Tuesday, June 30, 2015

Standard Essential Patents: Reviewing the IEEE’s Patent Policy for Standard Implementation- Part I

Earlier this year in March, the Institute of Electrical and Electronics Engineers (IEEE) published the latest version of its bylaws which shall apply to the licensing practices of its members in so far as they relate to the technology standards prescribed by the IEEE. Given that a lot has already been written about the policy, I am not sure if I can add a new perspective to it. Therefore, these series of posts I intend to pen may be treated as my on-going attempts to make sense of the policy given its relevance to my current body of work.

Articles 6 and 7 of the policy deal with the patent and copyright policies respectively. In this post, I review certain aspects of the Patent policy, which I believe are significant developments. Article 6.1 which contains the definitions defines “Compliant Implementation” thus:

Compliant Implementation” shall mean any product (e.g., component, sub-assembly, or end-product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard.

At a time when there is little or no judicial guidance, much less clarity, on whether the policy of the European Telecommunications Standards Institute (ETSI) envisages an obligation on SEP owners to grant FRAND-encumbered licenses to component manufacturers such as chipset makers, the IEEE’s definition of “compliant implementation” must be welcomed for its expansive scope and clarity. The definition expressly treats a component or sub-assembly, and not just the end-product, as product for the purposes of standard compliant implementation.

Although Intel has advanced a similar position in its amicus brief before the United States Court of Appeals for the Federal Circuit in Apple v. Motorola, the brief does not undertake a systematic interpretation of terms such as “Manufacture”, “Equipment” and “Methods” which have been defined in the ETSI IPR policy. This is not to say that Intel’s argument is without basis, but the reasoning in the brief could have been more comprehensive so as to deal with and negate the position that only end-product manufacturers are entitled to a FRAND license under the ETSI IPR policy. Fortunately, the IEEE policy leaves very little to imagination in this regard giving the impression that the framers of this policy have drawn important lessons from the ongoing debate with respect to the ETSI policy.

The other important definition, perhaps a more critical one, is that of an “Essential Patent Claim” which is defined as follows:

“Essential Patent Claim” shall mean any Patent Claim the practice of which was necessary to implement either a mandatory or optional portion of a normative clause of the IEEE Standard when, at the time of the IEEE Standard’s approval, there was no commercially and technically feasible non-infringing alternative implementation method for such mandatory or optional portion of the normative clause. An Essential Patent Claim does not include any Patent Claim that was essential only for Enabling Technology or any claim other than that set forth above even if contained in the same patent as the Essential Patent Claim”

It is pertinent to note that the definition includes both mandatory and optional portions of an IEEE standard. In other words, even if a patent claim covers an optional portion of an IEEE standard, it shall be deemed to be an Essential Patent Claim. It would be interesting to see a Court interpret this definition in the future in light of Fujitsu v. Netgear, where the subject-matter of the dispute related to IEEE standards. In this decision, the United States Court of Appeals for the Federal Circuit held that where a portion of a standard is optional:

standards compliance alone would not establish that the accused infringer chooses to implement the optional section. In these instances, it is not sufficient for the patent owner to establish infringement by arguing that the product admittedly practices the standard, therefore it infringes. In these cases, the patent owner must com-pare the claims to the accused products or, if appropriate, prove that the accused products implement any relevant optional sections of the standard. This should alleviate any concern about the use of standard compliance in assessing patent infringement. Only in the situation where a patent covers every possible implementation of a standard will it be enough to prove infringement by showing standard compliance.”

In view of this test, can the updated definition of an Essential Patent Claim prevail over the Federal Circuit Court’s ruling? Given that ruling of the Court, and not IEEE’s bylaws, has the force of law as to what constitutes "essential" and how essentiality may be established, the definition may not be of much use to patentees who claim ownership of IEEE standards in circumventing the test laid down by the Court.

The other interesting aspect of the definition of an Essential Patent Claim is its express exclusion of any enabling technology. “Enabling Technology” has been defined thus:

““Enabling Technology” shall mean any technology that may be necessary to make or use any product or portion thereof that complies with the IEEE Standard but is neither explicitly required by nor expressly set forth in the IEEE Standard (e.g., semiconductor manufacturing technology, compiler technology, object oriented technology, basic operating system technology, and the like)”

According to this definition, it appears that owners of essential patent claims cannot extend their claim of essentiality over or treat as essential those patent claims which are directed towards technologies/products that enable the implementation of an IEEE standard. In other words, since an IEEE standard could be silent on the actual manner of its enablement, a patentee which allegedly owns a Standard Essential Patent cannot claim that a specific enabling technology is essential for the implementation of the standard since there could be multiple ways of implementing the standard.

This does not mean that infringement cannot be alleged by the patentee. It only means that as opposed to using the claim of essentiality to establish infringement, the patentee would need to demonstrate a claim-based infringement using the conventional claim-to-product comparison. Therefore, only if the patent contains a claim which covers a particular manner of enablement of the standard or a product which facilitates enablement, it would be available for the patentee to allege infringement based on the claim since the essentiality of the patent cannot aid him in this regard. In this sense, the definitions of Essential Patent Claim and Enabling Technology strike a distinction between technology/product which enables the implementation of the Essential Patent Claim and technology/product which actually implements/uses the Essential Patent Claim. This is yet another interesting aspect of the definitions whose interpretation and application by Courts is bound to generate divergent views. 

