent (see section 30A of the Copyright Act 1957). Thus, the same condition applies to the licensing of software (copyright subject). Section 19(6) imposes a restriction on territorial limits for the extent of the licensed rights, which says that if such a territorial limit is not prescribed it will be assumed to be within India. The parties are required to follow the EXIM policy of India prior to granting software licences.
Restrictions on users
Are there any legal restrictions in your jurisdiction with respect to the restrictions a licensor can put on users of its software in a licence agreement?
No. There are no such legal restrictions. As an owner or licensor, the Licensor has the right to determine the terms of a licence agreement. These restrictions or terms should, however, not be illegal or violative of a prevalent statute in India or contrary to law.
Royalties and other payments, currency conversion and taxes
Is there any legislation that governs the nature, amount or manner or frequency of payments of royalties or other fees or costs (including interest on late payments) in an international licensing relationship, or require regulatory approval of the royalty rate or other fees or costs (including interest on late payments) payable by a licensee in your jurisdiction?
There is no statutory legislation, or approvals, that govern the frequency of payments of interest, royalties, fees and costs. The licence agreement should expressly include such interest and costs payable after the licensor passes his or her rights to the licensee. The rate of interest or penalty, etc, should not be unreasonable. The reasonableness of amount is a question of fact depending upon the facts and circumstances of each case. However, in estimating the loss or damage arising from a breach of contract, the means that existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account (explanation to section 73, the Indian Contract Act 1872).
Are there any restrictions on transfer and remittance of currency in your jurisdiction? Are there are any associated regulatory reporting requirements?
Yes, there exist restrictions on remittances of foreign currency, the procedure of which is governed under FEMA. However, in line with the Press Note issued in 2009 by the Ministry of Commerce and Industry, and effective immediately thereafter, the government of India had reviewed the earlier policy and decided to permit from then on payments of royalties, lump sum fees for transfers of technology and payments of use of trademarks and brand names on the automatic route (ie, without any approval needed from the government of India). All such payments will, however, continue to be subject to the Current Account Transactions Rules 2000, as amended from time to time.
Taxation of foreign licensor
In what circumstances may a foreign licensor be taxed on its income in your jurisdiction?
Foreign transactions that involve technical know-how including intellectual property rights assignment are liable to be taxed as per the Income Tax Act 1961. This includes sale of designs, lending services of technicians, royalties and licensing. Sections 44D and 115A provide for special methods for calculating income by way of royalties and technical services of foreign companies and non-resident Indians. The rate of tax fixed under section 44D is 20 per cent of the gross amount. Any income by way of dividend, interest and income from mutual funds is charged at 20 per cent. Under section 115, income by way of royalties or fees for technical assistance is charged at 20 per cent. Royalties include consideration for transfer of all or any rights, which includes the right to grant licences with respect to that of copyright in any book to an Indian concern or in respect of any computer software to a person resident in India.
India has entered into double tax agreements with some of the countries.
Competition law issues
Restrictions on trade
Are practices that potentially restrict trade prohibited or otherwise regulated in your jurisdiction?
The Competition Act 2002 aims to prevent practices that have an adverse effect on competition, to promote and sustain competition in the markets, to protect the interests of consumers and to ensure freedom of trade. Predominantly, the Act focuses on activities and agreements that hinder competition or unnecessarily hamper the functioning of the market forces, which are essential to healthy competition. It imposes strict bans on anti-competitive agreements and cartels that have, or are likely to have, an appreciable adverse effect on the economy.
Therefore, when the licensee is the only seller in the market and the licence agreement allows it unilaterally to change the price of the product, this is considered illegal as it amounts to abuse of a dominant position. Further, if a group of licensors enters into a combination that may be detrimental to competition, this will be void. However, this does not extend to share subscriptions or financing facilities or any acquisition, by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to any covenant of a loan agreement or investment agreement.
The Act aims to safeguard the intellectual property rights of the licensor. Section 5(3) allows the licensor to impose reasonable restrictions required to protect its intellectual property rights.
Are there any legal restrictions in respect of the following provisions in licence agreements: duration, exclusivity, internet sales prohibitions, non-competition restrictions and grant-back provisions?
