Ayyangar’s Ghost and the Indian Patent System: Preserving Confidentiality of Patent Licensing Agreements – Part II

by Yogesh Pai

The previous post provided a brief background of working requirements within the Indian Patents Act, in the context of a PIL filed by Prof Shamnad Basheer. This is a continuation.

Why Confidentiality of PLAs Matter:

Patents are private property rights with exclusivity at its core. There is a great deal of debate on the nature of exclusivity in the context of awarding remedies such as injunctive relief and damages. However, it must be clear that the function of exclusivity is not simply to stop infringement by exclusion, but also to allow patentees to enter into a voluntary exchange (voluntary licence) and diffuse the patented technology. Private ordering allows patent holders to monitise the value of their inventions by offering differential rates and other terms and conditions to different licensees based on actual and prevailing market conditions. Hence PLAs are often a subject-matter of confidentiality by way of non-disclosure agreements (NDAs) among different market players.

The exclusivity underlying a patent provides the patent holder with the power to control the output (by forcing a demand- supply mismatch) in order to realise a value that the market can bear. Price discrimination allows the patent holder to realise such a value based on prevailing market conditions. There are various reasons why licensing information, specifically on price and non-price conditions, can be considered as sensitive for both the parties involved in a licensing deal. All licensees do not see confidentiality as an impediment to manufacturing or distribution of the patented product. It allows downstream manufacturers and vendors to compete in the goods market. Although a large number of patentees may not practice the patent themselves (non-practising entities- NPEs) but agree to licence upon payment of royalties, some patentees do enter into long-term licensing deals with specific players in the downstream markets that allow such licensees to engage in a lot of value addition and compete for higher market shares. Thus differentiated licensing conditions achieved through confidentiality of PLAs have important benefits for the industry as a whole.

Price discrimination is achieved through several ways such as granting volume discounts, cross-licensing arrangements with smaller or zero royalties, and differential pricing based on conditions of purchase depending on buyers’ or products’ characteristics. Consumers also benefit from differential pricing since it allows the same patented technology to be used in differentiated products produced by various manufacturers. Unless such terms and conditions in a licence are specifically limited by a voluntary contract (specific commitments that may be undertaken by the patentees under SSO IPR policies), contract law (prohibition on certain types of contracts), regulation (patent law in India prohibits the inclusion of certain restrictive conditions), or competition law (where unfair and discriminatory condition in purchase or sale of goods or service may amount to abuse of dominance), there is no economic justification to prohibit price discrimination that may be achieved by preserving the confidential nature of PLAs.

Therefore, any forced disclosure of confidential terms contained in PLAs through FORM 27 defeats the voluntary bargain that patentees and individual licensees can strike based on prevailing market conditions. Disclosure of confidential licensing terms and conditions may have an irreversible impact on the bargaining power of the parties and how licenses get negotiated in the ICT sector, which has witnessed wider diffusion of patented technology through non-exclusive patent licenses (unlike in case of pharmaceuticals where there may be very few instances of non-exclusive licensing). Perhaps, it is for this reason (i.e., to preserve bargaining power between the patentee and several existing and potential licensees) that the current format of FORM 27 does not seek specific details of a license and leaves it to the patentee/licensee to give any available details.

Does the Patents Act Mandate Confidentiality of PLAs?

There are legal reasons why terms of licence contained in PLAs could be considered as confidential within the framework of the Act. It is very clear from the proviso to Section 69(4) of the Act that in case of a licence granted under a patent, the controller shall, if so requested by the patentee or licensee, take steps for securing that the terms of the license are not disclosed to any person except under the order of a court. This proviso stems from the requirement in section 69(4) to supply to the Controller of Patents copies of all agreements, licenses and other documents affecting the title to any patent or any license. Registration of a patent assignment/ license or any other kind of document connected to the transmission of ownership or entitlement is mandatory under 69(1) and (2) (read with Rule 90 and 91). FORM 16 provides a mechanism through which such registration is made possible. It is pertinent to note that FORM 16 must be accompanied by a certified copy of a PLA. Any failure to register such a contractual document shall not be admitted by the Controller of Patents or by any court as evidence of title, unless for reasons to be recorded in writing [section 69(5)].

Pertinently, the Ayyangar Report emphasises the importance of confidentiality of PLAs in Para 760 by stating that “[t]o allay any fears regarding disclosure of trade secrets the clause might provide that the terms of the agreement filed before the Controller should be kept confidential and should not be open to public inspection except under the orders of Court on the lines of Section 49 (5) of the Trade and Merchandise Marks Act, 1958 in respect of agreements as to registered user. Needless to say that this last provision can apply only to voluntary licenses.” In fact, the Ayyangar Report did suggest a provision exactly identical to Section 69(4) proviso of the current Act. From a historical perspective, it is clear that confidentiality has a strong grounding in the Indian Patent Act, 1970.

There is no readily available information to ascertain if patentees/licensees in India regularly file FORM 16 to register their licenses. It is doubtful if the Indian patent office has put in place an apparatus to maintain the confidential nature of PLAs. Furthermore, the Act or the Rules do not suggest how a request for non-disclosure of PLAs must be accompanied with FORM 16. However, it is clear that the proviso to Section 69(4) mandates non-disclosure of registered PLAs when accompanied with a confidentiality request at the time of such registration through FORM 16. Hence, any contrary requirement in FORM 27 to disclose the otherwise confidential terms of license contained in PLAs that is secured through a request made the patentee under the proviso to Section 69(4) militates against the clear mandate of the Act. Furthermore, in such cases the patent office may already have access to the confidential terms of PLAs, thereby negating the need for an additional disclosure under FORM 27 of specific details of licensing terms contained in those PLAs.