In the next post, I shall continue with my review of the IEEE patent policy. 

Friday, June 5, 2015

Trademark Remedies under the Companies Act, 2013

The erstwhile Companies Act, 1956 provided for certain trademark remedies under Sections 20 and 22. Section 20 spelt out the criteria for names which were deemed “undesirable” for registration as company names and Section 22 provided the mechanism for rectification of a company name. A more rationalized framework for rectification is available under Section 16 of the current Companies Act, 2013.

Extracted below is Section 16 of the 2013 Act:

16. (1) If, through inadvertence or otherwise, a company on its first registration or on its registration by a new name, is registered by a name which,—
(a) in the opinion of the Central Government, is identical with or too nearly resembles the name by which a company in existence had been previously registered, whether under this Act or any previous company law, it may direct the company to change its name and the company shall change its name or new name, as the case may be, within a period of three months from the issue of such direction, after adopting an ordinary resolution for the purpose;
(b) on an application by a registered proprietor of a trade mark that the name is identical with or too nearly resembles to a registered trade mark of such proprietor under the Trade Marks Act, 1999, made to the Central Government within three years of incorporation or registration or change of name of the company, whether under this Act or any previous company law, in the opinion of the Central Government, is identical with or too nearly resembles to an existing trade mark, it may direct the company to change its name and the company shall change its name or new name, as the case may be, within a period of six months from the issue of such direction, after adopting an ordinary resolution for the purpose.
(2) Where a company changes its name or obtains a new name under sub-section (1), it shall within a period of fifteen days from the date of such change, give notice of the change to the Registrar along with the order of the Central Government, who shall carry out necessary changes in the certificate of incorporation and the memorandum.
(3) If a company makes default in complying with any direction given under sub-section (1), the company shall be punishable with fine of one thousand rupees for every day during which the default continues and every officer who is in default shall be punishable with fine which shall not be less than five thousand rupees but which may extend to one lakh rupees.

From the provision, it is clear that while Clause (b) of sub-Section (1) allows only a registered proprietor of a trademark to apply to the Central Government for rectification of the name of a company whose name is identical to or “too nearly resembles” the registered trademark, the remedy under Clause (a) is not limited to a registered proprietor of a trademark. In other words, a company whose name is not a registered trademark too could invoke Clause (a) to seek rectification of the name of another company whose name is identical or too nearly resembles its own. This is an additional expeditious remedy to a suit for passing off if the trademark is used as a company name by a third party.

The remedy under Clause (a), which was available even under Section 22 of the erstwhile 1956 Act (albeit through a circuitous procedure), has probably been provided for in recognition of and as a counterpart to the action for passing off available to owners of unregistered trademarks under the Trademarks Act, 1999. That said, it is to be borne that while Clause (b) permits a registered proprietor of a trademark to apply for rectification of a company's name even if the former does not use the registered trademark as a company name, the remedy under Clause (a) is available only if both the applicant for rectification and the company against whom rectification is sought, use the trademark as company names. In this sense, the remedy under Clause (a) is narrower. On the positive side, while under Clause (b) a registered proprietor is required to make an application for rectification within three years of incorporation or registration or change of name of the company with respect to whom the rectification is sought, there appears to be no such limitation period under Clause (a).

The rule that corresponds to Section 16 is Rule 8 of the Companies (Incorporation) Rules, 2014 (which came into force on April 1, 2014) that enumerates detailed criteria to be mandatorily considered in deeming a proposed company name undesirable for registration under the Companies Act. Interestingly, Rule 8(2)(a) also deems undesirable a name which includes a trade mark that is subject of an application for registration under the Trademarks Act, 1999, unless the consent of the applicant for trademark registration has been obtained and produced by the promoters of the company.

Rule 8(2)(b), among other things, also bars a proposed company name which:
A. is identical with or too nearly resembles the name of a limited liability partnership 
B. resembles closely the popular or abbreviated description of an existing company or limited liability partnership
C. is identical with or too nearly resembles the name of a company or limited liability partnership incorporated outside India and reserved by such company or limited liability partnership with the Registrar of Companies under Section 4 of the Act (read with Rule 9)
D. is identical to the name of a company dissolved as a result of liquidation proceeding and a period of two years have not elapsed from the date of such dissolution
E. is identical with or too nearly resembles the name of a limited liability partnership in liquidation or the name of a limited liability partnership which is struck off up to a period of five years
F.  is generic to the trade
G. contains only the name of a continent, country, state, city


Clearly, Section 16 and Rule 8 seem designed to provide expeditious alternatives to suits for trademark infringement and passing off in so far as the use of marks as company names in concerned. I haven’t thus far come across an order passed by the Central Government in an application under Section 16 and I am not sure orders passed under Section 22 of the erstwhile 1956 Act were or are available on the website of the Ministry of Corporate Affairs. If they are not, they ought to be made available because it is important to know the quality of reasoning adopted by the Ministry in allowing or rejecting such applications. I request readers to share any such orders that they may be aware of. 

