For foreign patent owners, obtaining a patent in India is only one part of the broader commercial strategy. The ability to license that patent effectively determines how value is realized in the Indian market. Licensing in India operates within a defined legal framework, but practical considerations often shape outcomes more than statutory provisions alone. A structured approach to licensing is therefore essential.
Patent licensing in India is governed by the Patents Act, 1970, which recognizes both voluntary and compulsory licensing. In the context of commercial transactions, voluntary licensing arrangements form the primary mechanism through which patent rights are monetised. These arrangements allow patentees to authorize third parties to manufacture, use, sell, or import the patented invention in India under agreed terms.
One of the initial considerations is the nature of the licence. Licences may be exclusive, non-exclusive, or sole. The choice depends on the patentee’s commercial objectives, market structure, and the level of control desired. An exclusive licence grants rights to a single licensee and typically restricts the patentee from licensing others in the same field. A non-exclusive licence allows multiple licensees and may be more suitable where broader market penetration is required. The structure of the licence directly affects revenue potential and competitive positioning.
Territorial scope is another important aspect. While Indian patents are territorially limited, licensing arrangements may need to address cross-border elements, particularly where manufacturing, distribution, or technology transfer spans multiple jurisdictions. Clear delineation of rights within India is necessary to avoid overlap or conflict between licensees.
Royalty structuring requires careful consideration. Indian law does not prescribe fixed royalty rates, but commercial viability depends on aligning royalty models with market realities. Lump sum payments, running royalties based on sales, or hybrid models are commonly used. For foreign patentees, regulatory and tax implications, including withholding tax and transfer pricing considerations, must also be evaluated when structuring payments.
The concept of “working” of the patent in India plays a significant role in licensing strategy. As discussed in the context of Form 27 compliance, patents are expected to be commercially worked in India. Licensing can serve as a practical mechanism to ensure that the invention is made available in the Indian market, particularly where the patentee does not have a direct operational presence. A well-structured licence agreement can therefore mitigate risks associated with non-working and reduce exposure to compulsory licensing.
Quality control and performance obligations are also critical. Licence agreements should clearly define the standards that the licensee must meet in manufacturing or distributing the patented product. In addition, minimum performance requirements, such as sales targets or market penetration milestones, may be included to ensure that the licensee actively exploits the patent. Failure to include such provisions can result in underutilization of the patent and reduced commercial returns.
Confidentiality and technology transfer provisions require careful drafting, particularly where the patented invention involves know-how that is not fully disclosed in the patent specification. In such cases, licensing arrangements often extend beyond patent rights to include transfer of technical information, training, or support. Protecting proprietary know-how while enabling effective use of the technology is a key balancing exercise.
Registration of licence agreements with the Indian Patent Office, while not mandatory for validity, provides procedural advantages. Recorded licences strengthen the position of the licensee in enforcement scenarios and ensure that the licence is formally recognized in the patent register. For foreign patentees, this step can enhance transparency and support future transactions involving the patent.
From a commercial perspective, identifying the right licensing partner is as important as the legal structure of the agreement. Market knowledge, distribution capability, regulatory approvals, and operational capacity of the licensee directly influence the success of the licensing arrangement. In sectors such as pharmaceuticals, medical devices, and manufacturing, local expertise is often critical.
Foreign patent owners should also consider the interaction between licensing and broader regulatory frameworks in India. Sector-specific regulations, competition law considerations, and pricing controls in certain industries may influence how licensing arrangements are structured and implemented.
Patent licensing in India is not a purely contractual exercise. It is closely linked to compliance obligations, market access, and long-term portfolio strategy. A licence that is aligned with Indian regulatory and commercial realities can generate sustained value, while a poorly structured arrangement may limit both revenue and control.
For foreign patent owners, integrating licensing strategy with patent prosecution and post-grant compliance creates a more coherent approach to managing intellectual property in India. Early planning, careful drafting, and coordination with local counsel significantly improve the effectiveness of licensing arrangements.
IP assessment, due diligence & valuation play an important role at the time of company acquisition for buyer and seller alike as it would help them gain clarity as to what they are getting in the form of IP and whether the IP is worth acquisition or not. Typically, the IP which exists in the company is either registered or unregistered. The registered IP is often in the form of patent, trademark, design, copyright whereas the unregistered IP may be in the form of know-how, trade-secret, protocols, processes, confidential information etc. Docketing of registered IP is much easier than assessing unregistered IP because identification of IP which exists in the form of know-how, trade-secret can be really challenging. Moreover, transferring such unregistered IP at the time of company acquisition could be quite prone to misappropriation if stringent processes and guidelines are not followed.
The IP audit, followed by IP due diligence is beneficial to assess a collective value. Some of the important considerations for buyer and seller alike are as follows:
IP Audit and Segregation of IP
Firstly, it is required to take stock of all IPs and segregate them on the basis of type, relevance and priority. The following steps may be helpful:
All forms of IPs, registered or unregistered, shall be listed. While it is easy to list the registered IP, it may be quite challenging to identify, docket and valuate the latter.
The first round of segregation of IP shall be done depending upon its type, registration status and its relevance to the business.
Legal status of registered or the filed IP shall be identified to ensure that the IP is not expired or abandoned. If any official formality is to be fulfilled with respect to such IP, it may be done to ensure that the IP remains active and enforceable. This step is significant to avoid what occurred between Ebay and Skype. After 4 years of Ebay’s acquisition of Skype, they learnt that Skype did not own many of its key intellectual property rights owing to which they had to abandon their plans to launch Skype’s Initial Public Offering in the share market.
The second round of segregation shall be done depending upon relevance of IP for the business.
In case of the registered IP, which is not relevant for the business, options of out-licensing or sale of such IP may be explored.
If there is an IP which is not strong enough to get registered, such IP may be published as a research paper as well.
Sometimes, companies may also consider donating some of their IP or let the IP abandon or expire. For instance, Disney’s Steamboat Willie, one of the first iterations of Mickey and Minnie Mouse is now available in public domain as the copyright protection has expired after a long period of 95 years.
Docketing of IP
Secondly, docketing is a process of managing, documenting and tracking deadlines and documents related to the prosecution of IP assets, such as patents, trademarks, designs and copyrights. After segregation of IP is done to identify the relevant IP, following steps shall be performed:
Registered IP shall be docketed to observe the important official timelines, such as responding to official communication, paying the renewal fee to maintain it. For instance, post-acquisition of Jaguar Land Rover, it can be observed that Tata Motors is filing several patents across the world since it has acquired the necessary intellectual property rights of Jaguar Land Rover.
As a part of docketing, it is also required to note down expiry date of IP. For example, if there are only a few months remaining for a patent to expire, it may not be worthwhile to transfer that patent from seller to the buyer as transferring the patent requires amendments to be done and the cost of amendment may be high.
Due diligence and Valuation of IP assets
Thirdly, registration certificates of the registered IP shall be reviewed to understand whether there is a clear title of IP assets and on this basis, the valuation of IP shall be determined. In 2007, Kingfisher airlines merged with Deccan Airlines and following the merger, the Deccan airlines was named as “Kingfisher Red”. This completely diluted the trademarks of both the companies and there was a lot of confusion between Kingfisher and Kingfisher Red. owing to which Kingfisher Airlines suffered heavy losses. This merging which resulted in the creation of “Kingfisher Red” caused degradation in the brand status of Kingfisher Airlines and the company was deprived of its premium value.