There could be a large number of cases where patentees may not have submitted FORM 16 along with a confidentiality request. Perhaps, it is for this reason that Section 146(3) of the Act and Rule 131(3) vests discretion in the Controller to publish information received by him under FORM 27. Even where the Controller requires such disclosure from time to time during the continuance of the patent under Section 146(1) (different from the annual disclosure requirement under Section 146(2)), it is clear that the Controller has discretion not to publish such information, which may include the confidential licensing terms of PLAs.

Broader Implications of Disclosing Confidential PLAs terms in FORM 27

In some recent patent infringement cases involving Standard-Essential Patents (SEPs- standards such as 3G/4G encumbered by patents held by multiple companies), Indian courts have ordered “confidentiality clubs” so that confidential information on licensing terms and other information such as claim charts may not be disclosed. Such confidentiality clubs have a limited number of nominees of the litigating parties and few external experts. The members of the club are bound by confidentiality orders passed by the Court, which requires them not to disclose “…patent license agreements to anyone else or anywhere else, including in other legal proceedings, oral and written communications to the press, blog publications etc., so that the spirit of the confidentiality regime would be preserved.” [Ericsson v. Lava Delhi High Court 2016]. Any contrary requirement to disclose the confidential licensing terms under FORM 27 beyond the current requirements would nullify the need for confidentiality clubs ordered by the Hon’ble courts in some of these SEPs matters.

Patentees have often used different techniques to gain an upper-hand in licensing negotiations by providing inadequate information to potential licensees without the signing of NDAs a pre-requisite. While valid concerns could be raised in the context of courts considering pleadings and other documents as confidential, the licensing terms that are disclosed only under NDA are a subject-matter of confidentiality. The argument that patentees by subjecting themselves to courts have impliedly waived their confidentiality is not in the spirit of civil commercial litigation. In such a case, we may not have had adequate safeguards under the Act against such disclosure.

It is not clear why the petitioner states that the public disclosure of working information (which may potentially include confidential terms contained in PLAs) is “absolutely critical” for pending SEPs investigation at the Competition Commission of India. It is clear that the investigating authority under the Competition Act, 2002 has powers to call for any document, including confidential PLAs, to seek any critical information. Hence FORM 27 disclosures on licensing terms are not critical, if not redundant, in the context of CCI proceedings. Importantly, Section 57 of the Competition Act provides remedies against disclosure. The Commission or the Appellate Tribunal can deal only with previous permission in writing of the enterprise, disclose information obtained by them, otherwise than in compliance with or for the Competition Act or any other law for the time being in force.

Furthermore, the “Competition Commission of India (General) Regulations, 2009” elaborately deals with confidentiality of information submitted to the Commission. Under Regulation 35(2), a request for treating the confidentiality of any document can be made if public disclosure of such documents “will result in disclosure of trade secrets or destruction or appreciable diminution of the commercial value of any information or can be reasonably expected to cause serious injury.” It is pertinent to note that the Delhi High Court has upheld the validity of Regulation 35 by noting the denial of access to confidential information at investigation stage by the CCI does violate natural justice or the party’s ability to defend itself [Somi Conveyor Beltings Ltd. & Anr. v. Union of India & Ors., (2016)]. Since the use of NDAs for differential pricing is the crux of the matter in the SEPs investigations before the CCI, it remains to be seen how mandatory public disclosure of confidential information through FORM 27 may play out in such cases in the future.

Can FORM 27 be amended to seek confidential PLA terms?

The petitioner’s prayer to enforce compliance with FORM 27 is definitely laudable. However, a request to amend FORM 27 to require further details on confidential licensing terms or force mandatory public disclosure of such licensing terms raises some difficult questions, which could potentially be a subject of an Ultra Vires challenge. Any change in FORM 27 to adduce more information on commercial working, such as requiring the disclosure of confidential terms of PLAs, runs into the risk of violating other provisions of the Act. This is specifically when such confidential terms in PLAs may be publicly disclosed by the patent office. Such information has been previously requested under RTIs. Even if the Central Government unilaterally or under a judicial order agrees to amend FORM 27, it will have to take the parliamentary route to bring in any irreversible change in FORM 27 since it primarily affects the nature of confidentiality of licensing information preserved by the proviso to Section 69 of the Act. It is pertinent to note that any demand for additional disclosure of licensing terms contained in PLAs in FORM 27 cannot be done without legislatively fixing the discretionary nature of public disclosure allowed in Section 146(3) of the Act.

It is prayed by the petitioner that the Patent Office must mandatorily publish the entire information relating to commercial working (which could potentially include confidential licensing information) of all patents on the website of the patent office as per Section 146(3) of the Patents Act, 1970 read with Rule 131(3). It is very clear that 146(3) of the Act vests discretion in the Controller to publish information received through FORM 27. It is not through a judicial action but through legislative amendment alone that such a requirement can be made mandatory. As discussed above, there are cogent reasons why confidential licensing information cannot be disclosed without violating other provisions of the Act.

The petitioner has prayed that a committee of experts may be constituted to suggest reforms to “improve the public disclosure norms around the commercial working of patents.” Perhaps, it is also apt to suggest that the Government of India must float a discussion paper and invite wider stakeholder consultations before making irreversible changes to FORM 27. The bargain struck by the Patents Act in India must not be defeated by diluting the confidential nature of terms contained in PLAs.

The author is currently an Assistant Professor of Law and Co-Director of the Centre for Innovation, IP and Competition at National Law University Delhi. CIIPC is currently working on a project in this area titled Practising Patents in India. Views are personal.