Thursday, June 4, 2015

IP Licensing and Taxation: What is “transfer” in “transfer of right to use goods”?

In my last post I reviewed and differed with the decision of the Bombay High Court in Tata Sons & Anr. v. The State of Maharashtra & Anr. wherein the central question was whether Tata Sons’ Agreement for use of the Tata trademark with its group companies resulted in transfer of right to use the mark to the latter. In this post, the idea is to enquire deeper into the concept of “transfer” so as to understand the distinction between a license to the use goods (including a trademark) and transfer of right to use the goods.

Let’s start by breaking down “transfer of right to use the goods” into its constituents. It cannot be denied that there is a clear distinction between “right to use the goods” and “transfer of right to use the goods”. “Right to use the goods” is perhaps synonymous with “permission to use the goods”, which is very different from “transfer of the right to use goods”. In the case of “transfer”, the common understanding of the term is that it results in conveyance of title in the property, or one of the bundle of rights in the property to a third party. Therefore, to equate transfer of right to use with a mere right to use would be erroneous. A mere right to use the property with the consent of the owner of the owner of the property is a license. However, if one of the rights in the property, say the right of possession, were to be transferred by the owner of the property to another party, it would result in transfer of the right of possession, even if such transfer is for a limited period of time. It must also be borne that transfer results in excluding the owner of the property as well from exercising the right so transferred. It is for this reason that an exclusive license (i.e. to the exclusion of the right owner and all third parties) for howsoever a limited period of time, could qualify as transfer of right to use.

The above interpretation finds support in Para 32 of the Supreme Court’s decision in Twentieth Century Finance Corporation v. The State of Maharashtra, which is extracted below:

(32) Coming to the question that a transaction in question is in the nature of a contract of bailment, it is true that the High Court of Bombay in the judgment under appeal has taken the view that the transactions of the transfer of the right to use goods are in the nature of bailment. If such a view is taken then the State would not have the power to levy sales tax on such transactions. Unless such transaction is held to be a sale or deemed sale in law and it is only then the State legislature would be competent to enact law to levy tax under Entry 54 of List II of Seventh Schedule. The levy of tax is not on use of goods but on the transfer of right to use goods. The High Court proceeded on the footing that the transfer of right to use is different from sale or deemed sale without considering the legal fiction engrafted in clause (29A) of Article 366 of the Constitution. We are, therefore, of the view that the reasoning of the High Court in upholding the Explanation to Section 2(10) of the Act is not tenable in law.

As the Court rightly notes, in understanding the import of the words “transfer of right to use goods”, it is important to understand the need for treating such transfer of right to use as deemed sale for the purposes of taxation. Extracted below is Clause (29A) of Article 366 of the Constitution, which enumerates transactions that are deemed sales and to which sales tax applies:

(29A). Tax on the sale or purchase of goods' includes –
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) Involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

It is evident from that above that Sub-clause (d) of Clause (29A) treats transfer of right to use goods as deemed sale. As I said in the last post, the purpose of the legal fiction created by the Constitution (or State legislations) to deem transfer of right to use goods as “sale”, is to tax transfer of divisible rights (even if such transfer is for a limited period) despite the title in the goods remaining with the transferor. This fiction helps to prevent mischief in instances where a transaction, which for all intents and purposes is a sale of a right (if not the good itself), is sought to be couched as a license. However, the concept of transfer remains unaltered i.e. the result of the transaction must be to the exclusion of the owner and all third parties for it to acquire the status of a transfer. Simply stated, exclusivity, for howsoever limited a period, is inherent in transfer of any kindThis view finds resonance in the following observations of the Supreme Court in Twentieth Century:

“64. A perusal of Sub-clause (d) shows that the tax, envisaged therein, is on the transfer of the right to use any goods for any purpose, the period of use may or may not be specified, the consideration whereof may be cash, deferred payment or any other valuable consideration (need not necessarily be cash consideration). As the tax is on the transfer of right to use any goods, we shall ascertain the meaning of the word 'transfer'.

65. In The New Shorter Oxford English Dictionary 1993 Edition, Volume 2, Page 3367, its meaning is given, inter alia, as follows: '(Law)-conveyance of property, especially of stock of shares, from one person to another.' In Black's Law Dictionary Sixth Edition, Page 1497, the word 'transfer' is defined to mean, inter alia, "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property...'. In Corpus Juris Secundum Volume 87, Page 892, it is defined to mean, "common use of the word 'transfer' is, to denote the passing of title in property or an interest therein from one person to another and in that sense the term means that the owner of the property delivers it to another person with the intent of passing the rights which he had in it to the latter."

66. Our endeavour here is to discern what transfer, in the context of Clause (d), means. Is it simply signing of a document that brings about a transfer of right to use any goods or is it also necessary to give control of the goods to complete the transfer with the Intent of passing the right to use the goods to the hirer? A combined reading of the first and the second limb of Clause (29A) suggests that mere execution of a document de hors passing the domain of the goods does not result in transfer of right to use any goods and will not constitute a 'deemed sale' within the meaning of Clause (29A), The 'deemed sale' envisaged in Sub-clause (d) involves not only a verbal or written transfer or right to use any goods but also an overt act by which the transferor places the goods at the disposal of the transferee to make their use possible. On this construction, it is explicit that the transfer of right to use any goods involves both passing of a right in as well as domain of the goods in which right to use is transferred.

