India: Licensing In The Boardroom 2009

This article first appeared in Licensing in the Boardroom 2009, published by Intellectual Asset Management (IAM) magazine, www.iam-magazine.com

A. INTRODUCTION: LICENSING AS A BUSINESS STRATEGY

The importance of Licensing as a strategy for business alliance has increased over the years as a consequence of increased industrialization of which the fallout is diminishing real estate resources and increasing infrastructure costs. Building tangible assets now requires not just more effort and greater investment but far higher risk. Businesses therefore have to adapt by development or acquisition of intangible assets and exploit these as alternate or additional sources of wealth. With time, collaborations and alliances involving licenses of strong intellectual property have become critical to the success of business.

The importance of Licensing can also be attributed to the increasing competition in different industry segments and across product categories, the incentives to expand beyond domestic markets and convergence and harmonization of quality standards across the world due to globalization.

Often, an innovator company or individual does not have sufficient funds and resources to commercially exploit its intellectual property hence collaboration with other entities who possess these requisites becomes a logical choice to reap economic benefits from the untapped intellectual property. By way of example, an inventor may develop a new cell phone technology, which contains various components that are protected by means of patents, designs and copyrights. The manufacture of each requires separate infrastructure, technology and skills which the inventor does not by himself possess. Thus, licensing becomes a critical tool to commercialize the technology and earn profits in return. Similarly, creative fields like music, art, movies etc. thrive on licensing arrangements.

Corporations invest huge amounts of money in developing resources that can either be licensed out or resources necessary to identify new innovations in the market and work on favorable options of acquiring the same. Corporate teams undergo intensive training and acquire skills that help them interpret license terms, how to negotiate favorable license terms and avoid legal pitfalls.

At the end of the day licensing is essentially a business decision and adopted as a strategy after weighing all pros and cons. A clear cut and well monitored licensing program can ameliorate many common licensing related problems.

B. LICENSES UNDER INDIAN IP LEGISLATIONS:

Licensing IP as a business strategy has seen a steady rise in India post 1991 as a result of lifting of various government imposed bans or restrictions on trade, reduced administrative hurdles, clearer guidelines by way of legislations and involvement in international agreements and treaties. More multinational companies have ventured into the Indian markets than ever before and are doing thriving business through their licensees and authorized dealers. Rise in technology and scientific research centers in the country have also led to research collaborations and licensing of innovations developed through such research.

According to the International Intellectual Property Alliance, even though India's IP laws are strong, the country still suffers high piracy rates and inadequate enforcement mechanisms. In the software sector a number of companies devise strategies having licensing schemes at their core to rein in infringers and as a significant means of controlling piracy.

Indian legislations have set out clear guidelines in the body of the Acts, specifically: the Trademarks Act 1999, the Copyright Act of 1957 (last amended 1999), the Patents (Amendment) Act 2005; and the New Designs Act 2000. While these legislations lay down the specific requirements for licensing, basic laws of contract also determine the scope and context of any IP license. Among the international agreements, India acceded to the Bern Convention for the Protection of Literary and Artistic Works as early as on January 31, 1975. On September 7, 1998, India acceded to the Paris Convention for the Protection of Industrial Property, the Patent Co-operation Treaty and Trademark Law Treaty. The Paris Convention lays down basic international principles governing the protection of patents, trademarks and industrial designs and as a result of being a signatory to the Paris Convention, India is obliged to extend reciprocal intellectual property arrangements to all countries party to the convention. Further, in February 2007 India ratified its accession to the Madrid Agreement on Trademarks.

While the finer details can be found in each of the Acts pertaining to trademarks, copyrights, patents and designs, we have tabulated below the main provisions contained in the respective IP legislations concerning licensing:

C. UNDERSTANDING THE ESSENTIAL LEGAL CLAUSES OF LICENSE CONTRACTS AND AVOIDING LEGAL PITFALLS

Licensing arrangements often run into anti competition issues as they sometimes impose restraints that adversely affect competition in markets resulting in market division or price-fixing. Antitrust/competition concerns may rise when a licensing arrangement harms competition by affecting the prices, quantities, qualities or varieties of goods and services either among existing competitors or likely potential competitors in a relevant market. In India, Courts tend to determine such effects by asking whether the agreement is in undue restraint of trade and if so, whether the restraint is reasonable. India has witnessed very few anti trust / restrictive competition cases on the scale seen, for instance, in the United States. It is imperative to note that each license is specific to the parties and the nature of collaboration between them and the provisions will vary from transaction to transaction. Some of these scenarios are discussed below:

• Exclusive licenses: Licensing arrangement may involve exclusivity if licensor grants an exclusive license which restricts the rights of the licensor to sub-license or possibly the use of the IP itself. Another form of exclusivity is exclusive dealing, which arises when a license prevents or restrains the licensee from licensing, selling, distributing or using rival technologies. Such restrictions may shut out access to or increase competitor's costs of obtaining, important inputs, or facilitate coordination to raise price, etc. and are likely to be held anti-competitive.
• Cross-licensing: Agreements whereby owners of different IP, example, patents or know-how agree to license rights to one another commonly referred to as "cross-licenses". Generally they are viewed as pro-competition. However they must be scrutinized to determine the purpose of the cross-license. It is important to understand whether the arrangement creates a monopoly power in the relevant market beyond that existing prior to the agreement.
• Grantbacks: These arrangements can be pro-competition because they permit the licensor to license the technology without any risk that it will be foreclosed from the market. However, such arrangement can have anti-competitive effect if it substantially reduces the licensee's incentive to indulge in research and thereby reduce competition. The key factors considered in evaluating a grantback provision are:

• Field of use restriction: Licensing arrangements sometimes restrict the use of licensed IP to a particular field (product or geographic) even when there are other distinct fields in which it is useful. This is the field of use restriction. These types of agreements can promote competition, because they provide licensees with strong incentives to develop the market by focusing on a particular field. It is important to analyze and weigh the degree to which the restriction restrains competition with the legitimate goals it may produce. Geographic restrictions are permitted by patent law. The only exception being when it furthers market division among competitors.
• Agreements that deter research: Agreements that deter or discourage research and development are usually held to be anticompetitive as they retard innovation and adversely affect development. For example, a pooling arrangement that requires members to grant licenses to each other for current and future technology at minimal cost may reduce the incentives of its members to engage in research and development because members of the pool have to share their successful research and development and each of the members can free ride on the accomplishments of other pool members.
• Agreements that result in price fixing: A license can be challenged as being anti competition if it indulges in naked price fixing or market division.
• Tying arrangements: such arrangements are "per se" illegal if it is established that :

a. the products or services tied are unrelated ;

b. the sale or agreement to sell one product or service is contingent upon the purchase of the other product or service ; and

c. the licensor uses his market position and dominance to impose such arrangements upon the purchasers to restrain trade in the market.

• No challenge clause: No-challenge clauses have been held to be anti-competitive. In an attempted monopolization case, proof that the patents were bought as part of a scheme to acquire or maintain monopoly power may be anti-competitive as this results in the licensee paying royalty even if the patent is invalid.
• Term extending the payment of royalties beyond the time of the patent: Such a clause is most likely to have a potential anti-competitive effect. For example - if a licensor sold a patented machine for a fixed price and an annual minimum like a royalty pay, the patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se. Use of such patents to maintain or extend the power inherent in the patent beyond the term of the patent is anti-competitive.

D. CONCLUSIONS

There have been instances of licensing arrangements running into trouble after, both, long term and relatively shorter term cooperation. There are also instances of long term, enduring licensor-licensee relations that give hope for the success of this model of business. Examples can be cited from different industry segments where licensing arrangements went sour and reached the courts: Ziff Davis Inc., owner of the well known PC MAGAZINE, and Vogel Media International GmbH, owner of the well known CHIP magazine, had misadventures with their Indian licensees nearly a decade back. In the Ziff Davis case, the court firmly upheld the principles of licensee estoppel and emphasized that a licensee having acknowledged the proprietary rights of a licensor over the licensed trademarks cannot deny these subsequently. Other examples of cases that had a licensing history and went into litigation were from the manufacturing sector involving medical equipment (Synthes AG), electrical equipment (Telemecanique S.A.), garments (Hang Ten), software (Executrain, Inc.), education courses (Kaplan, Inc.) etc. Interestingly all these cases involved an intellectual property violation and ended well for the licensors and resulted in the licensee being restrained from misusing the licensed intellectual property or voluntarily undertaking in the court proceedings to refrain from doing so.

In nearly all cases, the reasons for the collapse of licensing arrangements boil down to (i) mistrust or breakdown of personal relations between the contracting parties, (ii) monetary issues such as division of profits and allocation of budgets for and sharing of advertisement and promotion costs (iii) better business projections or sweeping change in the business vision or market environment coupled with a good equation with a potential partner; and (iv) breach of the agreement by misuse of the licensed intellectual property by the licensee. These factors may sound suspiciously analogous to the factors that also make a marriage work or fail - unsurprisingly because the relations are contractual in essence. Thus while a number of safeguards can be built into licensing agreements to plug all foreseeable loopholes there will at any point of time also be factors that cannot be envisioned and the test will be the fundamental strength of the relations between the contracting parties.

Binny Kalra is a Senior Partner at Anand and Anand and heads the Litigation Department of the firm. She is a senior attorney with over 18 years of IP litigation practice involving a diverse range of subjects in highly contested matters. She has in-depth experience of multi-dimensional intellectual property issues and their treatment in courts and an expertise in strategic advice and planning for litigation.

Taapsi Johri is an Associate with Anand and Anand's Litigation department. She has experience in drafting and litigating law suits involving patent, trademark and trade secrecy issues and related IP disputes. She was admitted to the Bar in 2006. She earned an LL.M in Intellectual Property Laws from George Washington University, Washington DC in 2007, and has been working with Anand and Anand since November 2007.

Footnotes

1. ABA Section of Antitrust Law, Intellectual Property and Antitrust Handbook (2007) at page 420 quoting 569 F.2d 1084, 1101-02 (9^th Cir. 1978)

2. Jane K. Winn & Benjamin Wright, Law of Electronic Commerce (4th ed. 2002)

3. J.K. Jain v. Ziff Davies, Inc. 2000 PTC 244 (Del) DB

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