Liability and potential risk after acquiring IP
Lastly, Acquiring IP requires a lot of official formalities to be fulfilled in each country where IP is filed for or registered and Important considerations and liabilities to be considered for acquisition are as follows:
The buyer party must know that acquiring an IP comes with a lot of liabilities. For instance, transfer of IP from the seller to the buyer requires a lot of amendments in the official records of the office where IP is filed for or registered. Oftentimes, change of attorney also is preferred by the buyer for the purpose of prosecution which may cost extra. Post acquisition of IP and amendments in the official record, the buyer still has to bear liability in the form of annual renewal fee to maintain the IP For instance, prior to a court declaration in 2019, the ‘well-known’ status of the Vistara Airlines, a joint venture between TATA Sons Pvt Ltd and Singapore Airlines Ltd, remained under dispute since the requisite form and fees for inclusion of this trademark in Trade Mark Registry’s Well-Known trademarks was not done.
Further, if any of the IPs are litigated or opposed, due-diligence shall be performed to know what stage of litigation or opposition it is in and to observe what the further course of action will be. The failed merger between Indian pharmaceutical company Ranbaxy with Japanese Pharmaceutical company Daiichi Sankyo has several examples that the latter faced in terms of litigation hurdles, there was a settlement with US based pharmaceutical company Pfizer over a patent dispute; a settlement with Swiss pharmaceutical company Roche over a patent dispute; a payment of 500 million dollars to resolve a lawsuit and federal charges over the Indian company selling improperly manufactured drugs etc.
IP may be a valuable intangible asset playing a vital role at the time of M&A of the company. Prior to assessing the value of the IP, due diligence is necessary to understand legal status. The business relevance of IP as may be observed can be a game changer.
Buying patent (s) is a very effective way for the companies to increase size of their patent portfolio and get access to the new and latest innovations without spending much time and money on R&D. In today’s highly competitive world, acquiring intellectual property, is increasingly becoming an important business strategy to increase companies’ offerings or differentiating itself with respect to competition.
By in licensing a patent, companies get permission from the patent holder to use the patented invention for a specific period of time in a given jurisdiction and therefore, buying a patent may also help companies overcome risk of patent infringement.
The sole difference between buying and in-licensing of patent is that in case of buying patent, ownership of the patent gets transferred to the buyer and when patent is licensed, there is no transfer of patent ownership from patent holder to the buyer but it’s only permission granted by the patent holder to the buyer to use the patented invention for a specific period of time.
In this article, we will discuss advantages of buying patents and important considerations before taking decision to buy patents.
Why should companies buy patents?
Innovation is key to success of any business today and in order to obtain a competitive edge in the market, innovative products, processes or services shall be created. Acquiring innovative patents or technologies could be one of the most effective ways to create innovative products. When the patent is granted to patent holder by the Patent office, the patent holder is granted specific rights in a specific jurisdiction which he/she can license or sell it to other in lieu of royalty or an upfront payment. Therefore, if both patent holder and buyer are interested, the ownership of patent may be transferred to the buyer by patent holder.
In 2017, InVisage was acquired by Apple Inc, along with its patent portfolio of more than 100 patents on Quantum Dot Technology for Advanced Cameras along with other technologies. This is how Apple got access to Quantum Dot Technology and thereby it helped enhance size of its patent portfolio and use the acquired technology in their latest cell phones.
In 2014, flash array vendor Pure Storage acquired 100 patents from IBM, which were related to storage technology to prevent litigation. This way, Pure Storage could not only build a robust patent portfolio but also got freedom to operate in a wider range by minimising patent infringement risk. Further, acquiring patents also improved valuation of the company.
There are various advantages of buying patents, such as:
Obtaining access to new/latest technologies and markets
Reduce R&D cycle, thereby reducing time to market
Remain “ahead of the curve” vis-à-vis competition
Minimise patent infringement risk
Increase size of patent portfolio
It may help in branding or marketing
Important considerations while acquiring or licencing a patent
Buying of patent is a cost to the company. Hence it becomes important that only useful and relevant patents are bought. Following points shall be taken into consideration before taking final decision to buy a patent:
a. Area of Technology: In order to buy patents, first of all, areas of technology in which patents are to be bought shall be identified. Reading through the entire patent specifications, especially the claims will be immensely useful to find out subject matter claimed in the patent. Further, the patent to be acquired should complement or enhance the current technology offerings.
b. Jurisdiction: The buyer should be clear about the jurisdiction where the patented invention is to be used. For example, if the business of a company is only confined to India and US, then, patents filed/granted in these two jurisdictions shall be searched. However, there is a possibility of existence of good and relevant patents in other jurisdiction where there may be opportunity for companies to use such patents without a need to buy them or in-license them. For example, if an Indian automobile company finds a good, patented invention in Brazil for which Indian patent is either not filed or timeline to file in India has expired, the Indian company may use such patent in the countries other than Brazil. Patent rights are territorial in nature and patent granted in Brazil is valid only in Brazil. Using such patent outside Brazil generally does not deem to be infringement of patent rights. However, thorough due diligence is needed in such cases to ensure that there is no patent infringement risk involved.
c. Searching right patents: There are free and paid patent databases from where list of published patent applications or granted patents may be extracted using various search strategies. You may shortlist the relevant documents, read through the abstract and if need be, full patent document may be downloaded and read to understand which is the right patent to be bought.
d. Legal status of patents: It is very important to check legal status of the identified patents so that you know if they are “in-force”, “abandoned” or “expired” patents. It is good idea to segregate the identified patents into various categories depending upon their legal status. It is important to note here that you must buy only “in-force” patents because expired patents anyways are available for you to be used for free. As far as abandoned patents are concerned, they may have a possibility to be restored. So, if you are interested in abandoned patent, you must watch it carefully and periodically to understand if it comes into force again or gets expired. So, your strategy to buy such abandoned patent will change accordingly.
e. Making offer to the patent holder: After you have identified the patents of interest and confirmed their legal status, the next step could be to extract name and contact details of the patent holders to contact them to show your interest in buying the patents. Discussion may be initiated with patent holders regarding buying of the patents. At the time of buying patents, before making an offer to the patent holder, one of the important action points you should be focussing at, is valuation of the patent to understand how much you are going to pay for buying the patent. There are various well-tested methods to assess value of a patent, however, lots of things depend upon how the parties want to proceed.
f. Check prosecution history of the patent and it’s renewal fee: After patent application is filed, there are various prosecution stages through which a patent application passes to get a patent granted. This prosecution history may give you very vital information on quality of patent, kind of objections the examiner raised before grant of patent. This information may be of great use at the time of negotiation the patent holder. Further, after a patent is granted, there is an annual renewal fee which is to be paid by the patent holder to respective patent office to keep the patent in force. Failure to pay this fee may result in expiry of the patent. Once you buy the patent, you will be responsible for paying this renewal fee. So, depending upon the term of patent left, you must estimate the amount of fee payable by you to keep the patent in force.
g. PatentAssignment: Patent assignment is the term used with respect to transfer of patent rights and ownership from patent holder to buyer of patent. Here the buyer becomes owner of the patent and patent assignment is completed by executing assignment deed between patent holder and the buyer. Copy of such Assignment Deed is submitted to the respective patent office and then Controller of patent makes changes in the official records.
h. Patent Infringement Risk: It is worth noting here that even if you buy a patent and own it legitimately, before implementing or using such patent, it is important to ensure that usage of such patent does not infringe any third party’s patent rights. Hence Freedom to operate search or infringement analysis is important to be performed before acquisition of the patent.