72. Reverting to Sub-clause (d) of Clause (29A), a perusal of the Statement of Objects and Reasons appended to The Constitution (Forty-Sixth Amendment) Act, 1982, shows that the Parliament has taken note of the fact that the main right in regard to films relates to its exploitation and after exploitation for a certain period of time, in most cases, the film ceases to have any value, so instead of resorting to the outright sale of a film, only a lease or transfer of the right to exploit the film is made. The device by way of lease of films has been resulting in avoidance of sales tax so to curb that device, Sub-clause (d) is inserted in Clause (29A). Even so, Sub-clause (d) is wider import than a mere leasing of films. It applies to all kinds of leasing/hiring of goods, for example, leases of plants, machinery, computers, cars, planes, furniture etc,

73. A sale of any goods is complete when the property in the goods passes to the purchaser pursuant to a contract of sale of those goods. So also, a deemed sale of goods under Sub-clause (d), as has been pointed out above, will be complete when the control of the goods in which the right to use is transferred, passes to the transferee under the contract of transfer. Such a transfer of right to use any goods may be effected either by the execution of a written contract between the parties indicating the mode by which giving the control or domain of the goods to the hirer is contemplated or by an oral contract coupled with delivery of the goods to the hirer. There can be no oral contract with regard to unascertained goods because there can be no delivery of such goods. Where a written contract exists whether in regard to ascertained goods or unascertained goods, the intention of the parties, as evidenced by the terms of the contract to 'transfer of right to use the goods' is determinative of the fact as to when, how and where the right to use the goods is transferred. It is a well-settled principle of interpretation of contracts that the contract must be construed as a whole. When and where such a deemed sale, under Sub- clause (d), takes place is a question of fact which has to be decided on the facts and circumstance of each case, Including the terms and conditions of the contract evidencing the transaction.

74. It may also be pointed out that though the ingredients of a sale of the goods as defined in the Sales of Goods Act and a deemed sale of goods as defined in Clause (29A) of Article 366 are different there can be no difference in the incidence of tax and they cannot be treated differently for the purpose of levy of sales tax.”

These findings of the Court are consistent with Justice Lakshmanan’s enumeration of the ingredients of transfer of right to use goods in BSNL v. Union of India, which perhaps captures the spirit of the transaction best, as follows:

“To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c. The transferee should have a legal right to use the goods. Consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor. This is the necessary concomitant of the plain language of the statute viz. a "transfer of the right to use" and not merely a licence to use the goods;
e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

From these decisions of the Supreme Court, it is clear that the legal fiction of “deemed sale” does not alter the character and ingredients of “transfer”. Therefore, grant of a non-exclusive right to use a trademark does not, in my opinion, amount to “transfer of right to use the mark”. One hopes the decision of the Bombay High Court in the Tata Sons case is set aside by the Supreme Court and the law relating to transfer of right to use incorporeal goods such as IP is laid down with clarity.

Tuesday, June 2, 2015

IP Licensing and Taxation: Reviewing the Bombay High Court’s Decision in the Tata Sons case

On January 20, 2015, a Division Bench of the Bombay High Court delivered a 53-page decision in Tata Sons Limited & Anr. v. The State of Maharashtra & Anr. which assumes significance for IP licensing and taxation. The broad issue before the Court was the applicability of the Maharashtra Sales Tax on the Transfer of Right to use any Goods for any Purpose Act, 1985 to the TATA Brand Equity and Business Promotion Agreement entered into by Tata Sons with its group companies.

As the name of the Agreement suggests, its object was to protect, enforce and enhance the image and goodwill of the TATA name and its brand equity. In a nutshell, the Agreement permitted the use of the TATA brand name and its trademarks by the Tata Group of companies, subject to compliance with quality control conditions laid down in the Agreement by Tata Sons.

The specific issue before the Court was whether the nature of the transaction between Tata Sons and its group companies in relation to the permitted use of the brand amounted to “transfer of right to use any goods for any purpose” within the meaning of the Act. According to the tax authorities of the State of Maharashtra, Tata Sons was liable to pay sales tax on the Agreement since the transaction resulted in transfer of right in the Tata trademark (and therefore amounted to sale within the meaning of the Act), while Tata Sons contended that there was no transfer of right under the Agreement.

Apart from relying on several decisions of the Maharashtra Sales Tax Tribunal in support of its contention, Tata Sons also relied upon the landmark decision of the Supreme Court in BSNL v. Union of India (2006) (links here and here) where the essential ingredients of a transfer of right to use goods was spelt out by the Supremes. It was Tata Sons’ contention that the issues considered and the conclusions arrived at by the Supreme Court in the BSNL case squarely applied to its Agreement with its group companies.

