Saturday, July 2, 2011

Farhang v. IIT Kharagpur- Was there a Valid Oral Contract on the Joint Venture?

I have received mails and calls from IIT alumni asking me as to why the IP dispute involving IIT Kgp was largely under wraps until it was reported in the mainstream media recently.

I honestly have no idea, but I think the issue was reported in major newspapers in 2008 when the controversy first broke out. But after that, the proceedings haven’t been followed and analysed much.

IIT Kharagpur being one of India’s elite institutions of higher education, I think it is important to know the facts, lest rumour mills start working overtime and tarnish the reputation of this great institution. Precisely for this reason and to prevent a ripple effect on the reputation of other Indian academic institutions, we will be covering the dispute as much as possible.

Further, since there is a growing pressure on Indian universities to commercially harness their research, this dispute may have important pointers for them before they actively involve themselves in commercialization of technology.

Thus far, 3 posts have been written on the dispute, with the last 2 focussing on the June 1, 2010 order of the Californian Court. In the last post, we had written on how the proposed terms of the JV were modified, which modification was sought to be used by IIT as a defense against Farhang’s claim of breach of the JV agreement; the Court ultimately rejected the defense.

A detailed reading of the order informs us that there was no written Joint Venture agreement. In fact, Farhang claimed that there was a binding oral contract on the joint venture, and that IIT had breached the terms of the oral contract. If there was no written agreement, then how was the choice of the forum decided? Where did the parties agree that any disputes arising from the contract would be governed by Californian law?

From the order, it appears that IIT, in certain portions in its pleadings, had claimed that Indian law governed the oral contract on the joint venture, and in certain other places it claimed that Californian law was the applicable law.

Farhang naturally claimed that the contract was governed by Californian law. Since both parties had said so in one place or the other, the Court concluded that Californian law applied and also observed that Indian law and Californian law were substantially similar on contracts.

But there’s something intriguing here. On one hand, IIT contended that the applicable law was Indian law, and on the other, it contested the very existence of a valid oral contract. I am not saying that IIT couldnt have resorted to "alternate pleadings" (i.e. either there was no oral contract, but if there was one, Indian law applied to it), but I think there's a thin line that separates "alternate pleadings" from "irreconcilable/inconsistent pleadings". I make this point because one of IIT's defenses against Farhang's claim of breach of NDA, was that the JV had superseded the NDA.

Having taken this stance, I am unclear as to how did IIT persist with its contention that there was no binding and enforceable oral contract on the joint venture.  What were IIT’s grounds to support its stance that there wasn’t an oral contract in the first place?

IIT’s primary ground was that there was no formal written agreement which had been signed by both parties. The second ground was that the essential terms of the contract were not clear, and hence IIT couldn’t be reasonably expected to assume that there was a valid oral contract in place.

On the first ground, it appears that IIT had represented to Farhang that a joint venture was already in place, regardless of a formal written document not having been drawn up and signed. The Court cited this representation to hold that there was a binding oral contract in place.

On the second ground, following were IIT’s claims and the Court’s findings:

A. No clear terms on profit and loss sharing- The Court found that a total of 28% of the profits had been earmarked for IIT. In the absence of terms on loss-sharing, the general rule was that each party would bear its own losses in a situation where there are no compensations/salaries to be paid. Hence, profit and loss sharing terms were clear.

B. No clarity on decision-making and control- The Court found that Farhang would control the disclosure of confidential IP, whereas IIT would play the role of the technology expert, with Prof. Partha Pratim Chakrabarti of IIT acting as the CTO. Also, IIT would determine the pace of interaction with potential customers such as the Indian Railways. Therefore, decision-making and control too had been adequately chalked out.

C. The terms were not reasonably certain- The Court observed that all minutiae need not have been worked out between the parties for an oral contract to come into being. Since the essential rights and obligations had been determined, the terms of the contract were reasonably certain.

On the basis of these conclusions, the Court held that since there was a valid oral contract, the issue of breach was a plausible one and therefore must be duly adjudicated.

Fraud and Breach of Fiduciary Duty
Farhang alleged fraud and breach of fiduciary duty by IIT with respect to the confidential information that IIT was entrusted with. On this point, the Court dismissed these claims since Californian law disallows common law claims of fraud and breach of fiduciary duty, when relief for misappropriation of trade secrets had already been claimed.

In other words, since the facts underlying all these claims were the same, and since Farhang had already alleged misappropriation of trade secrets, she could not again agitate the issue of fraud and breach of duty.

Misappropriation of Trade Secrets
On the issue of ownership of trade secrets, which was raised by IIT, the Court observed that there were inconsistencies in the original statement of claims filed by Farhang and the amended one which was being considered at the time of the order. In the original claim, Farhang had said that the core technology was owned by her and TNR Holdings. However, in the amended claim, Farhang stated that she had transferred her sole title to MA Mobile.

The Court directed her to clarify the facts on ownership, but held that since trade secrets in the case included business models and plans, the claim of misappropriation of trade secrets could not be dismissed altogether.

As to whether Farhang had adequately identified the trade secrets in her claim in order for IIT to respond to the issue properly, the Court held that although the patent application which contained the core technology had been identified, the business models and plans which too comprise the trade secrets had not been spelt out with sufficient particularity.

Also, the Court held that there weren’t sufficient factual allegations to support the broad claim of misappropriation of trade secrets.

Directions 1, 4, 5 and 6 of the Court in its June 1, 2010 order finally read as follows:
1. Denies IIT's motion to stay this action;

4. Dismisses plaintiffs' claim for breach of the Non-Disclosure and Non-Use Provisions of the NDA with leave to amend within 20 days;

5. Dismisses plaintiffs' claims for fraud and breach of fiduciary duty with prejudice; and

6. Dismisses plaintiffs' trade secret misappropriation claim with leave to amend within 20 days.

A Side Note
The core technology in this case is the enablement of fluid mobile access to data on handheld devices, including dynamic real-time access and parsing of data that is not dependent upon continuous wireless data connection. As discussed, the Court treated the technology claimed in Farhang’s patent application as a trade secret.

I am assuming this was an unpublished patent application at the relevant period of the claim in the suit...because I don’t think a published patent application constitutes a trade secret since the decision to file for a patent constitutes a choice between keeping the technology a secret and disclosing it in a patent in return for monopoly. However, until such time the application is published, it retains its character as a trade secret. Corrections are welcome!

We’ll discuss the US Court's other orders in the case in the coming days. 

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