Conclusion
Buying a patent is an effective and powerful way to increase size of IP portfolio and own patents without spending much on R&D. However, like owning tangible property, IP ownership also comes with obligations and responsibilities. With proper due diligence and expert advice, this process can be made really effective and useful for the organization.
Changing market dynamics and pressure to compete globally have encouraged the growth of ‘creative destruction[1]’trends, leading to worthy innovation. To run parallel to the novel needs and demands of the market, it is essential for every country to scrutinize the scope of innovation, which ultimately affects the economic progress of a nation. The Organization for Economic Co-operation and Development (OECD) defines innovation as, ‘the implementation of a new or significantly improved product or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.’[2]
The impact of innovation on the growth and development of a country is multifold. An innovation economy is one, ‘which experience sustained growth through the creation and implementation of new technologies, product or processes in an ecosystem of inventors, entrepreneurs and investor.’[3] Mainly, four factors are attributed as contributory in shaping an innovation economy. These include economic incentives, to provide value to inventor to motivate them to invest in the innovation; financial stability; skilled human capital; and accessibility and smooth flow of information.[4]In addition to these, the Government is also required to play a role and provide its support in adopting such public policy that can help in leading the innovation driven economy.[5] This article will discuss and analyze the innovation model of Israel that led to its significant recognition throughout the globe.
Israel’s method of investing in innovation led to the creation of sustainable economic prosperity, subsequently leading to tremendous economic productivity and value
Israel is a small country in the Middle East with a population of only 8.5 million people. Despite its history of wars for freedom and continuous conflicts with neighboring countries, Israel has managed to maintain its reputation as an exceptionally prolific country in terms of nurturing an innovation-based ecosystem. Israel has long understood the importance of R&D and innovation, and how these concepts are an essential element for their country’s’ prosperity. Israel’s method of investing in innovation led to the creation of sustainable economic prosperity, subsequently leading to tremendous economic productivity and value.[6] Israel has seen a shift from being a knowledge economy to being recognized worldwide as an innovation economy. It has set an example for getting exceptional results with combined efforts of both their Government and private sector. It has been bestowed with the title of ‘Start-Up Nation’.[7]
The history of specific developments in Israel dates back to the 1960s, when Israel transformed into an emerging economy by transitioning from a country making no significant R&D contributions, to a country whose major focus was directed towards innovation led by novel R&D and technological creation.[8] The current figures may make someone believe that Israel has a rich history of strong industrial innovation, but around the year 1965, Israel saw a GDP growth of less than one percent with the lowest ratio of expenditure on R&D compared to any OECD countries except Italy.[9] The constant threat of war and terrorism that it experienced since its independence in 1948 had limited the prospects of stimulating growth.
Another significant problem faced by the economy was free immigration into Israel, resulting in an exponential rise of population in Israel during the time of its independence, almost doubling during the years of 1950-65.[10] The Government took this as an opportunity and started shaping the knowledge economy by investing heavily in education and training programs, which led to the rise of the skill and education level of the labor pool.[11] The shift was seen during the war phase of the 1970s when the focus was directed towards their defense industry which employed almost half of Israel’s scientists and engineers. Efforts were also made towards restructuring and privatization, to decentralize the economy.
During the mid-1980s, when Israel experienced an inflation rate of 375%, economic growth stunted abruptly. In response, Israel implemented a stabilization program focused towards financial reforms that helped in liberalizing the economy and bringing the inflation rate down to 20% by 1990.[12] From the 1990s onward, Israel shifted its economic model to transform into an innovation-based economy. This shift resulted in the economic growth reflecting a GDP growth of 5.9% on an average per year between the years of 1990 and 2000.[13]This growth also affected change in various domains throughout the country, including employment, inventions, etc.
By the year 2000, the employment rate in the Information and Communication Technology (ICT) sectors and software sectors rose to 87%.[14]Israel also saw a steady rise in the number of patent applications filed by Israeli inventors in the United States.[15] Companies started engaging in expertise likely to attract public offering to extend their link towards foreign capital markets. Interestingly, in a short span of time, Israel started representing the highest percentage of NASDAQ-listed companies in the world outside of the US along with significant recognition for most start-ups per-capita of any country.[16] It also became a country with the second largest Venture Capital industry.[17]
These achievements are the results of careful implementation of certain parameters with long-term planning mechanisms. This article will now discuss such parameters and the methodology of implementation of such factors by Israel in detail.
A. Foundation of Office of the Chief Scientist (OCS)
Israel realized the need for forming a strong base for building science and technology by the late 1960s. Israel started by creating a strong base to strengthen the roots of future prospective innovations. The Government took the decision to start building their ‘science economy’ which subsequently led to the formation of the Office of the Chief Scientist (OCS) in 1969 under the Ministry of Industry, Trade and Labor.[18] The OCS used to provide grants to encourage R&D activity, promoting innovations that carved the way for developments in various sectors. At the same time, Israel was also forced to invest in the military sector which boosted the R&D in the civilian and military domains. This led to a fruitful exchange of skills and technology between military and civilian sectors. The OCS also helped in building relationships with foreign companies by extending their co-operation through bilateral programs which resulted in access to global information.[19]
B. Focusing on Marketing and Business
Towards the end of the 1980s, Israel realized that a funding gap existed between growing startups and the potential market. Lack of financial intermediaries made it difficult for investors to trust startups enough to invest in them. This resulted in the failing of many companies, owing to their inability to sustain in the market. To counter this, the Government came up with a funding initiative called Yozma in 1993 which initially funded around 200 startups in Israel. These links with the foreign capital market came to fruition by pocketing successful IPO and acquisition deals from global companies, giving startups a much-needed financial boost. Furthermore, Israel saw foreign investment banks establishing their offices within the country and the emergence of Israel-specific funds by foreign venture capital firms. This indirectly helped market players to be aware of the global information which helped in better decision-making. Thus, it led to the harmonious development of entrepreneurship and innovation in Israel.
C. Government role in promoting R&D
Israel’s transition from a knowledge economy to a science economy and finally to a globally-recognized high-tech innovation economy reflects careful planning and significant efforts put forth by the Government to guide Israel’s path to global recognition. The need for a ground-breaking R&D is associated with the history of Israel freedom and subsequent wars and terrorism it faced owing to its political instability. To strengthen its military base, it started investing in military-driven technologies such as aviation and securities. It further extended it support for civilian R&D in the late 1960s, to compensate for a lack of natural resources.[20]
To develop a national science-based industry, the Government passed a law for the encouragement of R&D. The law provided incentives such as loans, discounts, tax exemptions, grants, etc. to promote industrial growth and to accelerate the exports. It was the first country to adopt the principle of ‘horizontal and neutral’ policies[21] to observe the market’s best practices that were best suited for commercialization.[22] The tax policies under these laws were framed in a startup-oriented manner to promote R&D initiatives.[23]
Some of the ground-breaking initiatives introduced by the Israeli Government are as listed below:
The Direct grant program: Under this program, the Government comprises a research team which selects firms based on their proposals and grants them 50% of their stipulated R&D budget. The firms that receive such grants are obliged to conduct all of their manufacturing in Israel itself. Grants are available for firms proposing to instill improvements in existing civilian or military products which are fixed at 30% and 20% respectively. Start-ups may avail 66% of their R&D cost for duration of two years, which should not be more than $250,000 per year. To create a balance in spreading economic benefits throughout the country, additional 10% grants are offered to those start-ups who choose to operate in certain specified geographical locations.
