Introduction

The goal of any IP owner is to monetize IP while preventing others from unauthorizedly doing so. Even so, in India, due weight is often not given to IP protection while entering commercial agreements, such as those for franchising, distribution, licensing, supply and manufacturing. It is surprisingly common for such agreements executed with Indian partners to either be entirely devoid of IP centric clauses or to feature inadequate/generic IP clauses.

Robust and comprehensive IP centric clauses are essential in commercial agreements, and these must detail the rights and obligations vis-à-vis the IP involved, such as the scope of permissible use, as described in more detail below. These aid the elimination of loopholes, determine what constitutes misuse, and suitably define default and breach, not only to reduce misuse but also to provide stronger and more direct claims against misuse/breach backed with contractually agreed upon terms, making it more difficult for the defaulting party to contest.

On the other hand, neglecting the inclusion of robust and comprehensive IP centric clauses results in grey areas and loopholes, leading to potential grave misuse of IP (both intentional and unintentional) as well as challenges in enforcement against defaulting parties. Essentially, there is scope for defaulting parties to either exploit these loopholes or use the gaps to their advantage and tie up parties in endless litigation. Enforcers are often posed with a higher evidentiary burden to first and foremost evidence their rights over the IP in question and thereafter, evidence that there has in fact been misuse/breach such that it traverses beyond the permissible scope.

Common IP Issues Arising from Commercial Agreements: What to Expect

In terms of misuse, the most common IP related issues faced with Indian partners include:

  1. Use of franchisor/distributor's IP by Indian partners (or current and former associates) beyond the scope of contractual rights or the scope intended by the IP right holder;
  2. Indian partners registering the franchisor/distributor's IP in India as their own where in fact, the essence and intent of the agreement did not intend for transfer of ownership of IP but mere use thereof – this is particularly common when the right holder has not itself taken steps towards statutory protection of its IP in the Indian jurisdiction and also very common with respect to domain names;
  3. Continued use and misappropriation of franchisor/distributor's IP after termination of the agreement. The infamous case of McDonalds v. Vikram Bakshi ('Bakshi') is a classic example of this. Despite McDonalds terminating its franchise agreement with Bakshi pursuant to which Bakshi was operating McDonalds outlets in India, Bakshi allegedly continued to run these outlets with McDonalds claiming significant losses as a result.

Getting Ahead of Possible IP Issues: How to Minimize these Issues

While what constitutes comprehensive and adequate IP clauses can only be judged on a case-to-case basis, taking into account the requirements of the contract and facts surrounding the same – some basic provisions to keep in mind while executing commercial agreements extending to India include:

  1. Clauses governing scope of use of existing IP: Clearly identifying the IP and setting out the manner and extent of permissible use of the IP by not only the titled party to the agreement but also by others such as sub-franchisees (should the same be permitted) – for instance, stating how the IP may be used in marketing and promotional material; on social media accounts; registering of .IN & .CO.IN domain names etc., thereby limiting and monitoring use of IP to what is required and necessary per the right holder's needs and intentions. Best practises include that ultimate control/ownership of social media accounts/websites lie with the IP owner with qualified access to only operate and upload content. The scope of the qualified access should be agreed upon in writing.
  2. Clauses governing use of know-how: The value of know-how and trade secrets entirely lies in their continued secrecy – once disclosed or misappropriated, the derivable value naturally decreases.Since there is no specific Indian legislation governing know-how and trade secrets, these are best protected contractually through clauses, outlining obligations and responsibilities in respect of know-how and trade secrets such as to whom and how such information may be disclosed, non-use of such information by any person beyond contractual rights, impermissible disclosure resulting in immediate termination of contract, monetary repercussions in the form of fee for breach of such clauses (which must be a genuine pre-estimate of the losses suffered) etc.
  3. Clauses governing copycat/counterfeit/unauthorized/unlicensed product(s) and adoption of similar IP: Permitting use of IP by third parties increases the risk of copycat products and/or adoption of IP that is deceptively similar. For instance, in a manufacturing agreement, the manufacturer may produce larger quantities of the products agreed upon and sell the excess quantity in the market in a manner not permissible. To curb this, agreements may include clauses such as non-use (restricting use of IP for personal benefit), non-disclosure (preventing disclosure of IP to third parties) and non-circumvention (preventing sale in certain instances) – a considered inclusion is required here since blanket vertical restraints may have anti-competitive effects. To further curb possible challenges, there may be express limitations to distributorship agreements limiting the distributor to specific territories and quantities it may sell or set up a period during which the defaulting party may not engage in similar business.
  4. Clauses governing post-termination obligations: Essential to prevent continued use of IP post-termination by laying down the consequences of termination of the franchise agreement or during any transition period on future use of the IP – such as cessation of right to use, disposal of existing inventory, termination of use by all associated or related parties such as sub-franchisees (irrespective of whether they are party to the parent agreement) and transition of the business to a new partner. Such clauses act as deterrents to misuse of IP and also simplify the enforcement process (both time wise and monetarily), if required.