Following are the ingredients of transfer of right to use identified by Justice Lakshamanan in the BSNL decision:
To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c. The transferee should have a legal right to use the goods. Consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor. This is the necessary concomitant of the plain language of the statute viz. a "transfer of the right to use" and not merely a licence to use the goods;
e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

Applying the above ingredients to its Agreement, Tata Sons contended that it did not envisage any kind of transfer of right as required by the Act for levying of sales tax. The limited purpose of the Agreement, according to Tata Sons, was to permit its group companies to use the Tata mark which was a mere license to use the mark, and not transfer of right to use the mark. It was also submitted that the Agreement was not a composite one for sale and service, consequently no part of the Agreement lent itself to the levying of sales tax. Critically, given that non-exclusive rights to use the mark were created in favour of 113 group companies, there was no factual or legal basis to arrive at the conclusion that “transfer" of right to use the mark was either provided by or was a consequence of the Agreement.

Despite these compelling arguments by Tata Sons, surprisingly the Bombay High Court went on to hold that the transaction provided for in the Agreement amounted to transfer of right to use goods. Although it cannot be disputed that goods under the Act include goods of incorporeal or intangible character such as patents and trademarks, the central issue is whether the Agreement resulted in a “transfer” of right to use the Tata mark. This issue, in my humble opinion, was not addressed convincingly by the Court.

A perusal of Paras 40 and 41 of the judgment reveals that the Court’s reasoning was based on the fallacious assumption that since the Act did not expressly require “exclusive” transfer, multiple non-exclusive rights of use being created in favour of third parties by Tata Sons too would amount to “transfer” within the meaning of the Act. What is astounding is that the Court acknowledged that in the facts of the case, the right to use the Tata mark was not granted to the group companies to the exclusion of Tata Sons, and yet concluded that there was a “transfer” of right to use.

The clear impression that one gets based on a reading of the judgment is that the Court was swayed entirely by the fact that (a) trademarks constituted goods and (b) that Tata Sons had created rights in favour of third parties to use the mark. The requirement of “transfer”, which is a condition precedent for application of the Act to a transaction, appears to have been given a complete go by. In the process, the Court has blurred a critical distinction between a trademark license and the transfer of right to use a trademark. Simply put, if an agreement between a trademark owner and a third party which permits non-exclusive use of the trademark by such third party in return for payment of royalty is not a license to use the trademark, then what constitutes a license so as to not attract the levying of sales tax?

In my opinion, the purpose of the legal fiction created by the Act to deem transfer of right to use goods as “sale” is to tax transfer of divisible rights (even if such transfer is for a limited period) despite the title in the goods remaining with the transferor. Further, this fiction helps to prevent mischief in instances where a transaction, which for all intents and purposes is a sale of a right (if not the good itself), is sought to be couched as a license. That said, I dont believe the concept of what constitutes transfer is altered i.e. the result of the transaction must be to the exclusion of the owner and all third parties for it to acquire the status of a transfer. Although the Act may not use the word “exclusive”, in my opinion, exclusivity for howsoever limited a period is inherent in transfer of any kind. To delve deeper into the issue, in the next few posts I will look into what constitutes "transfer" in general and for the specific purpose of taxation. Fortunately, the Bombay High Court’s decision is not final since Tata Sons has preferred an appeal before the Supreme Court. It would be interesting to see how the Supreme Courts treats IP licenses.

Comments and corrections are welcome!

Wednesday, May 13, 2015

Delhi High Court Dismisses Writ Petition by AIDS NGO Seeking Directions against Abuse of Divisional Patent Applications

In a crisp judgment dated May 7, 2015, the Chief Justice of the Delhi High Court dismissed a writ petition filed by a Delhi-based HIV/AIDS NGO, The Delhi Network of Positive People, in which directions were sought to amend the procedure under Patents Act, 1970 to prevent abuse of the process of filing divisional patent applications by patent applicants.

As our readers are aware, Section 16 of the Patents Act, 1970 permits filing a divisional patent application either suo motu by the applicant or in response to an objection raised or direction issued by the Patent Office, only when the basic patent application discloses multiple inventive concepts which are not cognate. The Petition (rightly) raises the issue of abuse of the process of suo motu filing of divisional patent applications by applicants who anticipate rejection of their patent applications, in the hope that they might get lucky the second time around, even when they are fully aware that they do not satisfy the requirement of Section 16 (this issue was dealt with in a post I wrote four years ago elsewhere).

To remedy the mischief, the Petitioner prayed for directions to the Ministry of Commerce requiring it to amend Form 1 of the Patents Act so as to include an undertaking by the patent applicant at the time of filing of a divisional application that the parent application discloses multiple inventions not constituting one single inventive concept and that the claims of the divisional application are not identical to those of the parent application. A second direction was sought which required the Controller of patents to take an ex parte decision on the maintainability of a divisional application before examining it for patentability. Finally, a provision for action against mischievous patent applicants was sought.

Although the Court recognized the validity of the concerns raised in the petition, it was dismissed on grounds that a Court could neither legislate nor issue a direction to the Legislature to enact in a particular manner. Further, in the absence of a constitutional challenge to the legislation, it would be equally impermissible for a Court to expand the scope of the legislation or recast it through interpretation. In this regard, reliance was placed on the Supreme Court’s decision in V.K. Naswa v. Home Secretary, Union of India (2012) 2 SCC 542. The High Court also observed that it could not direct the Controller of Patents to exercise his power in a manner contrary to the framework of the Act.