The MAGNET program: This program was introduced by OCS in 1993 with a vision to bring together companies and academic institutions to engage in practical research on innovative technologies. The Government provides an incentive in terms of 66% fund grants to encourage companies to tie up with research centers.
The Incubator program: This program is specifically focused towards the immigrants in Israel. By the early 1990s, immigration in Israel was at its peak. Although these immigrants were professionally skilled, they found it troublesome to form their base owing to the language barrier and their unawareness about market demands. To tackle this, the Government launched the incubator program in 1991 to support budding entrepreneurs amongst the immigrants. Incubators are physical locations with basic amenities, along with professional support systems such as lawyers, administrative staff, accountants, etc. The entrepreneurs are provided guidance on their business ideas along with funding for two years.
Bi-National Industrial R&D Foundation (BIRD): BIRD was launched in the year 1977 with the United States to promote the private industry in both the countries by encouraging harmonious development in marketing, manufacturing and R&D. Companies are eligible for conditional grants of 50% of the total R&D budget or $1.5 million, whichever is lesser. The repayment of such grants is required only if the companies are successful. This partnership helped Israel build a strong connection with the United States.[24]
MATIMOP: It is a Hebrew acronym for Israeli Industry Centre for R&D, launched to administer both international and bilateral cooperation agreements. It encouraged international companies to open their centers in Israel by providing tax reductions and other related relaxations as incentives.
D. Tackling Immigration to create a skilled human capital
Israel’s skilled human capital has helped tremendously in shaping its innovation economy. Its one-of-a-kind liberal immigration policy has helped Israel turn its disadvantage, i.e. a heavy influx of immigrants, into a profitable opportunity. This policy has contributed extensively in ameliorating Israel’s economic development. The Ministry of Immigrant Absorption was given the task to organize immigrants. Israel’s Government paid living expenses for immigrants in addition to teaching them regional languages, connecting them with professionals in their industrial domains, setting up incubators for immigrants and funding their startup ventures.[25]
E. Carving out human capital from Military base
Young people from the ages of 18 to 21 are required to serve the Israel Defense Force (IDF). There exist army units with different levels that admit people based on their score on a standardized test. Soldiers with the highest scores are placed with a unit specializing in military R&D. One such popular unit is unit 8200 which is known for its advancements in technology and intelligence. The culture of the IDF has shaped a lot of soldiers into entrepreneurs. Abilities such as taking impromptu decisions, shouldering responsibility, making quick decisions, analytical thinking, and loyalty have also contributed in shaping a business culture within the IDF.[26]
F. Promoting Intellectual Property Rights
Innovations, when shielded by private rights, encourage the nation as well as creators to indulge more in creativity and development. Israel recognized the importance of protecting intellectual property rights very early on. It revised its Patent Act in 1967 and increased the term of patent protection to 20 years including the application date. To enforce its patent rights in foreign countries, Israel became a signatory of all major treaties and conventions supported by the World Intellectual Property Organization[27](WIPO) and World Trade Organization[28] (WTO). Israel began including software under copyright protection in 1988, extending the protection period to 70 years. Creating ties with developed countries like the U.S. helped Israel to create an inexhaustive IP regime. This helped in fostering its innovation and creating a high-tech economy.[29]
Conclusion
Israel has earned a commendable name around the globe for its innovations. The R&D support provided to investors has credited Israel with plenty of profitable inventions. Around 250 companies with a global presence have R&D labs in Israel today, which includes Fortune 500 companies and tech giants like Facebook and Apple. Between a span of 1999 to 2014, Israel has started more than 10,000 companies, and is hence justified in claiming the title of Start-Up nation.[30]Israel is remarkable in that their relatively small population of approximately 9 million people is now competing with highly populated countries like the U.S. and China[31].As discussed above, the innovation sector flourishing in Israel is a result of its ability of converting its liabilities into assets.
For example, Israel tackled the lack of freshwater by developing world-class technology in drip irrigation, thereby focusing on desert agriculture. Israel also carefully planned its development in high-tech innovation to attract market leaders from developed countries. This led to only minor setbacks when their Arab neighbors decided to boycott Israeli products. Further, Israel has always focused on global customers to study the global market unlike other developing countries that helped its indigenous companies penetrate global market. Following the principle of ‘open innovation’, Israel helped startups to be guided by flourishing high-tech companies, thereby encouraging and mentoring entrepreneurs to contribute further to Israel’s economic development. This has also resulted in an exchange of ideas between enterprises, benefiting innovation on a whole and further contributing to Israel’s innovation index. By strengthening its intellectual property protection, Israel has aggrandized the value and utilization of innovations. Lastly, Israel’s history with innovation that resulted from an interplay between academic, industrial and Government sector reflects a strong foundation for Triple Helix Model of Innovation.[32]
List of 10 breakthrough innovations by Israel
S.No.
Product Name
Product Details
Developing company
Product Image
01.
MyEye
A visual assistance device wearable by a person that includes a camera and a processor. The processor captures multi-image frames from the camera. A candidate image of an object is searched in the image frame. The person wearing the device is notified of an attribute related to the object. For more details click here.
OrCam Technologies Ltd. [Jointly founded in 2010 by Prof. Amnon Shashua & Mr.Ziv Aviram]
This device absorbs moisture from the atmosphere to provide drinking water. It works as an Atmospheric Water Generator (AWG) with a defrost system. For more details click here.
A software that enables Advances Driver Assist Systems (ADAS) and is designed in a way to support the three pillars of Autonomous Driving- Sensing, Mapping, and Driving Policy. For more details click here.
A device used to facilitate at-home ultrasound, which docks with a patient’s mobile phone to deliver high quality images, which are stored on a remote drive and forwarded for clinical review or online consultation. For more details click here.
A compact handheld device that measures exhaled breath for early diagnosis of cancer. It won 2018 Innovation Award by the European Commission for Most Innovative project. For more details click here.
Technion Research & Development Foundation Limited. Invented by: Prof. Hossam Haick.
A tube-shaped device that opens up arteries to treat coronary heart disease and blockages without requiring open-heart surgery. For more details click here.
Epilady introduced the first epilator to the market in 1986, revolutionizing hair removal for ladies all over the world by providing a cost-effective, mess-free alternative to shaving and waxing. For more details click here.
A device equipped with a handheld examination kit and app that allows an individual to perform guided medical exams anytime and anywhere. For more details click here.
Tyto Care Ltd. Invented By: GILAD-GILOR David, Even Yehuda.
[5]HarryYuklea, ‘An Integrated Approach to VC Financing Policy: ‘The Plumber’s Model of Entrepreneurial Finance’ (2009) ERPN.
[6]MK Eli Cohen, ‘Innovation in Israel 2017 Overview, Israel Innovation Authority’, innovationisrael.org.il.
[7]Dan Senor & Saul Singer. ‘Start-up nation: The story of Israel’s economic miracle’ (Random House Digital, Inc., 2011).
