Hedging against uncertainty in the IPR Regime: Contractual protections

Anay Shukla, Lead, Pharma Healthcare team, Darren Punnen, Member, Pharma Healthcare team and Vidya Phanse, Intern, Nishith Desai Associates, discuss contractual strategies that companies engaged in IP-oriented businesses may employ to exploit their IP, without fearing its unauthorised use by a business partner

India is certainly witnessing a change in its intellectual property (IP) policy and regulatory framework. The government published its National Intellectual Property Rights Policy in 2016, which formalised the government’s intention to push Intellectual Property Rights (IPR) as a marketable financial asset. Contrary to popular perception, it was not just lip service. The government walked its talk by introducing a slew of reforms over the last year as well as this year. For instance, it amended the Patent Rules, 2003 and allowed ‘Tatkal’ or expedited patent examination, which should significantly reduce the overall time-frame for grant of a patent. Similarly, the Trade Mark Rules, 2017 have adopted rationalised procedures such as e-service of documents, which should significantly reduce time required to obtain a trade mark.

Despite consistent efforts of the government, India does not score high on international scale for IP recognition and protection. For instance, India has reportedly remained almost at the bottom of the U.S. Chamber of Commerce-International Intellectual Property Index for four years in a row. Similarly, the Global Intellectual Property Centre (GIPC) index on IP standards has placed India at the bottom of 45 countries. The official US government statement on the state of IPR protection and enforcement in India reportedly reads as follows: “India also remains on the Priority Watch List this year (2016) for lack of sufficient measurable improvements to its IPR framework despite more robust engagement and positive steps forward on IPR protection and enforcement undertaken by the Government of India.”

This apparent contradiction may cause uncertainty in the mind of the reader about whether or not to trust the IP framework of India for doing IP oriented business in India.

One way to overcome the apparent uncertainty regarding protection and enforcement of IPR is to use the time-tested contractual law framework. In this article, we will be discussing some contractual strategies that companies engaged in IP-oriented businesses may employ to exploit their IP, without fearing its unauthorised use by a business partner.

The most important contractual strategy is the use of a non-compete provision. A non-compete provision essential stops a party to a contract from competing in the field of business of another party. In the context of this article, this provision could come handy in a scenario where a company fears that its patent may not be recognized or invalidated during the term of the agreement. In such a situation, a non-compete provision enables such a company to restrain the contracting party, which has signed a non-compete agreement, from conducting business in the field of the company.

However, it should be remembered that non-compete provisions have their own limitations. They have been proven to be enforceable during the term of the agreement. However, enforcement of non-compete provisions after the expiry of the term of the agreement may or may not be successful depending on the facts of the case. If the intention is to restrain a company after expiry of term, then it is recommended to ensure that the other company has accepted that the information, that is essential to exploit the IP, is confidential to the company. It may be possible to prevent the contracting party from transferring or disclosing such confidential information to third parties after expiry of term, provided such information was not known to the other company prior to the contract and is not known to the public.

Another limitation of the non-compete provision is reasonability. It is to be remembered that a non-compete provision is not an agreement to refrain from doing profitable business in its entirety, but simply an agreement not to compete with the existing business of the company. Therefore, non-compete provisions should always be limited in scope, necessary in requirement and tight in language. Unreasonable non-compete provisions are not enforceable.

A common contractual strategy to negate the effect of invalidation of patent or trademarks is to define IP as broadly as possible. Therefore, even if one of the corresponding IPR is invalidated, unenforceable or found to be non-existent by a Court, a company can rely on IPRs emanating from other IPs. For instance, an Indian court has held that royalties cannot be collected once a patent has expired or has ceased to exist. In addition, Indian patent law allows a licensee of a patent that has seized to be in force, to conclude the license arrangement after giving the licensor three months’ notice. In such as case, defining IP under any agreement to be limited to only the ‘patent’, would effectively end the ability of the company to legitimately be paid. However, if the IP is defined broader to include other IPs such as know-how which will survive invalidation of the patent, the contracting party would be obligated to pay the company for the use of its IP despite invalidation of its patent.

There are many other such innovative contractual strategies that pharma and medical device companies are employing today to successfully do business in India, in order to hedge against the uncertainties in its IPR framework. In this way, even as the IPR regime in India continues to evolve for the better, companies can ensure that they can continue to optimally conduct business in India. As it is commonly said, “when a door closes, look out for the window that opens!”