The other reason for dismissal of the petition was the Court’s view that it could not adjudicate on the issue in vacuum without their being a specific cause of action or without the impleadment of an errant patent applicant as a respondent to the petition. I am not sure the absence of these two ingredients is fatal to a writ petition which challenges the Patent Office's handling of divisional applications as opposed to targeting any patent applicant in particular. The Petitioner may seek consolation from the Court’s direction to the Ministry of Commerce and the Controller of Patents to treat the petition as a representation and consider taking appropriate measures to address the issue.

I agree with the Court on the impropriety of directing the Executive or the Legislature to amend a statute or to interpret it in a manner not envisaged by it. That said, I think that the current declarations sought from an applicant in Form 1 already have the effect of declaring that a divisional application is not identical in its claims or scope to the parent application. In Para 9 of Form 1, which is titled “Declarations”, a patent applicant is required to declare that there is no lawful ground of objection to the grant of the patent. Further, when a divisional application is filed, the applicant has to furnish the details of the parent application and declare that the divisional has been filed pursuant to Section 16 of the Act.

It could be argued that if an applicant knowingly files a divisional patent application which is identical to the parent, he is in violation of his own declarations in Para 9 for having knowingly filed an application which does not satisfy the ingredients of Section 16. If a patent is ultimately granted pursuant to the divisional, it may be revoked under Section 64 on the same substantive grounds on which the parent was rejected, apart from the ground of having obtained the patent on a false suggestion or misrepresentation under Section 64(1)(j) of the Act. Upon revocation, the IPAB or a Court in a counterclaim, as the case may be, could impose exemplary costs for having committed fraud on the Patent Office. That said, the issue remains that there is no mechanism as on date to address the issue right at the stage of examination of the divisional application. One possible solution may be for the Controller General of Patents to issue a practice direction requiring:
A.      patent applicants to submit a copy of the parent application when a divisional is filed;
B.      patent examiners to scrutinize the issue of maintainability of a divisional before examining it for patentability

Comments and corrections are welcome.

Saturday, May 9, 2015

Compensatory Costs for False or Vexatious Claims or Defenses in IP Disputes

Picture yourself as a new entrant to a field of business who intends to launch a product which strikes the right balance between performance and cost-effectiveness. Just a week before the launch of your product, you get sued for infringement of a patent or a design by a better-placed competitor (“X”) who succeeds in securing an ex parte ad interim injunction which kills the launch of your product. During the course of the litigation, you manage to establish before the Court that X’s suit was malicious and false/vexatious i.e. it was instituted with the specific object of thwarting the launch of your product despite his knowledge that he had no real cause of action against you. Does the law address this situation?

Now put yourself in the shoes of an IP holder, say a patentee, who discovers that a former licensee (“Y”) is continuing to sell the patented invention despite the termination of the license (which has not been challenged by the licensee). Upon being sued, the former licensee Y contests infringement knowing fully well that his product is identical to the product that was sold by him during the subsistence of the license. Further, Y challenges the validity of your patent on multiple substantive grounds despite having satisfied himself of its validity prior to obtaining the licensee from you. You, the patentee, ultimately convince the Court of the false/vexatious nature of Y’s defense of non-infringement and patent invalidity (notwithstanding the fact that Section 140 of the Patents Act does not prohibit Y from the challenging your patent’s validity). Does the law address this situation?

Section 35A of the Code of Civil Procedure, 1908, which governs the conduct of civil suits specifically provides a remedy. Extracted below is the provision:

35A. Compensatory costs in respect of false or vexatious claims or defenses.
(1) If any suit or other proceedings including an execution proceedings but excluding an appeal or a revision, any party objects to the claim of defence on the ground that the claim or defence or any part of it is, as against the objector, false or vexatious to the knowledge of the party by whom it has been put forward, and if thereafter, as against the objector, such claim or defence is disallowed, abandoned or withdrawn in whole or in part, the Court, if it so thinks fit may, after recording its reasons for holding such claim or defence to be false or vexatious, make an order for the payment the object or by the party by whom such claim or defence has been put forward, of cost by way of compensation.
(2) No Court shall make any such order for the payment of an amount exceeding three thousand rupees or exceeding the limits of it pecuniary jurisdiction, whichever amount is less:
Provided that where the pecuniary limits of the jurisdiction of any Court exercising the jurisdiction of a Court of Small Causes under the Provincial Small Cause Courts Act, 1887 or under a corresponding law in force in any part of India to which the said Act does not extend and not being a Court constituted under such Act or law, are less than two hundred and fifty rupees, the High Court may empower such Court to award as costs under this section any amount not exceeding two hundred and fifty rupees and not exceeding those limits by more than one hundred rupees:
Provided, further, that the High Court may limit the amount or class of Courts is empowered to award as costs under this Section.
(3) No person against whom an order has been made under this section shall, by reason thereof, be exempted from any criminal liability in respect of any claim or defence made by him.
(4) The amount of any compensation awarded under this section in respect of a false or vexatious claim or defence shall be taken into account in any subsequent suit for damages or compensation in respect of such claim or defence.