[8]DanBreznitz, ‘Innovation-based industrial policy in emerging economies? The case of Israel’s IT industry’ (2006) Business and Politics 8.3.
[9]Daphne Getz &Vered Segal, ‘The Israeli innovation system: An overview of national policy and cultural aspects’ (2008) SamuelNeaman Institute for Advanced Studies in Science and Technology.
[10]MeirPugatch, Morris Teubal, &OdedaZlotnick, ‘Israel’s High-Tech Catch-Up Process: The Role of IPR and Other Policies’(2009) in Odagiri et at Intellectual Property Rights, Development, and Catch Up: An International Comparative Study: An International Comparative Study (2010), Oxford University Press, Oxford, England.
[12]World Bank, ‘Inflation Rate, Israel 1961-2009’ World Development Indicators.
[13]GDP Growth: Israel & OCED, 1990-2010, World Bank WDI Data; See above, supra note 7.
[14]GilAvnimelech&Morris Teubal, ‘Creating venture capital industries that co-evolve with high tech: Insights from an extended industry life cycle perspective of the Israeli experience’ (2006) Research Policy 35.10, 1477-1498.
[17]StefanoBonini&SenemAlkan, ‘The political and legal determinants of venture capital investments around the world’ (2014) Perspectives on Financing Innovation, Routledge, 161-192.
[23]AssafRazin& Efraim Sadka, ‘The economy of modern Israel: Malaise and promise’(1993) University of Chicago Press.
[24]GilAvnimelech, Martin Kenney & Morris Teubal, ‘The life cycle model for the creation of national venture capital industries: the US and Israeli experiences’, in Dr. Elisa Giuliani et al, Clusters Facing Competition: The Importance of External Linkages (Ashgate Publishing Limited2005).
[27]Berne Convention for the Protection of Literary and Artistic Works: Texts. Geneva: World Intellectual Property Organization, 1982; Paris Convention for the protection of Industrial Property, Mar. 20, 1883; Patent Cooperation Treaty, June 19, 1970.
[28] Agreements on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994.
[30]D Nordfors and B. Berger, ‘Technology Transfer Between Industry, Academia and Defense in Israel’ (2000) Swedish Academy of Engineering Sciences.
[31]David Yin, What Makes Israel’s Innovation Ecosystem So Successful, (Forbes, 9 Jan. 2017), <https://www.forbes.com/sites/davidyin/2017/01/09/what-makes-israels-innovation-ecosystem-so-successful/?sh=4322a5c370e4> accessed 21 May 2021.
[32]Drori, G., et al, ‘The helix model of innovation in Israel: The Institutional and Relational Landscape of Israel’s Innovation Economy’ (2013) Department of Sociology and Anthropology, The Hebrew University of Jerusalem.
Intellectual property rights (IPR) are elemental in modern-day business strategy. Technology transfer transactions provide income to several companies operating in countries all across the globe. These countries immensely benefit from the taxation of IP related transactions leading to the growth of their economies. Thus, to promote more of such ventures, willing countries pledge to follow international treaties such as the Trade-Related Aspects of Intellectual Property Rights (TRIPS), which contain several provisions to govern trade-related matters between countries in respect of IPR. Certain tax exemptions and deductions are also provided to native companies in other member states to provide an incentive to enhance their business income. In the Indian context, it has been observed that an efficient IP taxation regime and royalty policy would persuade creators to produce more original and artistic work and expand the number of technology or know-how transfers into the country.
The following article provides a basic understanding of how income derived from IPR transactions are taxed under the Income Tax regime in India.
Taxation Policy in India w.r.t. Intellectual Property Rights
The taxation structure in India provides that income from intellectual property rights (IPR) are segregated according to the nature of the transaction. If an individual authors a book, creates music or is the sole inventor of a medicinal cure, then in those situations, the Income Tax Act of 1956 (the ‘Act’) provides for certain tax deductions which will promote tax planning. Once the nature of the transaction is determined, it is easy to identify whether the amount paid is taxable or would be allowed as a deduction. The categories under which IP can be taxed are –
Deductions – In the pre-existing stage of an IP, the cost which is incurred on analysis, manufacturing, i.e., capital spent on research and development is treated as an expense and is to be deducted from the gross income received for the calculation of income tax.
Income – Income from an IPR either by assignment or licensing is treated as Capital gains or income received from royalties under the Income Tax Act, 1961.
Goods and Sales Tax – Tax on the sale of IP, transfer of IP, licensing of IP and assignment of IP are covered under the GST Act.
What is intellectual property according to tax law?
As per the definition of ‘capital asset’ in Section 2(14)[1], a capital asset has an all-embracing connotation except if it expressly excludes a certain item. It includes ‘property of any kind,’ which undoubtedly incorporates intellectual property. The Act does not define intellectual property as such but the difference between tangible and intangible assets is examined in Section 2(11)[2]. Intangible assets, as per the definition, include ‘know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature.
Royalty
Section 9(1)(vi)[3] of the Income Tax Act elaborates the definition of royalty. Royalties are taxable as income or as a business expense. It is to be noted that regardless of the conditions mentioned in Section 9(1)(vi)[4], if the IP is located in India, then the consideration for its use or disposal will arise in India and will be taxed according to Section 5(2)[5] of the Income Tax Act. Income by way of royalty is taxable under the Income Tax Act for a resident except in respect of:
any right, property or information used or services utilized outside India or
To make or earn any income from any source outside India.
Royalty income is taxable for a non-resident in respect of –
any right, property or information used or services utilized in India or
To make or earn any income from any source in India.
If such income is payable due to an agreement made before the 1st day of April 1976, and the agreement is approved by the Central Government, such income cannot be taxed.
In CIT Vs. Koyo Seiko Co. Ltd[1999 233 ITR 421 AP] it was held that royalty excludes any consideration which would be chargeable under the head of ‘Capital Gains’ and is assessable to capital gains tax at the rates applicable. Thus, royalty is any consideration, including lump-sum amounts but excluding those which would be the income of the recipient chargeable under the head capital gains, for:
The transfer of all or any rights (including the granting of a licence) in respect of an invention, patent, secret formula or process, model, design, trademark or similar property;
The imparting of any information concerning the working of or the use of an invention, patent, secret formula or process, model, design, trademark or similar property;
The use of any invention, patent, secret formula or process, model, design, trademark or similar property;
The imparting of any information or the use or right to use concerning technical industrial, commercial or scientific knowledge, experience or skill; (but not including the amount referred to in Section 44BB[6].)
The transfer of all or any rights (including the granting of licence) in respect of any copyright, scientific, artistic or literary work including films or videotapes for use in connection with television or tapes for use in connection with radio broadcasting, but consideration for the sale, distribution or exhibition of cinematographer films.
The render in of any other service about the activities mentioned above.
Expenditure and Deductions
While determining tax liability, the aim and object of the expenditure should be kept in mind to decided whether it is a capital expenditure or revenue expenditure. A revenue expense is deductable from the chargeable income of a business, while the expenditure incurred on capital is not. The Supreme Court in the case of Assam Bengal Cement Companies Ltd. v. CIT [1955 SCR (1) 876], observed that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the benefit of the business it is attributable to capital expenditure. On the other hand, if it is made for running the business or using it to produce profits, it is a revenue expenditure.
