How Will the Commercial Courts Ordinance Affect Patent and Design Suits?

The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015 came into force on October 23, 2015 and the Delhi High Court (Amendment) Act, 2015 came into force on October 26, 2015. Vide notification dated November 24, 2015, the following directions were issued by the Delhi High Court:

1.       All suits or other proceedings pending in the Delhi High Court on the Original Side up to the value of rupees one crore, excepting those cases in which final judgments have been reserved, shall be transferred to the jurisdictional subordinate courts.

2.       All suits or other proceedings the value of which exceeds rupees one crore but does not exceed rupees two crores, other than those relating to commercial disputes the specified value of which is not less than rupees one crore (as defined in The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015), pending in the Delhi High Court on the Original Side, excepting those cases in which final judgments have been reserved, shall be transferred to the jurisdictional subordinate courts.

While the effect of this notification on pending suits relating to Intellectual Property depends on the interpretation of the First Proviso to Section 7 of the Ordinance (which is pending in a writ petition filed before the High Court of Delhi), the position with respect to certain patent and design suits appears to be relatively clear thanks to the Second Proviso. Section 7 reads as under:

All suits and applications relating to commercial disputes of a Specified value filed in a High Court having ordinary original civil jurisdiction shall be heard and disposed of by the Commercial Division of that High Court.

Provided that all suits and applications relating to commercial disputes, stipulated by an Act to lie in a court not inferior to a District Court, and filed on the original side of the High Court, shall be heard and disposed of by the Commercial Division of the High Court.

Provided further that all suits and applications transferred to the High Court by virtue of sub-section (4) of Section 22 of the Designs Act, 2000 or section 104 of the Patents Act, 1970 shall be heard and disposed of by the Commercial Division of the High Court in all the areas over which the High Court exercises ordinary original civil jurisdiction.

The reference in the Second Proviso is to suits and applications which have been “transferred” to the High Court by virtue of Section 104 of the Patents Act and Section 22(4) of the Designs Act, both of which relate to situations where the validity of the patent and design have been challenged respectively. Simply put, suits which have been transferred to a High Court by virtue of the said provisions will be transferred to the Commercial Division of the High Court regardless of the valuation of the Suit and counter-claim.

This position was recently taken by a Single Judge of the Delhi High Court in Novartis v. Cipla wherein it was held as under:

“22. It is an undisputed fact that the present High Court exercises Ordinary Original Civil Jurisdiction. Before passing of the Ordinance, the suit for infringement of patent and designs which were being filed before the District Judge(s) of District Courts have been transferred to this Court, once the patent is challenged in the written statement by the defendants as a defence or by filing of the counter-claim under the Patents Act, 1970 and under Section 22(4) of the Designs Act, 2000. Various matters had been transferred by the District Courts from time to time to the High Court, who had received the same after pleading the defence in the written statement or a separate counter-claim filed by the defendants. Under these circumstances, it is quite clear that under any circumstances, such matters have to be heard and disposed of by the Commercial Division of the High Court which has the Ordinary Original Civil Jurisdiction irrespective of their pecuniary value.”

Although the law appears to have been correctly applied in the facts of the decision, the question that remains is this- the reference in the Second Proviso is to High Courts which exercise ordinary original civil jurisdiction. Does this mean that the Second Proviso does not apply to Courts which do not exercise such a jurisdiction? What would be the consequence of such a reading? Would it mean that in High Courts which do not exercise such jurisdiction, there will not be a transfer of such suits to the commercial divisions of the High Courts? Then what happens to such suits? Would they remain unaffected by the Commercial Courts Ordinance and continue to be prosecuted the way they currently are?

It is important to address this issue because according to Section 21 of the Ordinance, the Ordinance shall prevail over any other law in force. Comments and corrections are welcome!