A reading of the provision makes it clear that the remedy of compensatory costs is equally available against a plaintiff’s false/vexatious claim and a defendant’s false/vexatious defense. However, what renders the remedy illusory is the paltry amount of INR 3000 prescribed as the upper limit. This defect in the provision has been pointed by the Supreme Court in several decisions and has been the subject-matter of cogitation by the Law Commission of India in its 240th Report.

What is also to be noted is that unless the affected party raises the objection of false/vexatious claim or defense, a Court cannot suo motu embark on such an enquiry or grant the remedy provided for under the provision. This aspect too has been addressed by the Law Commission which, among other things, has sought to rechristen ‘compensatory costs’ as ‘exemplary costs'. Following are the amendments to the provision recommended by the Commission:

(1)    Ceiling limit of Rs. 3,000/- prescribed in the year 1976 needs to be enhanced to Rs. 1,00,000/-.

(2)    Out of the costs awarded under Section 35-A (maximum being Rs. 1,00,000/-), part of the costs should be allowed in favour of the party who has been subjected to frivolous or vexatious litigation and a part of the amount of costs should be directed to be deposited in the Judicial Infrastructure Fund to be created by each High Court

(3)  The expression ‘exemplary’ should be substituted for the word ‘compensatory’ wherever it occurs in Section 35-A.

(4) Every Court, on its own, even without an application from one of the parties, shall be empowered to award exemplary costs under section 35-A if the Court is satisfied that the claim or defence is false or vexatious to the knowledge of the party. However, before passing such order, opportunity of hearing shall be given to the party against whom such order is proposed to be passed on the date of pronouncement of judgment

Tuesday, April 7, 2015

Intermediary liability regime- A Historic Opportunity Missed by the Supreme Court

Ever since the pronouncement of the verdict by the Supreme Court on March 24, 2015 in what I prefer to call the “IT Writ Petitions” (since they went beyond Section 66A of the Information Technology Act, 2000), a lot has been written on mainstream and alternative forums on the striking down of Section 66A. And rightly so because its draconian nature, vagueness and unreasonableness were writ large. The number of instances in which the now erstwhile provision had proven its susceptibility to abuse, bears testimony to the dangers it posed to free speech and hence its fundamental constitutional infirmity (readers may recall I have written on Section 66A earlier on the blog).

In stark contrast, the other provision of the IT Act, which has now been read down by the Supremes, namely Section 79(3)(b), has not received its due in popular discourse. This is perhaps because this provision required and still requires attention to nuances. The challenge to the provision was mounted on behalf of internet intermediaries solely by the Internet and Mobile Association of India (IAMAI) in W.P(C). 758/2014 in the same batch of IT Writ Petitions. This challenge was critical owing to the integral nature of intermediaries to the internet ecosystem and the role they place as disseminators of free speech and expression of internet users. With the internet increasingly becoming the medium of choice for expression of social, cultural and political views outside of the mainstream media, attention must be paid to the clamps imposed on intermediaries which facilitate free speech.

According to the IT Act, an intermediary means any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web hosting service providers, search engines, online payment sites, online-auction sites, online market places and cyber cafes”. Clearly, any restrictions on the ability of intermediaries to host content would have an immediate, direct and adverse bearing on the the internet user’s freedoms under Article 19(1)(a). This is the pith and substance of IAMAI’s challenge to Section 79(3)(b).

Section 79(3)(b) which applies to internet intermediaries, prior to being read down by the Court, used intermediaries as proxies to impose constitutionally impermissible restrictions on free speech i.e. restrictions which are beyond Article 19(2).  Therefore, it was the contention of IAMAI that, if Section 66A is liable to be struck down for imposing direct restrictions on an internet user’s free speech and expression which are beyond the pale of Article 19(2), it stands to reason that such or similar restrictions imposed on the user indirectly through intermediaries under Section 79(3)(b), are equally ultra vires Article 19(2). In other words, what cannot be done directly, cannot be done indirectly either, the litmus test being the direct and immediate consequence of the restrictions under Section 79(3)(b) on curtailment of the internet user’s freedoms under Article 19(1)(a).

In order to lend perspective to the challenge to Section 79(3)(b), it is important to understand that the internet as we know it today, is increasingly driven by User Generated Content (the other UGC) which is monumental in sheer diversity and scale. Numbers perhaps tell the story better- every minute almost 360,000 tweets are published on Twitter, 30,000 edits are made to Wikipedia, Facebook users share 684,478 pieces of content and more than 100 hours of video are added to YouTube. These mind-boggling numbers are in fact responsible for contributing to an emerging area in information management systems, namely Big Data. Given these numbers, it is practically impossible for intermediaries such as Google, Twitter or Facebook to pre-screen content or exercise any kind of ex ante editorial control. This also means that intermediaries cannot vouch for or take responsibility for the legality of the content being uploaded or transmitted or published on their platforms. And yet in 2004, no less than the Chief Executive Officer of Baazee.com, Avnish Bajaj, was arrested for the offer of sale of an obscene video clip made on the portal by a user.