Section 32 (1)(ii) – Depreciation of an intellectual property asset as an expenditure [7].
Depreciation of an asset is considered to be a business expense and the section accounts for such depreciation of IP to be an expenditure for computation of Income Tax.
Section 35A – Expenditure on the acquisition of patents and copyrights [8]
When the consideration is paid in a lump sum, the depreciation over the acquired patent and copyrights shall be claimed over a period;
When the consideration is paid periodically, the depreciation can be claimed as an expenditure fully incurred for business.
Any expense undergone after 28th February 1966 but before 1st April 1998 on the acquisition of patent rights or copyright for a business committed actions will be allowed for each of the previous years on an amount equal to the appropriate fraction of the amount spread over fourteen years.
Section 35AB – An assessee who has paid any lump sum consideration to acquire any know-how for the use of his business, the expenditure for the same shall be deductable in six equal instalments for six years in the following manner [9]–
1/6th of the amount paid shall be deducted while calculating the profits and gains of the business for the previous year;
the balance amount shall be deducted in equal portions for each immediately succeeding the previous five years.
Section 80 GGA – deduction in respect of certain donations for scientific research or rural development [10].
The research work for the development of intellectual property such as a patent comes under the category of scientific research. Under present laws, expensed deductions and additional weighted deductions are permitted to everyone for research and developmental expenditure. For the tax years 2017-2018 to 2019-2020, the weighted deduction is limited to 150% after which it will be reduced to 100% of the expenditure.
Section 80 O – no deduction in respect of royalties from certain foreign enterprises [11]
40% for the assessment year beginning on the 1st April 2001,
30% for the assessment year beginning on the 1st April 2002,
20% for the assessment year beginning on the 1st April 2003,
10% for the assessment year beginning on the 1st April 2004,
No deduction from 1st April 2005 onwards.
Section 80 QQA – Specific provision for copyright products [12]
A deduction of 25% shall be allowed from any income obtained by an author in the exercise of his profession on account of any lump sum consideration for the assignment or grant of right in the copyright of any of his works, except for the following –
Dictionary
Thesaurus
Encyclopedia,
Any book that has been added as a textbook in the curriculum by any university for the degree of graduate or postgraduate course of the university, or
Book which is written in any language specified in the 8th schedule of the constitution or any other language as the Central Government by notification in the official gazette specifies for the promotional need of the language.
Section 80QQB – deductions made in respect of royalty income of authors of certain books other than text-books [13]
Section 88 RRB – Specific provision for patented goods and services [14]
In some cases, the total income earned on a patent can be divided into royalty and additional income other than royalty. The income received as royalty is only eligible for tax deductions. When income is received as a royalty, the whole income or Rs. 3 lakhs (the lesser amount) shall be deducted. If a compulsory license is being granted for a patent, the terms and conditions of the license agreement shall decide the status of the income to allow deduction under this section which shall not exceed the amount of royalty.
Basic qualification criteria for an inventor under this section-
The individual must be an Indian resident.
Original patent holders are only eligible to tax benefits.
The patent under this section should be registered under the Patent Act of 1970, either on or after April 1, 2003.
Section 115BBF – concessional tax rate on the exploitation of patents [15]
10% concessional rate of taxation is applicable on royalty income from the exploitation of patents granted under the Patents Act, 1970. The following criteria must be satisfied –
The patentee should be an eligible Indian taxpayer,
The total income of the patentee must include income by way of royalty in respect of the patent developed and registered in India,
At least 75% of the expenditure is incurred in India for the invention, and
No other expenditure is allowed under the tax provisions if the concessional tax rate under this section is availed.
The benefit of Section 115BBF can be used in any year but the patentee is required to continue to avail of the benefit for the next 5 years. If the option is not exercised in any of the next 5 years, the benefit under the section for the next 5 years following such year in which option is not exercised, shall cease the exist.
Startups and SME’s
A Startup is an industry that has been in existence for not more than seven years and has a turnover not exceeding twenty-five crores whereas an SME is an enterprise with an investment of up to one crore in Plant and Machinery. A startup primarily focuses on the innovation and development of products and processes. Startup-India is an initiative of the government which intends to catalyze the startup culture in India to build a strong and inclusive ecosystem for innovation and entrepreneurship in the country and to provide IPR facilitation, better tax benefits and easier compliance procedures. The special tax exemptions to promote such startups are –
Section 80 IAC: Income tax exemption for recognized startups [16]
After getting recognition as a startup, this section provides that for any three consecutive years out of a block of 7 years (10 years for startups from the Bio-Technology Sector) from the date of its incorporation, tax exemptions can be availed. The eligibility criteria for the same is –
The entity should be a recognized startup,
Only private limited companies or limited liability partnerships are eligible,
The startup should have been incorporated after the 1st of April 2016.
After getting recognition, a startup may apply for Angel Tax Exemption. Eligibility Criteria for this section is –
The entity should be a DPIIT recognized startup
The aggregate amount of paid-up share capital and share premium of the startup after the proposed issue of shares, if any, does not exceed INR 25 Crore.
Other Benefits for Startups regarding IPR:
Patent applications and facilitation helpline will be speedily available.
The entire fees of the facilitators for any number of patents, trademarks or designs that a startup may file shall be taken up by the Central government and the cost of the statutory fees shall be paid by the startup.
Startups shall be provided with an 80% rebate in the filing of patents.
Government Scheme for MSMEs– Support for International Patent Protection in E&IT (SIP-EIT) Scheme
This scheme of the Government of India provides financial support to MSMEs and technology startups for international patent filing. The reimbursement limit provided in it has been set to a maximum of INR 15 lakhs per invention or 50% of the total charges incurred in filing and processing a patent application, (the lesser of the two). This scheme can be availed at any stage of international patent filing by the applicant. The reimbursement, however, will only apply to expenditures incurred from the date of acceptance of a complete application by DeiTY which has to be approved by a competent authority.
Conclusion
Today, several entities derive most of their income from their IP assets and thus enforce the importance of IP and the need for a more enabling taxing regimen. In India, the current economy is witnessing rapid growth in micro and small sector enterprises with great abilities to compete at a global level. Most of these enterprises do not protect their intellectual property due to several reasons such as lack of awareness, lack of funds, exhaustive procedures etc. and are not well equipped to take their businesses to the next level. Awareness of tax planning and a supplementing taxing regimen is the way forward to make a win-win situation for both the Government and the competing parties.
Patent valuation can be defined as a method to determine the real market value of patents. It is important as it plays a crucial role during many transactions such as negotiating deals, procuring investments, identifying strengths and weaknesses of the enterprise, technology transfers etc.
Important elements used to determine the value of a patent are –
NPV (Net Present Value);
Forecast of future value (growth options);
Financial model to estimate cash flows from the patent.
The market today provides for three main approaches to value patents as provided in the table above. However, it has been acknowledged that factors such as the nature of the transaction (whether by assignment or licensing), desired result, realistic growth opportunities and the expenditure on research and development of the patent must be kept in mind while selecting which approach is most suitable.
The two broad classifications of valuing patents are through the quantitative and qualitative approach where one uses numeric and economic data. The other analyses the opportunities and the risks associated with the patent. A mixture of the two, or popularly known as the hybrid model of patent valuation, is in much demand. It provides for a holistic approach to understand all the aspects of income generation from a patent. The same will be discussed towards the end of this article.