    In Lakme Lever Pvt. Ltd. ('Lakme') vs. Annapurna Enterprises and Ors. ('Annapurna')1 - Lakme was swiftly able to obtain an interim injunction and appointment of a court receiver against Annapurna for continued use of Lakme's IP, including trade marks, artworks, signage, outlet layouts etc., despite termination of the franchise agreement. The IP had been licensed pursuant to the said agreement. Noting that the said agreement contained explicit provisions concerning the licensed IP, materials, business system and continued operations, the Court opined that 'there is an ample prima facie case and the balance of convenience is undoubtedly with the Petitioner'.
  1. Clauses governing non-disclosure and indemnification: Establish pre-agreed standards for protection of IP and consequences upon breach/misuse of IP and IP clauses – aiding in fixing liability and easier access to a claim of damages by enforcement of such clauses. For instance, indemnification in cases of copycat products or where one-party attempts to register the right holder's IP in India – by filing trade mark applications, registering Indian extension domain names etc.
  2. Clauses governing Jurisdiction: Should be drafted in a manner by which the power to seek injunctions in India is not ousted – such that any direction towards enforceability/indemnification against breach/infringement of IP rights arising within India may be carried out.

Additionally, all such clauses should clearly and specifically identify the actual IP and not make general references such as "should not use Franchisor's IP...". A definition clause suitably identifying all marks, work product etc. clearly should also be included. It goes without saying that one must not rely on, proceed with, or carry out actions pursuant to a possible collaboration on the basis of oral agreements, letters of intent, or email communications without a written and executed agreement in place.

In Yves Saint Laurent ('YSL') Vs. Brompton Lifestyle Brands Private Limited ('BLBPL') and Ors.2, YSL had entered into a franchise agreement granting Beverly Luxury Brands Limited a franchise to open and operate a store in Delhi under YSL's registered brand. Upon termination of the agreement, BLBPL, a sub-franchisee of Beverly Luxury Brands Limited, by virtue of a supply agreement with this party, continued to operate the store.

Given the rights granted by the franchise agreement surrounding YSL's IP and the fact that the supply agreement clearly stated that there is no transfer of rights, title and interest of YSL's IP without prior consent, and rights conveyed are limited and co-terminus with Beverly Luxury Brands Limited's rights, it was noted that BLBPL's rights would terminate upon termination of the franchise agreement irrespective of whether or not YSL was privy to the supply agreement, and therefore, BLBPL cannot be construed as a permitted user and use would amount to infringement.

The franchise agreement comprising of IP centric provisions noted above, strengthened YSL's case, even with respect to a sub-franchisor with whom it never directly entered into an agreement, and allowed for a simpler and more straightforward enforcement without having to prove or disprove knowledge regarding the additional supply agreement.

Conclusion

IP forms an invaluable part of every business' asset base. The effects of misuse span from misappropriation to brand tarnishment amongst other things. Commercial agreements tend to, at the outset, provide access to IP and consequently also open gateways to the possibility of misuse.

While the Indian legal system clearly provides for remedies against misuse of IP arising out of commercial agreements, lack of established clarity on the ownership and permissible use of IP typically makes for a challenging and complicated road to successful enforcement.

Therefore, when entering into commercial agreements, an important aspect to invest in is IP protection – this is best done by getting out ahead prior to any actual misuse and including comprehensive IP specific clauses governing rights and obligations surrounding the IP involved.

Understandably, even appropriate IP centric clauses cannot entirely eradicate IP issues. However, investing in inclusion of detailed IP specific clauses is as good as killing two birds with one stone. Such clauses better identify rights and liabilities in various situations – acting to deter unscrupulous activity and misuse as well as simplifying the road to recourse in the event of misuse. The clarity surrounding IP rights in commercial agreements reduce the evidentiary burden and time spent in enforcing as well as naturally, attendant costs.

Footnotes

1. Comm. Arbitration Petition (L) No. 4867 of 2020

2. CS (COMM) 789/2022

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.