To address such instances and to ensure that intermediaries are not held liable for content created/published by their users, the definition of “intermediary” was effected (which is the current version) through the Information Technology (Amendment) Act, 2008 and Section 79 of the Act was amended to carve out a safe harbor for intermediaries from liability arising from User Generated Content.  As part of the amendment, in return for the safe harbor, a corresponding “takedown” (removal of content) obligation was cast on intermediaries under Section 79(3)(b), which was challenged by IAMAI in its petition that led to the provision being read down by the Court.

Section 79(3)(b) has two prongs- the first relates to a takedown notice upon receipt of ‘actual knowledge’ of the illegality of content hosted by the intermediary, and the second envisages a takedown notice issued by a Government or its authorised agency to the intermediary. Both prongs give rise to different but equally grave concerns. The problem with the first prong is that although it borrows the term ‘actual knowledge’ from the EU Directive on E-Commerce 2000/31/EC dated 8th June, 2000, it is nowhere defined in the Indian statute. Importantly, the legal and operational challenges with the use of the term have been clinically captured in a study undertaken in the European Union.  This study correctly notes that the term is capable of being interpreted and has been interpreted in a few jurisdictions to mean that intermediaries are expected to sit in judgment over the legality/unlawfulness of content impugned in a takedown notice. Clearly, this is beyond the wherewithal of intermediaries, which establishes the unreasonableness of this mandate. Echoing the validity of this contention, the Court read down ‘actual knowledge’ to mean knowledge of a court order directing the intermediary to expeditiously remove or disable access to the impugned content.

The second prong of Section 79(3)(b) firstly suffers from vestation of adjudicatory powers in the executive to determine illegality of content, which is problematic. Secondly, the use of the term “unlawful” in Section 79(3)(b) enlarges the scope of restrictions to beyond the specific categories identified in Article 19(2). In response to the second concern, the Court drew parity between the executive’s (only the Central Government) power to block content under Section 69A and the executive’s power to direct takedown on content under Section 79(3)(b) and implicitly noted that the limitation of Article 19(2) applied to the executive’s power under both provisions.

This is perhaps the most positive outcome on the issue of intermediary liability because by reading in Article 19(2) to restrictions imposed on intermediaries under Sections 69A and 79(3)(b), the Court has accepted the argument of the intermediaries that the test to be applied to any law is whether it directly impacts free speech, regardless of who such restrictions may be applied through (in this case through intermediaries). Importantly, even if such restrictions are imposed in return for immunity to intermediaries under Section 79(1), such perceived largesse to intermediaries does not legitimize the transgression of the boundaries set by Article 19(2). This position has received the thumping endorsement of the Supreme Court.

That being said, although the Court has encumbered the executive’s takedown power under Section 79(3)(b) by reading in Article 19(2), the fundamental question of the executive’s constitutional competence to direct such takedown was not addressed, perhaps because the Court was already convinced of such competence during its analysis of Section 69A. Be that as it may, the consistent thing to do would have been to include in Section 79(3)(b) the de minimis procedural safeguards provided for under Section 69A and the blocking Rules, or the safety vales under Sections 95 and 96 of the Code of Criminal procedure, 1973 (which deal with the Government’s power to ban books/publications). This is so because, unlike Section 69A, Section 79(3)(b) does not provide for a hearing either to the intermediary or the creator of the content prior to the takedown, nor is  there a provision for appeal under the Act from such a takedown (except for a Writ Petition).

It is surprising that after taking detailed cognizance of the procedure laid down for blocking under Section 69A, the Court did not apply the same yardstick and due process to Section 79(3)(b). Critically, having recognized the reader’s right to receive information/content in its analysis of Section 66A, the Court ought to have taken note of the adverse effect of a summary executive takedown on the right of the internet audience to receive content, even if such notice is within the metes and bounds of Article 19(2). Had these concerns been addressed, the verdict would have been far more comprehensive on Section 79(3)(b) is concerned.

All in all, although the Court has addressed some primary concerns of intermediaries relating to Section 79(3)(b), thereby rendering their immunity more meaningful, the Court could have dealt with the other equally important concerns which have a concrete and critical bearing on the intermediary liability regime in India. This would have made India a much more attractive destination for investments by intermediaries given the potential of the internet economy and e-commerce. Perhaps, the egregious language and consequence of Section 66A drew the Court’s attention much more than the layered issues posed by Section 79(3)(b) and the Intermediary Rules. After all, out of 122 pages of the judgment, 109 pages have been devoted to Section 66A and a like provision of the Kerala State Police Act. Only the final paragraphs of the verdict, paras 112-118, deal with the issue of intermediary liability.

It is undeniable that the judgement is a welcome one and is expected to further the cause of democratization of the internet in a tangible manner. However, given the opportunity the IT Writ Petitions represented in undertaking a comprehensive overhaul of the IT Act on a range of related issues, each of which has a critical bearing on freedom of speech and expression on the internet, it appears that the Supreme Court has passed up a wonderful opportunity, which may not present itself in the future.

Disclosure: I was part of the team that represented a consortium of internet intermediaries, namely the Internet and Mobile Association of India in the Supreme Court in W.P(C) 758/2014 which challenged Section 79(3)(b) and the Intermediary Rules. Mr.Saikrishna Rajagopal of Saikrishna & Associates argued the petition. All opinions expressed here are personal and academic.