The popular methods to assess value of the patent are as below:
Market ApproachMethod
As the name suggests, this approach takes into consideration the amount of money that a buyer is willing to pay for a similar patent in an already existing market. This method is also known as the comparable transaction approach. The assumption that this approach is based upon which the value of the patent is equal to the amount that a buyer is willing pay to a seller of a similar patented product. The shortcomings of this approach are finding a comparable patent in the market and the ability of such a comparable patent in income generation would not be the same as the patent being valued.
The following components are required to use this approach of patent valuation –
An active marketplace with available price information;
An identical or a group of identical patents in the market;
A method to control the variables or differences.
2. Income ApproachMethod
The income approach is also known as the Discounted Cash Flow (DCF) approach. It estimates the overall profit that a patent can generate. Most commonly, the value of the patent is based on company-specific profit projections and the use of a risk premium. The projected revenue inflow of the patented technology is discounted by variables such as the risk premium to ascertain the present value of the patent. The value attainted is considered to be the market value of the patent. The drawback of this approach is that the values used in the first place to derive at final market value can be clouded by subjective bias and manipulation.
The following components are essential to this approach:
An estimate of the revenue inflows generated by the patent during its useful life;
Measuring direct costs relating to the patent which are to be deducted against the revenue inflows;
The amount of risk associated with the patent must be discounted or deducted from the present-day value of the patent.
3. Cost ApproachMethod
In this approach a patent is valued based on the amount of cost incurred to develop a similar patent either internally or externally. The historical rates trending in the market or the estimate of the cost of creation (based on current market conditions) serve as a basis to come up with the required cost estimate. It seeks to determine the value of a patent at a particular point in time by summing up the direct expenditures and opportunity costs involved in the development of the patent and considering its obsolescence. The most obvious shortcoming of this approach is that it does not consider the income-generating nature of a patent, which can and in most cases, is the primary reason to create a patent.
The following are the components required to carry out this approach:
An estimate valuation of the cost of development of a patent;
Value of expenditures, opportunity costs, inflation etc. at a particular point of time;
Costs related to obsolescence of patent over a period of time.
4. Hybrid Model
A hybrid model would consist of factors envisaged in all of the above approaches. It included features of both qualitative and quantitative nature. This model aims to customize the patent valuation to the exact nature of the transaction that it aims to participate in. This approach has also been known to have the most practical use and has become an upcoming in the current market.
The following elements are essential to this model:
The size of the market and the share of the technology concerned;
The annual turnover that is generated by the patented technology;
The profit derived after applying tax and other duties;
The risk value that should be discounted;
If the patent is a part of a product, then the value of how essential it is to the product.
Conclusion
No method of valuation can predict the value of a patent with 100% accuracy but valuing patents have become crucial to companies due to their ability to generate capital, attract profitable partners, enabling licensing and franchising business models and their relevance in solving disputes. Thus whichever mode of valuation that a company uses should have a nexus with the ultimate objective that the company has for the patent. Many companies often use two approaches together such as the income approach and the cost approach to obtain a more holistic view; further customization is possible and should be incorporated for such valuations in the future.
A patent assignment is an act by the patent owner in which the patent owner permanently transfers the patent’s exclusive rights to third party (Assignee). This transfer of rights is documented in the official patent record. In a patent assignment, the assignee must pay the assignor a consolidated amount and can collect profits from the patented invention subsequently. This qualifies as a consideration.
Patent licensing allows for the creation of value from innovation as well as the advancement of certain other strategic corporate objectives. Bilateral licensing transactions are the hallmark of the ‘traditional’ patent-licensing industry. It is moreover characterized by consequential transaction costs borne by the parties and information asymmetries that threaten to shrink the market over time. An exclusive license encompasses all of the patent’s rights licensee receives except the title. In this instance, the licensee enjoys the same rights as the patent owner, with the exception of the ability to transfer the patent to another individual or company. This restriction exists simply because even though the agreement allows the rights to be transferred; the patent owner retains ownership of the title.
The rights in lieu of the license agreement are predominately granted to the licensee and in accordance to the terms of the said agreement cannot be transferred further. Ergo, patent licensing is only for a limited term, when the license period ends, the owner reclaims his exclusive rights to his invention.
Professor David Teece asserted in an unconventional paper[1] that the ability to construct value from invention was dependent on interrelate assets like marketing, production, and after-sales assistance. Innovators frequently lack direct ownership or control over these assets, forcing them to license out the commercialization process.[2] Licensing can also be used to impact market demand and competitiveness. Patents are licensed out to restrict competitors from further conducting research and development.
This article states the various practices involving the re-assignment clarifying the ownership of the Patent Agreements.
Infringement Litigation
The patentee (licensor) has the sole right to sue for infringement under the Indian patent system.[3] The only statutory exceptions are the exclusive license and the licensee to whom a compulsory license has been granted.[4] A non-exclusive licensee is not allowed to sue for infringement in his or her own name.[5]
Preventing a third party from infringing on the patent, on the other hand, serves the interests of both the licensor and the licensee. Unlicensed usage by a third party will result in ULR fees being charged to the licensor. Similarly, the licensee will be concerned about an infringing competitor who has not been subjected to ULR payments, the expressions of the mutual interest. It may be however become problematic as the expenses of contesting the infringement are more than the patentee’s personal returns, (s)he may not be motivated to file the claim.
Patent buyouts
At least two instances during the early nineteenth century, when both patents and prizes were employed to encourage discovery, Governments integrated the patent and prize systems by purchasing patents. Patent buyouts are appealing because they provide the chance to eliminate monopolistic pricing distortions and duplicate research incentives while increasing rewards for innovative research. It’s crucial to investigate how they implemented the patent buyouts in practice.
Patents scarcely incentivize original research owing to the fact that potential inventors will not consider consumer surplus while deciding whether or not to pursue it. By purchasing the patent for Daguerreotype photography and releasing the technique in the public domain in 1839, the French government blended aspects of the patent system and direct government sponsorship of research. Daguerreotype photography was quickly embraced over the world after the patent was bought out, and it underwent significant technical advances. Patent buyouts like these have the capacity to eradicate monopolistic price distortions and inefficient reverse engineering incentives while further stimulating original research. Determining the price is a major difficulty for any patent buyout mechanism.
The government would propose to buy out patents at this private value times a fixed markup that would roughly cover the gap between the social and private value of inventions. Inventors could have the option of selling or preserving their patents. Government-purchased patents are usually released into the public domain.
However, in order to encourage auction participants to be honest about their appraisals, the government would select a few patents at random and sell them to the highest bidder. Encouragement of invention through such a process would necessitate greater discretion from government officials than the current patent system, but somewhat less discretion than that exercised by the National Institutes of Health.
Patents also restrict research by generating excessive motivation to produce alternatives for patented assets while providing too little incentive to develop complements. Firms can steal rents from existing patent holders by producing replacement inventions. The minimal information available implies that this issue could be intense. Mansfield, Schwartz, and Wagner (1981) discovered that 60 percent of patented discoveries were reproduced within four years, with the average imitation cost being two-thirds of the original cost of development. Potential complementary invention developers, conversely, will have insufficient incentive to create these inventions if they must first invest in developing supplementary inventions before negotiating license arrangements with original patent owners [Green and Scotchmer 1982]. Sometimes, due to asymmetric information, agreements between owners of complementary patents are not achieved, and inventions go underutilized.[6]
Grant Back
Many patent license agreements fail to address licensee improvements, allowing the licensee to file improvement patents of their own, potentially rendering the licensor’s technology obsolete or even preventing the licensor from commercializing its own product with the enhancements. By including “grant back” provisions in license agreements, a licensor can ensure that when licensing out patents covering its technology, any improvements by the licensee are granted back to the licensor. A licensor can ensure that when licensing out patents covering its technology, any enhancements made by the licensee are granted back to the licensor by incorporating “grant back” terms in license agreements.