Indian Patent Office Releases Guidelines for Examination of Computer Related Inventions

By an order dated August 21, 2015, the Controller General of Patents, Designs and Trademarks released the latest guidelines for examination of patent applications dealing with computer related inventions. The guidelines are available here. This post is merely an update on this development. I hope to undertake an analysis of the Guidelines soon.

Paragraph 3 of the Guidelines contains definitions of algorithm, computer, computer network, computer programme, computer system, data, firmware, function, hardware, "per se", software and a few more similar and relevant terms. Para 4.5 of the Guidelines deals with determination of excluded subject-matter in patent applications, with specific sub-heads separately dealing with determination of various categories of subject-matter excluded under Section 3(k) of the Patents Act, 1970. Extracted below are some of the relevant portions:

4.5 Determination of excluded subject matter relating to CRIs 
Since patents are granted to inventions, whether products or processes, in all fields of technology, it is important to ascertain from the nature of the claimed CRI whether it is of a technical nature involving technical advancement as compared to the existing knowledge or having economic significance and is not subject to exclusion under Section 3 of the Patents Act. The sub-section 3(k) excludes mathematical methods or business methods or computer programme per se or algorithms from patentability. Computer programmes are often claimed in the form of algorithms as method claims or system claims with some „means‟ indicating the functions of flow charts or process steps. It is well-established that, in patentability cases, the focus should be on the underlying substance of the invention, not the particular form in which it is claimed. What is important is to judge the substance of claims taking whole of the claim together. If the claims in any form such as method/process, apparatus/system/device, computer program product/ computer readable medium fall under the said excluded categories, they would not be patentable. However, if in substance, the claims, taken as whole, do not fall in any of the excluded category, the patent should not be denied. 

4.5.4 Claims directed at Computer Programme per se: 
The computer programme per se is excluded from patentability under section 3 (k) apart from mathematical or business method and algorithm. Claims which are directed towards computer programs per se are excluded from patentability, like (i) Claims directed at computer programmes/ set of instructions/ Routines and/or Sub-routines written in a specific language (ii) Claims directed at “computer programme products” / “Storage Medium having instructions” / “Database” / “Computer Memory with instruction” i.e. computer programmes per se stored in a computer readable medium The legislative intent to attach suffix per se to computer programme is evident by the following view expressed by the Joint Parliamentary Committee while introducing Patents (Amendments) Act, 2002:

“In the new proposed clause (k) the words ''per se" have been inserted. This change has been proposed because sometimes the computer programme may include certain other things, ancillary thereto or developed thereon. The intention here is not to reject them for grant of patent if they are inventions. However, the computer programmes as such are not intended to be granted patent. This amendment has been proposed to clarify the purpose.” 

The JPC report holds that the computer programmes as such are not intended to be granted patent. It uses the phrase “ … certain other things, ancillary thereto or developed thereon…..”. The term “ancillary” indicates something essential to give effect to the main subject. In respect of CRIs, the term “ancillary thereto” would mean the “things” which are essential to give effect to the computer programme. The clause “developed thereon” in the JPC report may be understood as any improvement or technical advancement achieved by such development. Therefore, if a computer programme is not claimed by “in itself” rather, it has been claimed in such manner so as to establish industrial applicability of the invention and fulfills all other criterion of patentability, the patent should not be denied. In such a scenario, the claims in question shall have to be considered taking in to account whole of the claims. 

Supreme Court's Interpretation of Special Jurisdiction Provisions in IPRS v. Sanjay Dalia

On July 1, 2015, the Supreme Court pronounced its verdict in the much awaited case of IPRS v. Sanjay Dalia where the issue was the interpretation of the special jurisdiction provisions, namely Section 62 of the Copyright Act, 1957 and 134 of the Trademarks Act, 1999. The Court held that if the cause of action incidentally arises at a place where the principal office of the plaintiff is located, the plaintiff cannot rely upon Sections 62/134 to institute a suit at a place where its branch office is located.