There are no legal restrictions with respect to the duration of the licence except that the Copyright Act 1957 states that if the contract is silent on the duration of the licence, it is considered to be five years (section 19).
The licence may be exclusive or non-exclusive. There is no legal restriction in respect of the exclusivity of the licence.
There are no legal restrictions in respect of internet sales prohibitions except when the same is for illegal goods or services or activities (eg, gambling activities on the internet) or is covered under the Information Technology Act 2000.
The licence may contain a prohibition on the licensor and licensee competing with one another in the jurisdictions they are operating in; the same depends upon the terms of the contract.
There are no legal restrictions in respect of grant-back provisions and the same depends on the contractual arrangement between the parties.
IP-related court rulings
Have courts in your jurisdiction held that certain uses (or abuses) of intellectual property rights have been anticompetitive?
Yes, courts in our jurisdiction have held that certain uses (or abuses) of IPR have been anticompetitive. For instance, in a recent case (Telefonaktiebolaget Lm Ericsson v Competition Commission of India, W.P.(C) 464/2014), Indian smartphone manufacturers, such as Micromax and Intex had alleged that Ericsson had demanded excessive royalties from them for its standard essential patents in respect of technologies that are used in mobile handsets and network stations. It was held that by virtue of such anticompetitive acts, Ericsson had abused its position of dominance.
Indemnification, disclaimers of liability, damages and limitation of damages
Are indemnification provisions commonly used in your jurisdiction and, if so, are they generally enforceable? Is insurance coverage for the protection of a foreign licensor available in support of an indemnification provision?
An intellectual property infringement indemnity provides the customer with limited protection against claims, by persons who are not parties to the contract (known as ‘third parties’), based on allegations that the customer’s use of the licensed software infringes the third party’s intellectual property rights (eg, copyright, patents and trade secrets).
An intellectual property (IP) infringement indemnity usually imposes two distinct obligations on the software vendor: (i) an obligation to defend the licensee against IP infringement claims; and (ii) an obligation to indemnify (reimburse) and hold harmless (protect) the licensee against obligations and liabilities (including court awards and settlement payments) resulting from IP infringement claims.
The scope of such an infringement indemnity can be adjusted using the same variables - beneficiaries, covered claims, time restrictions and financial limitations as apply to a general indemnity. An IP infringement indemnity usually requires the licensee to comply with the same kinds of procedural obligations: prompt notice of a covered claim, conduct and control of defence or settlement of a covered claim and cooperation regarding a covered claim as apply to a general indemnity.
Such infringement indemnities are often subject to exceptions for certain kinds of infringement claims (eg, certain patent infringement claims), exclusions for infringement claims caused by certain circumstances (eg, the licensee’s modification of the licensed software or unauthorised use of the licensed software), and limitations on the software vendor’s total financial liability.
Waivers and limitations
Can the parties contractually agree to waive or limit certain types of damages? Are disclaimers and limitations of liability generally enforceable? What are the exceptions, if any?
The parties can contractually agree to waive or limit certain types of damages. The disclaimers and limitations of liability are generally enforceable between the parties to the agreement. One exception is that a sub-licensee may not be bound by the waiver or limitation of damage between the licensor and licensee.
Right to terminate
Does the law impose conditions on, or otherwise limit, the right to terminate or not to renew an international licensing relationship; or require the payment of an indemnity or other form of compensation upon termination or non-renewal? More specifically, have courts in your jurisdiction extended to licensing relationships the application of commercial agency laws that contain such rights or remedies or provide such indemnities?
The law does not impose any condition on, or otherwise limit, the right to terminate or not to renew an international licensing relationship or require the payment of an indemnity or other form of compensation upon termination or non-renewal between the parties. As with any type of commercial agreement, a licence agreement should have both a defined term and provisions outlining when a party may terminate the agreement, and for what reason. It is also recommended to deal with the effect of termination in advance, so that each party can plan an exit strategy with full knowledge of the consequences of any termination of the agreement.
Impact of termination
What is the impact of the termination or expiration of a licence agreement on any sub-licence granted by the licensee, in the absence of any contractual provision addressing this issue? Would a contractual provision addressing this issue be enforceable, in either case?