Literature in relation to Employee-Employer Patent Ownership
By omitting to add a “deemed ownership” provision in the Patents Act of 1970, Indian policymakers missed the mark. Section 39 of the UK Patent Act, Section 132 of the Israeli Patent Act, and Section 6 of the Chinese Patent Act have all codified similar provisions. This deeming theory is founded on the “duty to invent” principle, which states that a person who has a duty to invent cannot have a patent registered in his name. This premise is based on the idea that if an employee has exploited the company’s facilities, technological know-how, or resources, the employer should not be barred from the benefits.
As a corollary, an employee who created the invention during his or her “course and scope of employment” is unable to get a patent in his or her own name. In Darius Rutton Kavasmanek v. Gharda Chemicals, the Bombay High Court was introduced this argument of “duty to invent.” The court, however, refused to evaluate the issue since it was an injunction appeal, and it could not opine on the merits of the case. In addition to the “duty to invent” argument, the “shop-right” principle, which originated in the United States, can be used to address the ownership problem. Regrettably, it has yet to be implemented in India. Even if there is no agreement for royalties, shop-right is a non-exclusive and non-transferable license with the employer to use the innovation without paying royalties. Even if the employee, who is the patent owner, sells his interest in the patent, the employer retains his shop-right in the patent under this doctrine.
When global firms are involved in Research and development activities and their inventors are Indian employees, the above-mentioned flaw in Indian patent law is very troublesome. According to Section 39 of the Patents Act, any resident of India who applies for a patent or causes an application for a patent to be filed in a country outside of India must first obtain authorization from the Controller of Patents.
For instance, a US corporation wishes to submit a patent in the US, but the inventors are Indian employees who live in the country. It might now be argued that the Indian employees, by their patent assignment agreement, have ‘caused’ the patent application to be filed in the United States, necessitating clearance from the Indian Controller of Patents. This is a significant impediment to the employer-company receiving a patent in a timely manner. Such unnecessary delay in an area as dynamic as intellectual property is likely to have an influence on the utilization of resident Indian personnel for invention. Incorporating such a provision that assigns patent ownership to the employer/company, on the other hand, will go a long way toward resolving such issues.
It’s worth noting that the United States Patent Act makes no mention of patent ownership between employers and employees. However, the courts have established a number of precedents that benefit employers“It is feared that if a corporation is denied the advantages of its success, it would cease to subsidize and experiments will go,” the court held in Goodyear Tyres and Rubber Company v. Miller in the United States. In future judgements, Indian courts could take cognizance of this and set better precedents to potentially enable occlude loopholes in the patent law.
With India’s existing patent ownership framework, the employer bears the threat of not owning the invention despite making significant investments. Employers may be hesitant to invest in research possibilities as a result of this. An equivalent approach in India, as in the United States, the United Kingdom, and other nations, would undoubtedly aid in the resolution of patent ownership disputes between employers and employees. If the invention was developed using the employer’s resources and during the course of employment, the employer should be given a say in the patent, even if there is no pre-assignment / assignment agreement for the same involving the abovementioned principles.
There clearly is a dilemma revolving the true ownership of the Patents developed under employment and the legal literature of various countries reflect the very same. The question of ownership, however, in India remains with the employer (with the assignment of intellectual property in the course of employment) development during an employment.
There is a certain exception which that outruns the private benefit and focuses on public good.
Compulsory License
Compulsory license occurs when the government grants authorization to any individual or organization to use, sell, or manufacture a patented design or product for the public good, regardless of the patent owner’s wishes. Compulsory licenses are commonly given in the pharmaceutical industry and in products that meet the standards set forth in Section 84 of the Patent Act 1970. On March 9, 2012, Natco Pharma Ltd. received the first compulsory license in India for making a generic version of Nexavar, a patented Bayer Corporation drug.
Compulsory licensing is provided under Chapter XVI of the Patents Act of 1970 as an essential precaution for defending the public interest. Any interested party can request compulsory license after three years if the invention is not fairly available to the general public. The central government has the authority to file an application with the controller, requesting that the controller endorse a patent with the ‘license of right’.
The provision of the central government was repealed by the amendment. Furthermore, required adjustments were made with regard to whether the public requirements were fulfilled, if the innovation is not manufactured in India or if the patentee refuses to accord a license, by removing a presumption that the public’s requirements are fulfilled based on local manufacture. The amendment also granted the controller the authority to issue a forced license in the event of a national emergency. There is also a provision that allows a third party to apply for a compulsory license even though the invention is not manufactured in India. This shift also allows the controller to revoke the compulsory license if the circumstances that led to it cease to exist.
In simple terms, the choice to assign or license is based on the most profitable commercialization route available to the patent holder. And, while making a decision, the advantages of receiving royalties or alternatively receiving a lump sum price, giving away title, or simply surrendering the rights to commercialize the invention in a certain location for a set length of time must always be evaluated against one another. Assignment may occasionally seem more beneficial than licensing.
Regardless of the fact that the law safeguards a patentee’s interests, the patent holder must prepare an appropriate assignment or license agreement to avoid any potential disputes regarding the ownership. Intellectual property rights have only recently come to the attention of the general public. Where industrial property is adequately protected, which in turn raises the country’s economy, a comprehensive understanding of intellectual property rights is vital. The entire legal infrastructure was furnished by the Government of India. Software, traditional knowledge, plant varieties, and geographical indications have all been accorded specific legal provisions. Among these provisions, certain remedies are only available to the owner of the intellectual property; hence the determination of ownership and proper re-assignment becomes vital.
[1] David J. Teece, “Profiting from Technological Innovation : Implications for Integration, Collaboration, Licensing and Public Policy”, 15 Research Policy 285 (1986).
[5] Pravin Anand, T. Saukshamaya & Aditya Gupta, India, in Patent Litigation : Jurisdictional Comparisons 201, 203 [Massimo Sterpi et al. (eds.), 2011]; Suchita Saigal, Parul Kumar & Aditya Verma, Licensing Intellectual Property Rights’ Use, in The Law of Business Contracts in India 92, 96 (Sairam Bhat edn., 2009).
[6] The Quarterly Journal of Economics , Nov., 1998, Vol. 113, No. 4 (Nov., 1998), pp. 1137-1167
Patent licensing allows for the creation of value from innovation as well as the advancement of certain other strategic corporate objectives. Bilateral licensing transactions are the hallmark of the ‘traditional’ patent-licensing industry. It is moreover characterized by consequential transaction costs borne by the parties and information asymmetries that threaten to shrink the market over time. An exclusive license encompasses all of the patent’s rights licensee receives except the title. In this instance, the licensee enjoys the same rights as the patent owner, with the exception of the ability to transfer the patent to another individual or company. This restriction exists simply because even though the agreement allows the rights to be transferred; the patent owner retains ownership of the title.