Reproduced below are the provisions in question:

62. Jurisdiction of court over matters arising under this Chapter. --          

(1) Every suit or other civil proceeding arising under this Chapter in respect of the infringement of copyright in any work or the infringement of any other right conferred by this Act shall be instituted in the district court having jurisdiction. 

(2) For the purpose of sub-section (1), a "district court having jurisdiction" shall, notwithstanding anything contained in the Code of Civil Procedure, 1908 (5 of 1908), or any other law for the time being in force, include a district court within the local limits of whose jurisdiction, at the time of the institution of the suit or other proceeding, the person instituting the suit or other proceeding or, where there are more than one such persons, any of them actually and voluntarily resides or carries on business or personally works for gain.” 

134. Suit for infringement, etc., to be instituted before District Court. -- 

(1) No suit-- (a) for the infringement of a registered trade mark; or (b) relating to any right in a registered trade mark; or (c) for passing off arising out of the use by the defendant of any trade mark which is identical with or deceptively similar to the plaintiff's trade mark, whether registered or unregistered, shall be instituted in any court inferior to a District Court having jurisdiction to try the suit. 

(2) For the purpose of clauses (a) and (b) of sub-section (1), a "District Court having jurisdiction" shall, notwithstanding anything contained in the Code of Civil Procedure, 1908 (5 of 1908) or any other law for the time being in force, include a District Court within the local limits of whose jurisdiction, at the time of the institution of the suit or other proceeding, the person instituting the suit or proceeding, or, where there are more than one such persons any of them, actually and voluntarily resides or carries on business or personally works for gain. 

It is clear from both provisions, which are identical in all material respects, that they provide additional jurisdictional remedies over and above the conventional options available to a plaintiff under Section 20 of the Code of Civil Procedure, 1908. The central issue before the Court was the interpretation of the phrase “carries on business” used in both provisions, which has a bearing on the following scenarios:

1.       Can a place where the branch office of the plaintiff is located, in the absence of a cause of action which has arisen in such place, be treated as a place where the plaintiff corporation “carries on business”?

2.       In a situation where a cause of action has arisen at the place where the branch office is located, is the plaintiff barred from instituting a suit at a place where he has his registered/principal office because no cause of action has arisen there? In other words, does the Plaintiff not have the option of choosing between the principal/registered place of business, and the branch office where the cause of action has arisen in whole or in part?

In order to address these scenarios, it is imperative to understand the construal of the Explanation to Section 20 of the CPC since it spells out the meaning of “carries on business”. Reproduced below is Section 20 with the Explanation:

20. Other suits to be instituted where defendants reside or cause of action arises.- Subject to the limitations aforesaid, every suit shall be instituted in a Court within the local limits of whose jurisdiction—

(a) The defendant, or each of the defendants where there are more than one, at the time of the commencement of the Suit, actually and voluntarily resides, or carries on business, or personally works for gain; or

(b) any of the defendants, where there are more than one, at the time of the commencement of the suit, actually and voluntarily resides, or carries on business, or personally works for gain, provided that in such case either the leave of the Court is given, or the defendants who do not reside, or carry on business, or personally work for gain, as aforesaid, acquiesce in such institution; or

(c) the cause of action, wholly or in part, arises.

Explanation: A corporation shall be deemed to carry on business at its sole or principal office in India or, in respect of any cause of action arising at any place where it has also a subordinate office, at such place.

The phrase “carries on business” in the Explanation has been interpreted in two other decisions of the Supreme Court, namely Patel Roadways v. Prasad Trading and New Moga Transport v. United India Assurance. In Para 10 of New Moga Transport, the Court held thus:

“10. On a plain reading of the Explanation to Section 20 CPC it is clear that the Explanation consists of two parts: (i) before the word “or” appearing between the words “office in India” and the words “in respect of”, and (ii) the other thereafter. The Explanation applies to a defendant which is a corporation, which term would include even a company. The first part of the Explanation applies only to such corporation which has its sole or principal office at a particular place. In that event, the court within whose jurisdiction the sole or principal office of the company is situate will also have jurisdiction inasmuch as even if the defendant may not actually be carrying on business at that place, it will be deemed to carry on business at that place because of the fiction created by the Explanation. The latter part of the Explanation takes care of a case where the defendant does not have a sole office but has a principal office at one place and has also a subordinate office at another place. The expression “at such place” appearing in the Explanation and the word “or” which is disjunctive clearly suggest that if the case falls within the latter part of the Explanation it is not the court within whose jurisdiction the principal office of the defendant is situate but the court within whose jurisdiction it has a subordinate office which alone has the jurisdiction “in respect of any cause of action arising at any place where it has also a subordinate office”.”

In light of this ratio and after having extensively reviewed the object of Sections 62/134, the Supreme Court in IPRS rightly observed that these special jurisdiction provisions are exceptions to Section 20 of the CPC only in so far as they permit the plaintiff to sue at a place of his residence or where he works for gain or carries on business. In other words, the provisions are not to be construed as granting cartes blanches to the plaintiff since there are limitations/riders which apply to the plaintiff’s ability to sue even under Sections 62/134. This sentiment finds express endorsement in Para 16 of the decision.

In reading in limitations into the provisions, the Court relied upon the spirit of convenience of parties which is embodied in the Explanation to Section 20. According to the Court, keeping with the spirit of the Explanation, unless a cause of action arises at a place where the branch office of the plaintiff is located, it cannot be deemed as a place where the plaintiff “carries on business” for the purposes of Sections 62/134. In the absence of such a qualification, plaintiff corporations with branch offices in far flung places could harass defendants by suing them at such places despite the cause of action not having arisen there. Simply put, the convenience of defendants has not been entirely done away with by Sections 62/134 since balance is struck by using cause of action as the parameter to determine jurisdiction in so far as the branch office of the plaintiff is concerned.

Viewed from another angle, the underlying rationale is that a branch office has not been accorded the same status under law as a principal place of business for the purposes of jurisdiction. Consequently, a branch office needs to be supplemented by a cause of action for it to be deemed in law as a place where the plaintiff "carries on business". In fact, under Sections 62/134, the place where the branch office is located is the only appropriate place for the plaintiff to sue when the cause of action has accrued there. This approach strikes a balance between the convenience of the plaintiff and the defendant since the assumption is that the branch office makes it convenient for the plaintiff to sue, and the accrual of the cause of action in that place means the defendant’s goods are being sold there and therefore it is not inconvenient for him to defend himself.

Based on this logic, following are the practical jurisdictional consequences:

1.       If the principal place of business of the plaintiff is at X, and the cause of action has arisen at Y where there is no branch of office, Plaintiff may sue at X based on Sections 62/134, and at Y based on Section 20(c) of the CPC.

2.       If the principal place of business of the plaintiff is at X, and the cause of action has arisen at Y where there is a branch office, Plaintiff may sue only at Y, not X, if the suit relates to the said cause of action.

3.       If the principal place of business of the plaintiff is at X, and the cause of action has arisen at Y, and branch office is at Z, then plaintiff may rely on Sections 62/134 to sue at X and Section 20(c) of the CPC to sue at Y, but cannot sue at Z under any circumstances invoking Sections 62/134 or Section 20.

There is another scenario which is possible. The plaintiff could have its principal place of business at X and a single defendant may give rise to two causes of action simultaneously at Y (where there is a branch office), and Z (where there is no branch office). In so far as Y is concerned, the plaintiff cannot sue at X or Z, going by the ratio of the IPRS. Further, with respect to the cause of action at Z, the plaintiff may sue either at X based on Sections 62/134 or Z based on Section 20(c). However, both causes of action, namely with respect to Y and Z, cannot be combined in a composite suit since the ratio of the Supreme Court’s decision in Dhodha House would come in the way.

Comments and clarifications are welcome. 

