Defending hidden value

Strict internal controls, risk assessments and staff education are vital for long-term success in protecting intellectual assets. Equally important is keeping a close eye on the activities of competitors and proactively monitoring for cases of infringement

By Rodney Ryder in New Delhi

Protecting and enforcing intellectual property (IP) rights remains one of the most acute legal challenges facing domestic and international businesses in India.

The goal is clear: for innovators to enjoy a monopoly or near monopoly over the use of intangible assets such as technology, recognizable marks, creative work, knowledge or processes that they have invented or created. The successful protection of these intellectual assets ensures that creators alone reap any economic or strategic benefits that stem from their work.

Furthermore, effective IP protection fosters a culture of creativity and technological advancement by rewarding innovators and therefore stimulating further innovation.

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The reality, however, is very different. Despite India’s well developed legislative framework for IP protection, the picture on the ground is that of a deluge of enforcement failures and a catalogue of court cases that have been pending for many years with no resolution in sight.

For the growing number of enterprises that base their business models on intellectual assets rather than traditional bricks and mortar, this is a cause for alarm.

The theft of intellectual property, and the resulting inability to pursue a competitive advantage, can be devastating. And in India, where knowledge-based industries have been a major engine of economic growth, domestic and international businesses are particularly vulnerable.

Protection begins at home

As with many other significant challenges, the solution begins at home. Simple measures such as educating staff about IP and IP protection, and the business risks associated with poor protection, can have surprising results. Many significant IP violations could have been avoided had staff been required to lock away their files and keep “clean desks”.

Alarmingly, India has no specific legislation to protect confidential information. Limited legal protection can be drawn from disparate aspects of case law in India and the United Kingdom, but for the most part, the burden of protection falls on the owners of the information at stake.

To this end, there are a number of practical steps that companies can take to safeguard and protect their confidential information:

• All employment contracts should include confidentiality clauses.

• A company-wide policy should be established to determine which information is confidential, the level of confidentiality, and the employees and/or third parties who are permitted to access it.

• Sensitive documents should be securely stored and clearly marked. Records of their use and disclosure should be maintained at all times.
Non-disclosure agreements (NDAs) are another useful tool for protecting sensitive information. They serve to clarify that the information in question is confidential and define the rights of the enterprise in the event of a breach.

The scope of an NDA must be carefully considered: An agreement that is too wide could amount to an unreasonable and unenforceable restraint; an agreement that is too narrow, on the other hand, may contain significant loopholes.

Perhaps the greatest threat to confidential information is posed by the internet. Web-based e-mail services such as Yahoo, Hotmail and Gmail provide an easy and often undetectable route out of the office for vast quantities of sensitive information. Companies should have appropriate policies and monitoring systems to regulate the use of emails (especially web-based email accounts). A standard disclaimer and confidentiality warning should be automatically attached to all outgoing emails.

It is also prudent for a company to have policies that set out its expectations for the handling of confidential information. Furthermore, staff must be educated about the principles of confidentiality and the procedures for accessing and disseminating sensitive information.

Know your strengths

A fundamental step in the development of an effective IP strategy is for companies to decide which intellectual property is worth protecting and at what cost. To do so, they must identify the strategic objectives of their business and assess the significance of different intellectual assets in the pursuit of these goals.

Other factors to consider include the value of each intellectual asset, the cost of protecting it, the degree and type of protection available and the potential consequences of any infringement.

As soon as the strategic IP assets have been identified, legal protection should be sought as quickly as possible. Holding back on an application increases the risk of a competing business – which may have developed the same technology independently – securing a monopoly position on its use.

Legal protection

The application process for copyrights and trademarks is relatively straightforward.

A trademark may be registered by submitting an application to the Trade Marks Office, following which a process of examination is conducted. The examiner is obliged to accept the registration unless grounds for rejecting the application under the Trademarks Act, 1999, are met.

When seeking to obtain copyrights, the overriding consideration of the examiner is whether the work is original. It may also be necessary, however, for the applicant to prove that a significant degree of skill, labour, judgment and expertise was used in the creation of the work.

Industrial designs fall under the jurisdiction of the Designs Act, 2000.

This states that in order to qualify for protection, a design must be original, applicable to an article and apparent to the eye.

The application for registration must be lodged within six months of the creation of the work.

There is no formal registration process for circuit layouts.

To obtain legal protection, a circuit must be original.

It must also be made by an Indian citizen or be first commercially exploited in India or one of several other countries that is designated by the regulations. Commercial exploitation is deemed if the circuit layout is sold, let, distributed by way of trade or otherwise offered for sale.

For a patent application to be successful, the applicant must demonstrate a basic invention or a new process of manufacture. The Patents Act, 1970, defines this as “a new product or process involving an inventive step and capable of industrial application”. Essentially, the invention must be useful, it must be novel and it must be clearly distinguishable from the “prior art base”. As the court noted in Biswanath Prasad Radhey Shyam v Hindustan Metal Industries, “the fundamental principle of patent law is that a patent is granted only for an invention which must be new and useful”.

