INTERNATIONAL LAW: Intellectual Property and Outsourcing to India

Vol. 29 No. 4

By

Poorvi Chothani is a founder and managing partner of LawQuest, a law firm in Mumbai, India. Vidhi Agarwal is a partner at LawQuest.


As global outsourcing to India increases, the protection of intellectual property (IT), including any trade secrets or confidential information that may be transferred to or created in India in the context of outsourcing, is a critical concern for the offshoring company.

Copyright protection. Under the Indian Copyright Act of 1957 and Copyright Rules of 1958, copyright subsists in an original literary work; in an original dramatic work and its adaptation; in an original musical work, including in a software program; in a painting; in a film; in a sculpture; in a drawing, as well as a diagram, map, chart, or plan; in an engraving or a photograph, whether or not any such work possesses artistic quality; in an architectural work of art; and in any other work of artistic craftsmanship. Copyright is protected for 60 years following the death of the author, 25 years from first broadcast, or 60 years from first publication of the photograph, motion picture, or sound recording. Notably, although computer programs that show technical effects are arguably patentable under Indian patent law, software or computer programs are not patentable per se.

Companies considering offshoring should be aware of certain differences in Indian copyright law protection of software, in as much as these aspects affect the decision to outsource. Although contracts may provide for application of non-Indian law, companies should be aware that Indian law may be used to determine IP ownership and infringement for IP transferred to, created in, or licensed from India. Some notable aspects include inalienable moral rights under Section 57 of the Copyright Act; fair use exceptions applicable to software under Section 52, which creates categories of non-infringing use; application of the work-for-hire principles to software contractors under Section 17, which permits ownerships rights in foreign contractors absent a clear agreement; compulsory licensing ordered by the Copyright Board; geographical, time, and exercise restrictions on assignments under Section 19 (limited to territory of India, five-year term, and requirement to exercise rights within one year of assignment), absent a clear agreement to the contrary; and finally, the requirement that all owners of a patent or copyright be parties in an infringement suit, under Section 61.

Protecting trade secrets and confidential information. There is no statutory protection given to trade secrets in India. Parties mostly rely on the contract to protect trade secrets. In addition to contractual obligations, Indian common law also recognizes the “breach of confidence” tort irrespective of the existence of a contract. For example, say an Indian service provider has engaged a subcontractor in India to perform the offshored services for an outsourcing company. If the Indian subcontractor discloses or misappropriates the outsourcing company’s trade secrets or confidential information, the company has neither a “breach of confidence” claim against the subcontractor nor a breach of contract claim, except in the unlikely event that the outsourcing company has contracted directly with the subcontractor. The contract between the outsourced company and the Indian service provider might well hold the provider liable for damages caused by the subcontractor’s inappropriate disclosure. But that cause of action still does not directly address or foreclose the subcontractor’s past and possibly future misconduct. Essentially, then, the outsourced company is left without a direct remedy against the Indian subcontractor and without an immediate legal means to effectively stop the disclosure.

A concern for third-party subcontractor misconduct exists with respect to the misconduct of employees and ex-employees of the Indian service provider. Companies must also carefully scrutinize relevant contracts between Indian service providers and their subcontractors.

Patent strategy. Before initiating an offshoring business involving India, an outsourcing company should decide whether to protect IP that might be shared or created in India through trade secrets or Indian patent. The company’s main concern is whether to seek local patent protection for any invention that is either patentable or already patented outside India and will become obtainable in India as a result of the outsourcing commitment. Likewise, the company must find out if local patent protection should be sought for any project-related novelty originating in India and if global protection should be sought for any India-originated innovations.

An outsourcing company in India should be attentive to the fact that Indian patent laws authorize the government to grant a “compulsory license” to a private party or a government agency under certain circumstances. India’s patent laws also provide for extensive “research and experimental use” exceptions. Under these exceptions a third party’s trial use of a patent, even for commercial purposes and without the patent owner’s permission, does not qualify as infringement. Lastly, an outsourcing company must take into account that computer programs and business methods are not patentable in India. They must be protected as trade secrets in the course of appropriate contractual protections.

Other IP considerations. Outsourcing companies often involve joint efforts that create new IP products or rights, raising IP ownership issues. Newly created IP is, or should be, jointly owned. Unless the parties clearly and expressly define the terms of joint ownership, the parties involved in outsourcing projects are likely to face problems and conflicts. In India, under Section 50 of the Patent Act of 1970, a joint owner of a patent can commercially exploit the patent only after obtaining consent from the co-owner and is required to provide an accounting to the co-owner for all transactions pertaining to the patent. The Controller of Patents has the statutory power to intervene and pass directives in certain circumstances under Section 51.

India does not have specific laws pertaining to privacy or data protection, although recent amendments to the Information Technology Act of 2000 contain some relevant new provisions. It is important to note that although there have been recent modifications by way of the new Information Technology Amendments of 2008 to the IT Act to address data protection and privacy, the provisions are not as comprehensive or as specific as the laws in certain developed countries. Section 66C of the Act now provides for the punishment of imprisonment and a fine for identity data theft, and the 2008 amendments include a similar punishment for cheating by impersonation using a “communication device or computer.”

As a realistic approach to deal with IP risk, the outsourcing company should perform and employ risk-management practices prior to starting any outsourced arrangement in India. The company should execute detailed, up-front due diligence of the Indian service provider. To further mitigate risk, a company may take on a distributed research and development model by dividing research and development responsibility among many supplier entities and, if appropriate, across multiple jurisdictions. To mitigate enforcement risks, the outsourced company should look at other options, such as performance bonding insurance, letters of credit, or guarantees from the Indian service provider and its financially accounting affiliates.

In India, litigation of breach of trade secret protection clauses can lead to open disclosure and significant loss of the trade secrets at issue if the legal proceedings are not closed. Therefore, the operative contract should state that all disputes relating to the outsourced company’s trade secrets and confidential information are subject to confidential mediation or arbitration, rather than to litigation, which will, if possible, be conducted in a non-Indian venue, and that all IP and information involved in the proceeding will be treated confidentially.

 

ABA Section of International Law

This article is an abridged and edited version of one that originally appeared on page 7 of International Law News, Winter 2011 (40:1).
For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.
Website: www.americanbar.org/intlaw.
Periodicals: The International Lawyer, quarterly journal; International Law News, quarterly newsletter.
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Books and Other Recent Publications: China Law Deskbook, 3d ed.; A Legal Guide to Doing Business in the Asia-Pacific; Joint Ventures in the International Arena, 2d ed.; Choosing the Language of Transnational Deals; ABA Guide to International Business Negotiations, 3d ed.; Careers in International Law, 3d ed. For more, see www.americanbar.org/groups/international_law/publications.html.

 

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