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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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 1^st, 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. 

Farhang v. IIT Kharagpur- I

In an earlier post, I had written on the suit filed in a Californian District Court by M.D.Farhang and MA Mobile against IIT Kharagpur. There appears to be some confusion in the air on the facts of the case and the central issues at dispute. In this post, I’ll discuss a few salient conclusions in the Californian Court’s order of June 1, 2010.

Farhang filed a suit in the US on May 27, 2008, and IIT Kgp filed a suit sometime in August 2009. Do both suits cover the same issues? If yes, do Courts in both countries need to initiate parallel judicial proceedings? If one of the Courts can resolve all issues at dispute, shouldn’t principles of private international law kick in? (meaning thereby the other Court will have to let go of the matter respecting the principle of comity)

The Californian Court’s take on this issue is clear, but is it complete?...the Court discusses US case law on “international comity” and re-states the principle calling it “international abstention”. The Court says that instead of applying the principle of comity of nations as a factor in deciding jurisdiction, the Court must look for “true conflict”, and not merely a possibility of such a conflict.

The Californian Court goes on to justify the restatement on grounds that if “international comity” is invoked without application of mind, then any defendant in a US proceeding could file a suit in a foreign jurisdiction, invoke comity and deprive the Plaintiff from availing relief from US federal Courts. Therefore, US federal Courts must abstain from matters only under extremely limited circumstances, since they have a “virtually unflagging obligation” to exercise their jurisdiction.

To decide if the narrow window for abstention is available in a particular case, the following factors need to be considered:

(1) whether either court has assumed jurisdiction over a res,

(2) the relative convenience of the forums,

(3) the desirability of avoiding piecemeal litigation,

(4) the order in which the forums obtained jurisdiction,

(5) what law controls, and

(6) whether the foreign proceeding is adequate to protect the parties' rights. 

Mind you, this isn’t an exhaustive or mechanical list. If there is a substantial doubt that a foreign proceeding  may not resolve all contentious issues, the US Court need not even undertake the above analysis. It can assume jurisdiction over the matter directly. Fair enough, one must say. Let’s see how this principle of abstention has been applied in the case.

Following is the relevant excerpt from the Order:

"Applying this analysis to this case, the court finds substantial doubt that the Indian proceedings would resolve all of the issues in this action. In its complaint filed with the High Court at Calcutta, IIT makes the following claims: (1) IIT never entered into a valid and enforceable nondisclosure agreement (“NDA”) with Farhang; (2) IIT expended time, money, and resources into developing the disputed IP; and (3) Farhang has wrongfully detained and utilized the IP. In the Indian proceeding, IIT seeks: (a) a declaration that there is no valid NDA between IIT and Farhang; (b) a declaration that IIT is the owner of the disputed IP; (c) a permanent injunction restraining Farhang and other defendants from utilizing the IP without IIT's written permission; (d) a decree for Farhang to return the IP; and (e) damages for wrongful detention of the IP. 

Meanwhile, in the instant action, plaintiffs Farhang and M.A. Mobile Ltd. bring claims against IIT and other defendants for: (1) breach of the NDA, (2) breach of joint venture agreements, (3) breach of fiduciary duty, (4) fraud, and (5) misappropriation of trade secrets.

Even if a ruling by the High Court in Calcutta in favor of IIT on all counts could completely dispose of all of plaintiffs' claims in the federal action, there can be no doubt that a ruling by the High Court in Calcutta against IIT would leave various issues for this court to adjudicate. Therefore, there is substantial doubt that the Indian proceedings would completely resolve the issues in this action. Under these circumstances, granting a stay would be “a serious abuse of discretion.” Therefore, the court denies IIT's motion to stay this action."

On the face of it, this conclusion seems consistent with the principles of international abstention. This is so because, even if the High Court of Calcutta were to rule against IIT in the suit filed by IIT, there would remain certain outstanding issues for which there would be no remedy as far as Farhang is concerned. But this seems like an incomplete proposition...why?

The US Court does not take into account the very real possibility of Farhang filing a counter-claim against IIT in the Calcutta suit proceedings. If both IIT’s suit and Farhang’s potential counter-claim were to be consolidated and decided together, all issues could be resolved by the Indian Court.

Of course, one could say the same argument could be applied to the US proceedings as well. Also, the US suit was filed well before the Indian suit. That being the case, the other possible technicality that needs to be looked into is a strictly jurisdictional one i.e. does Farhang have a remedy in the US, specifically before the Californian Court, in the first place?

IIT seems to have raised this issue before the US Court. We’ll discuss this along with other important findings in the order in the next post. 

Stale News: IIT Kharagpur in the Dock before a US Court

I am sure most Indian readers must have already read in today’s news reports that IIT Kharagpur, the first and the oldest of Indian Institutes of Technology (the famed ‘IITs’) is staring down the barrel in a suit in which it has been arrayed as one of the primary defendants by MA Mobile Limited and Mandana D Farhang, a US-based entrepreneur. 

The case, which was filed before the Northern District of California in May 2008, concerns alleged misuse of Farhang’s invention and trade secrets by the Technology Incubation and Entrepreneurship Training Society (TIETS) of IIT Kharagpur. The US suit alleges (1) breach of the NDA, (2) breach of joint venture agreements, (3) breach of fiduciary duty, (4) fraud, and (5) misappropriation of trade secrets, by IIT Kgp.

In her suit, Farhang states that in the year 2003, MA Mobile and she had entered into an agreement with the IIT Kgp for creation of a prototype of a mobile computing application which could be used by the Indian Railways. The application, along with trade secrets and customer information, was shared with IIT Kgp for the creation of the prototype by the latter. Allegedly, IITKgp subsequently shared the trade secret and the application with IBM and Indian Railways in breach of its agreement with Farhang.  

IIT Kgp, on its part, has claimed that Farhang did not have the right to file the suit in a US Court since provisions of the California Corporations Code had not been satisfied. Reportedly, Section 2105 of the Code requires foreign corporations to obtain a certificate of qualification from the Secretary of State prior to transacting intrastate business in California. M.A. Mobile is a foreign corporation chartered under the laws of the Commonwealth of Dominica.

Further, IIT Kgp too filed a suit before the High Court of Calcutta in April 2009 claiming that Farhang was using the institute’s technology without authorization. IIT Kgp had also prayed for an anti-suit injunction whereby the foreign suit instituted by Farhang was sought to be stayed until the Indian proceedings were concluded.

The High Court of Calcutta issued an interim injunction against Farhang which prevented her from using the disputed IP during the pendency of the suit.  I haven’t found th HC’s order on Manupatra or Indian Kanoon. If any of our readers have, I request them to share it with us.

From what I have gathered, three orders have been passed by the US Court dated June 1, 2010, September 3, 2010 and September 7, 2010. We’ll discuss them in the next few posts.