For a standard patent, the creation of the invention must involve an inventive step or a feature “that involves technical advance as compared to the existing knowledge, or having economic significance or both”. An innovation patent requires an innovative advancement.

If the invention or innovation is obvious to a skilled person in the field in question, a patent is unlikely to be granted.

“Patent blitzkrieg” – protection or abuse?

In recent years patents have taken on a greater significance than simply a means of protecting innovation.

A controversial range of strategies collectively known as “patent blitzkrieg” are now commonly used by companies to manage and suppress the activities of their competitors. These include “umbrella patents” which are broad enough to prevent the development of similar products, “accordion patents” which begin with a single invention but expand to include associated products and processes, and “bottle neck patents”, which control an invention that an entire industry needs.

Patent “evergreening”, where incremental changes are made to existing innovations with the sole purpose of obtaining new patents and therefore extending the period of protection, is another controversial strategy.

It is vitally important that business managers and corporate counsel are aware of these strategies and guard against them.

They must diligently monitor patent requests filed by their competitors in order to identify and oppose any applications that may represent “patent blitzkrieg” or unfairly threaten their company’s competitive position.

There is generally an opportunity to oppose competitors’ IP registrations, which at the very least may cause some delay.

However, before opposing a patent application, a company must bear in mind that any sensitive information presented in its opposition may not necessarily be kept confidential.

Remedial procedures

In spite of the best prevention strategies, IP infringements continue to be a major problem in India and numerous other countries.

When they occur, the IP owner may decide to exercise its fundamental right to ensure that no other person or entity can take advantage of the cost and effort it took to develop or acquire the intellectual property in question.

If a potential infringement is identified, the first step is usually to issue a “cease-and-desist” letter. A legal adviser will generally issue this letter but first it is important to obtain evidence of the infringement and accurate details of the infringer.

The effect of the cease-and-desist letter is significant. It protects the enterprise against an order for costs where the plaintiff would have otherwise argued that it would have agreed to the demands had it been notified of them prior to any court action. Furthermore, if the infringer repeatedly infringes after receiving the letter, it constitutes evidence of a deliberate intention to infringe those IP rights.

India’s IP legislation comprehensively sets out the remedies that are open to IP owners to enforce their rights. These remedies include damages or an account of profits (to be elected by the plaintiff).

Account of profits is intended to prevent unjust enrichment whereas damages are designed to put the plaintiff in the same position it would have held if the infringement had not occurred. These remedies may not be awarded if the defendant can prove that the infringement was innocent. The owner of the IP rights can also seek interim and final injunctions.

In all cases, action must be taken within six years from the date on which the infringement occurred. A failure to commence action within this period means the right to enforce the IP rights in respect of the infringing act will be lost.

Enforcement action

One of the most important considerations in determining whether to go ahead with an enforcement action is the precedent value that the litigation will bestow: A success in the action may be enough to drive infringers away from the market. A failure may see the collapse of the IP owner’s business altogether.

Another significant factor is cost, which can be mitigated with offensive and defensive IP insurance. However, this insurance itself has a cost and its usefulness needs to be weighed against the perceived need for IP enforcement. The cost of management time taken up by any action should also be considered.

Litigation in India is often tediously slow and costly and alternative mechanisms for resolving disputes are fast gaining popularity as a result.
Indeed, it is now common to find a standard clause in contracts requiring the parties to at least attempt some form of alternative dispute resolution before resorting to the courts.

Arbitration is one popular option. Another is mediation, which typically involves a mutually respected independent person facilitating a settlement. Mediation will only succeed if all parties to the dispute are truly open-minded about finding a resolution.

In most cases, litigation is the last resort. It should only be embarked upon once the IP owner has taken stock of its risks in the context of its overall business objectives. This entails considering the commercial, legal and, if relevant, political risks in following through with an enforcement action.

All of these issues should be set out in an appropriate risk management plan, which would usually be prepared by legal advisers. These advisers should also provide a budget for the conduct of the enforcement proceedings.

Optimum protection

An effective enforcement strategy must be proactive and multifaceted. It should be tailored to match the business objectives of the IP owner and include strong elements of internal control, risk assessment and staff education.

It is also necessary to implement procedures for monitoring the activities of competitors and for identifying cases of potential infringement.

Finally, carefully considered plans must be in place for dealing with violations if and when they occur.

These should include assessments of the most appropriate forums for enforcement action and guidelines to determine whether and when action should be taken.

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Rodney Ryder is a partner with FoxMandal Little, where he heads the technology, media and communications law practice. He is an adviser to the Ministry of Communications and Information Technology, the Technology Law Committee of the Indian parliament and the Data Security Council of India.

Mr Ryder can be reached at rodney.ryder@foxmandallittle.com.