Friday, July 1, 2011

Farhang v. IIT Kharagpur- How Were the Terms of the JV Modified?

A brief discussion on the Farhang-IIT Kharagpur dispute was undertaken in the last two posts. In the last post, we discussed the grounds on which IIT’s motion for stay of US proceedings was denied by the Court. In this post, we’ll discuss a few other important findings in the Californian Court’s order of June 1, 2010.

IIT argued that MA Mobile did not satisfy the requirements of Section 2105 of the California Corporations Code. Under Section 2105, a foreign corporation such as MA Mobile (which was incorporated in Dominica) had to obtain a certificate of qualification from the Secretary of State before commencing its intrastate business in California. Also, another provision of the Code reads as follows:

“A foreign corporation which “transacts intrastate business without complying with Section 2105 shall not maintain any action or proceeding upon any intrastate business so transacted in any court of this state, commenced prior to compliance with Section 2105, until it has complied with the provisions thereof

What this means is that even if MA mobile had transacted business within the State of California, it could not institute a legal action relating to the intrastate business if it did not fulfil Section 2105. This means, for IIT to establish that MA Mobile was not entitled to file a suit before the Californian Court, it had to prove that the suit arose from MA Mobile’s intrastate business. 

This combined with the fact that MA Mobile did not have a certificate of qualification at the time of filing of the claim, would preclude MA Mobile from seeking any relief from the Californian Court.

Unfortunately, although IIT was able to establish that MA Mobile did not have the required certification before the claim was filed, it could not prove that the action arose from intrastate business i.e. business within the State of California. Expectedly so, since none of the transactions between the parties to the suit could be termed as “business within the State of California”. Naturally, IIT’s motion on this jurisdictional ground was rejected.

Breach of NDA
Farhang alleged that IIT had shared her trade secrets in violation of the NDA between the parties. However, the Court didn’t see much merit in the material submitted to support this claim. Farhang then alleged that IIT had used her invention and her trade secrets in violation of the NDA. This too did not pass muster before the Court because the JV entered into by the parties superseded the NDA and gave IIT the right to use the IP to develop the technology that was provided to it by Farhang.

It was also alleged that IIT had breached the Return clause of the NDA, which required IIT to return all documents/materials which contained Farhang’s IP/information, upon demand. IIT apparently returned just one CD containing the source code of the software application, but did not return the rest of the documentation. Consequently, the Court found some merit in this claim.

Breach of Joint Venture Agreement
The facts stated in the order on the issue of breach of the JV agreement in fact make for a startling read because they relate to the representations made by IIT to Farhang during the course of the amendment to the JV.

According to Farhang, both parties to the JV were supposed to develop the technology and market it together through an Indian entity called “Cool e-mobile” which was to be set up by Farhang under the JV. Prof.Partha Pratim Chakrabarti (better known as “PPC” in IIT Kgp lingo), one of the primary defendants in the US suit, was to be appointed as the CTO of Cool e-mobile.

As part of the JV, for their role in developing the IP and helping get Indian Railways as a customer by “bypassing the tender process”, IIT was to receive 3% of the equity in Cool e-mobile, and another 25% would have been distributed among members of Prof.PPC’s engineering team who worked on the project.

Farhang alleged that in direct violation of the JV, IIT “abandoned all efforts in developing the technology”, and worked on its own plans of commercialization.

To this, the defence offered by IIT was that the terms of the JV were modified to exclude IIT from the JV (and hence there was no breach of the JV). The modification was undertaken because the IIT team realized that “Indian law” (presumably the IIT Act) did not permit IIT to form a joint venture company “directly” with Farhang. To circumvent this, it was apparently proposed by IIT that Farhang could instead collaborate with IIT’s incubation centre TIETS.

What is critical is that it was represented to Farhang that “for all intents and purposes, IIT and its incubation centre were one and the same”! The fact is that IIT and the incubation centre are two distinct legal entities, which the US Court duly takes note of.

If IIT indeed made such a representation to Farhang, subsequent to which she agreed to the modification of the terms, this means Farhang was given the impression that IIT had only been superficially excluded from the JV to avoid violating Indian law, but that for all practical purposes IIT would be the brains behind the JV.

The US Court took a similar view and rejected the defense put up by IIT on this issue.

Legalities apart, the factual matrix presented in the US Court’s order regarding the representations made by IIT to Farhang, if true, are disturbing. I must say I am yet to read the other two orders of the US Court. Therefore, my impression is based solely on the order of June 1st, 2010.

I think every Indian university which wishes to actively interact with the industry has a lesson or two to learn from IIT Kharagpur’s experience in this dispute. I am not sure what kind of advice was given to IIT Kharagpur during the negotiations on the JV, but I think it isn’t unreasonable to say this appears to be a controversy that could have been avoided...

We’ll continue with this dispute in a few more posts. 

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