As the terms of any licence agreement are binding upon the parties that have entered into the agreement, if the clause specifying the termination period of the licence suffices such termination and expiration, the same will automatically have an impact on any sub-licence granted by the licensee in absence of any particular provision mentioned in the agreement. If the sub-licensed party still continues to use the licensed intellectual property right such an act will lead to infringement implications. However, in some situations (depending on the terms of the licence), the licensee may be the agent of the licensor and thus the sub-licensee may be a sub-agent. In such cases, the licensor is directly responsible to the sub-licensee on the representations of the licensee and the termination of the licence between licensor and licensee may not automatically lead to the termination of the sub-licence. An express contractual provision addressing the aforesaid issue will be enforceable since the clause would clearly lay down the impact such termination will have on the sub-licence.
Impact of licensee bankruptcy
What is the impact of the bankruptcy of the licensee on the legal relationship with its licensor; and any sub-licence that the licensee may have granted? Can the licensor structure its international licence agreement to terminate it prior to the bankruptcy and remove the licensee’s rights?
Many licence agreements also attempt to provide a party with the immediate right to terminate upon the bankruptcy or insolvency of the other party. However, the effects of a bankruptcy or insolvency on the termination of intellectual property rights (including licence rights) is a conflicting legal area. The termination may not be enforceable in any event; a stay of termination may be applied for by a licensee or its trustee in order to be able to maintain its business. Any such provisions should be viewed with a degree of suspicion, and drafted carefully if enforceability is critical.
Impact of licensor bankruptcy
What is the impact of the bankruptcy of the licensor on the legal relationship with its licensee; and any sub-licence the licensee has granted? Are there any steps a licensee can take to protect its interest if the licensor becomes bankrupt?
Generally, provisions related to bankruptcy of either party are built in the licence agreement. Termination clause of a licence agreement as a matter of practice in India contains provisions regarding the termination of the agreement upon the bankruptcy of either party. Therefore, at the time of negotiations and finalisation of a licence agreement, the licensee must ensure that its rights and interest are protected in case the licensor goes bankrupt.
In each contract, the parties are free to decide upon the consequences of either party being declared bankrupt.
Governing law and dispute resolution
Restrictions on governing law
Are there any restrictions on an international licensing arrangement being governed by the laws of another jurisdiction chosen by the parties?
There are no restrictions on an international licensing arrangement being governed by the laws of other jurisdictions chosen by the parties except for issues of taxation. Thus, the parties may choose to be governed by the laws of another jurisdiction instead of India. However, they may still have to pay the taxes as applicable under the Indian laws.
Contractual agreement to arbitration
Can the parties contractually agree to arbitration of their disputes instead of resorting to the courts of your jurisdiction? If so, must the arbitration proceedings be conducted in your jurisdiction or can they be held in another?
In such a case, an express condition stating the requirement for arbitration of the dispute is to be incorporated in the contractual agreement that is agreed to by both the parties. Arbitration proceedings can be conducted in any jurisdiction as agreed by the parties. The parties can agree to exclude arbitration in toto, if they intend to directly resort to the courts having jurisdiction.
Would a court judgment or arbitral award from another jurisdiction be enforceable in your jurisdiction? Is your jurisdiction party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
Yes, as India is a member of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a court judgment or arbitral award from another jurisdiction can be enforced in India unless it is invalidated on some grounds by the court in India under section 13 of the Code of Civil Procedure 1908 or under any other law.
Is injunctive relief available in your jurisdiction? May it be waived contractually? If so, what conditions must be met for a contractual waiver to be enforceable? May the parties waive their entitlement to claim specific categories of damages in an arbitration clause?
Injunctive relief is available and can be waived contractually. Claims and damages can also be waived in an arbitration agreement by agreeing to the jurisdiction of the arbitrator. The injunctive relief may be waived, provided the arbitral proceedings have not been decided and an arbitral award has not been obtained.
The parties may also waive their entitlement to claim specific categories of damages in an arbitration clause.
The information in this chapter is accurate as of January 2018.