Standard Essential Patents: Reviewing the IEEE’s IPR Policy- Part II

In the last post, I reviewed portions of the IEEE’s updated IPR policy for Standard Essential Patents. I continue with the review in this post.

What is common between the IPR policies of IEEE and ETSI is that both disclaim any verification or certification of validity or essentiality or infringement of any patent claim declared as Essential by a patentee. The IEEE policy further disclaims any enquiry into the FRAND-compliance of a patentee’s licensing terms. Importantly, it states that “Nothing in this policy shall be interpreted as giving rise to a duty to conduct a patent search”. This could be interpreted to mean that the policy does not cast a burden on any third party to undertake a search for patents which it infringes or may potentially infringe, which is consistent with the extant practice of casting the obligation of establishing infringement on the right holder. Simply stated, a declaration of essentiality by a patentee remains a unilateral declaration by the patentee, with no formal imprimatur by the IEEE.

This is further corroborated by an express window in the Policy which permits a prospective licensee (“Applicant”) and the patentee (“Submitter”) to litigate over patent validity, enforceability, essentiality, or infringement; Reasonable Rates or other reasonable licensing terms and conditions; compensation for unpaid past royalties or a future royalty rate; any defenses or counterclaims; or any other related issues. This is a thumping endorsement of the position that a prospective licensee’s bonafide challenge to the assertions of the patentee cannot result in an adverse inference of unwillingness. As recognized last year by the England and Wales High Court in Vringo v. ZTE, a prospective licensee is well within its rights to challenge the validity and essentiality of the patents asserted without being branded an “unwilling licensee”. It must however be noted that if litigation is merely employed to delay an inevitable payment, which must be demonstrated by the patentee from the conduct of the prospective licensee and the lack of apparent merits in its challenge, the prospective licensee may not be entitled to be treated as a “willing licensee”.

As regards a patentee’s access to exclusionary remedies such as injunctions, the Policy firstly defines “Prohibitive Order” to mean an interim or permanent injunction, exclusion order, or similar adjudicative directive that limits or prevents making, having made, using, selling, offering to sell, or importing a Compliant Implementation. Further, except for circumstances envisaged by and in the Policy, a patentee who claims to own an Essential Patent Claim may not seek Prohibitive Orders against prospective licensees. 

That exceptional window is available when the implementer of an IEEE Standard fails to participate in, or to comply with the outcome of, an “adjudication”. Adjudication includes adjudication in a first appeal by any party from the decision of the forum of first instance on any issue. Importantly, the scope of the adjudication could relate to a host of issues such as license terms, patent validity, essentiality and the like. Therefore, an injunctive remedy is available to a patentee only when an implementer fails to abide by a Court’s finding, which includes the finding of an arbitral tribunal. Until then, no such remedy may be sought against the implementer of a standard.

As for what constitutes a “Reasonable Rate” of royalty, here’s the definition from the Policy which is best reproduced:

“Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:

• The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim.

• The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation.

• Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license.

So not only is the patentee precluded from claiming royalty based on the ex post value of the patent i.e. post its inclusion in an IEEE standard, the royalty must also be based on parameters attributable to the overall contribution of the patent to the IEEE standard and must be a measure of the smallest saleable component which implements the standard. These factors appear to have been distilled from the Microsoft v. Motorola and Innovatio decisions.

Broadly speaking, although there could be room for further refinement (as is always the case), the Policy must be credited for clarifying quite a few issues which have festered to the detriment of all stakeholders, particularly prospective licensees. Importantly, the Policy is a reasonably good template for other SSOs to draw from and build on. Let’s hope the ETSI IPR Policy too is amended on similar lines given the room for exploitative abuse by patentees under the current ETSI Policy.

Standard Essential Patents: Reviewing the IEEE’s IPR Policy- 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 in SEP jurisprudence. 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. 

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. 

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 kind. This 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.

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!

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.

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 240^th 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