Opportunity India

Each working day this April, and in March before it, a specially constituted bench of the Delhi High Court convened to hear arguments in a single case. At issue was an appeal in the protracted dispute between Swiss pharmaceutical innovator Roche and Indian generics maker CIPLA over cancer drug erlotinib. According to Pravin Anand, managing partner at Anand & Anand, the case will be a landmark no matter how it ends. “Roche v CIPLA is one of the only cases which has finally gone to trial and been decided thus far. The fact that there is a special bench which hears arguments in it every day demonstrates how important it is perceived to be,” he says. “When this and other early cases like Merck v Glenmark are decided, the principles of patent law will have gotten a little ironed out”.

That one of the country’s first headline patent suits is still being heard on appeal is a useful reminder that patent litigation in India is a phenomenon that only really got started in earnest six or seven years ago. But as the dispute between Roche and CIPLA inches towards a final decision, their peers are not waiting on the sidelines to study the results. These early verdicts may tell us a lot about the shape of things to come, but they are unlikely to stem the growing number of cases being filed – the stakes in this market are simply too high.

In issue 71, IAM looked at whether China is on its way to becoming a global patent litigation forum on par or close to the United States and Europe. The logic behind this is simple. The long-dominant US courts have seen falling rates of litigation in the wake of developments such as the introduction of inter partes reviews and the fallout from the Supreme Court ruling in Alice v CLS Bank. With another round of patent reform potentially on the cards and ongoing concerns over validity in key technology areas, this trend might be set to continue. But the emergence of new opportunities elsewhere means that patent suits are more likely to move elsewhere than disappear altogether.

The most obvious destination is Europe, where the impending inauguration of the Unified Patent Court offers the tantalising possibility of continental injunctions some years down the road. But China, we argued, might not be far behind, given its huge consumer market, new specialist IP courts and fiercely competitive technology sector. Stakeholders interviewed both in Asia and in the West by and large agreed; but many indicated that they are watching developments in India just as closely, and suggest that it is a prime contender to become a regional hotspot for closely watched patent battles. In fact, India offers some advantages that in some ways already make it a more attractive forum than China.

So this is something of a companion piece – part two of IAM’s examination of Asia’s most important emerging litigation venues. In the past year, India has been at the centre of several patent stories that attracted global notice: slow-burning pharmaceutical battles, a spate of injunctions out of Delhi and ongoing efforts to reform and streamline the judiciary. Against this backdrop, we analyse some of the factors that are catapulting India’s courts to international prominence and some of the hurdles they will have to overcome along the way.

The High Court of Delhi. The lion’s share of landmark patent cases in India have passed through this court. A recent string of interim injunctions issued in SEP cases have caught the attention of patent practitioners around the world

www.delhihighcourt.nic.in/events_gallery.asp Copyright © 2010. Delhi High Court. All Rights Reserved.

How we got here

While is difficult to find complete statistics on patent suits in India, practitioners agree that they are on the rise. The country saw hardly any patent litigation prior to 2005. Filing levels remained low for years, but shot up after the passage of the Patents Amendment Act of 2005 – the third of three revisions which brought the Indian regime into compliance with the World Trade Organisation Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Among other things, the act extended product patent protection to pharmaceuticals and agro-chemicals, a move which several years later would spur some of the first major patent lawsuits in the country. Annual filings more than doubled between 2004 and 2007, reaching a peak of 43,674 in the most recent data year, 2012-2013 (see Figure 1). The majority of these were granted to foreign companies; though Indian filings have grown at a similar rate, foreign enterprises still applied for more than three times as many patents as locals in 2012-2013. Little surprise, then, that multinationals are the plaintiffs in many of the cases that have garnered notice in recent years.

Figure 1. Patent application trends at the Indian Patent Office. Data for year starting April, ending March

Source: Annual Reports of Comptroller General of Patents, Designs and Trademarks

Another factor that had a chilling effect on litigation is the notoriously slow judicial process – an issue that today, while somewhat improved, is by many accounts still a problem. Along with expanding the scope of patentability, reforms to the Patents Act and the Code of Civil Procedure sought to shorten the pendency of cases. Witness testimony can now be provided in an affidavit, with only the cross-examination conducted live in court. Witnesses who are indisposed or located far away can give testimony entirely through videoconference. Retired judges and senior lawyers have been subcontracted to take statements and record evidence; the work of these so-called court commissioners has freed up the diaries of busy judges. Along with these fast-track procedures, efforts were made to make the courts more tech savvy; it is no longer uncommon to see a judge with a computer in front of him at trial, says Anand. While these changes have been rolled out across the country, Anand points out that the Delhi High Court in particular has developed a culture of innovation that has allowed it to take the lead in enhancing efficiency.

But perhaps the most important factor influencing litigation trends is India’s status as a hub for generic pharmaceuticals. The domestic generics industry took off during the years when only process patents (rather than product patents) were available for drug companies. Today, medicines produced in India are exported all over the world; meaning that if originator companies cannot stop generics at the source, their task becomes akin (to borrow Anand’s metaphor) to fighting bees with a hammer. For heavyweights such as Roche, Merck and Novartis, this has effectively rendered the uncertainty surrounding the new laws, the lack of experience and the likelihood of success irrelevant. Once the law was amended and compounds became patentable, there was simply too much at stake for these companies not to try protecting them through litigation.

For non-pharmaceutical companies, weighing up whether to litigate in India is a trickier proposition. For most, the key potential benefit is the prospect of securing an injunction, particularly at the interim stage. Whether we see a boom in patent lawsuits in the coming years may well be dictated by how often and how readily Indian courts grant this type of relief. In the first place, the market itself is second only to China in sheer size. Plenty of Indian companies are heavily dependent on the local market; while foreign companies (especially those in China) increasingly rely on India to drive future revenue growth. An injunction in a country of 1.2 billion people (and one of the world’s 10 largest economies) is not the sort of thing that can be ignored. Describing those companies that have most confidence filing suit in India, Anand says: “They’ve got a market in India. They all have business here and nobody wants an infringer to grab a share of that.” For others, stopping the manufacture of infringing goods is the primary concern. And if the Modi government’s Make in India initiative successfully attracts more manufacturing to the country, this motive will become increasingly important. As India’s consumer market becomes bigger and more mature, Indian court orders will only become more powerful tools.

SEPs in the spotlight

Pravin Anand, managing partner, Anand & Anand

“It’s a huge market and I see licensing developing massively in the future”

Prathiba M Singh, senior advocate

“People are already looking here, testing the waters. So long as people understand that the system is fair, they will use India. That underlies everybody’s decision making”

Over the past year, many companies have come alive to the importance of patents in India and the potential power of an injunction issued by the Indian courts. No single enterprise has done more to take people by the shoulders and shake them from their slumbers than Ericsson. India is a crucial market for the Swedish telecoms giant, which has had a foothold in the country for over 100 years. In addition to sales, the company maintains three R&D centres and a manufacturing plant there (with another factory coming onstream soon, in a nod to the Make in India initiative). When Ericsson experienced difficulties in concluding licensing agreements with infringers in India, it decided to take some of them to court. The move thrust standard-essential patents (SEPs) firmly into focus and confirmed that pharmaceutical companies are not the only enterprises that needed to worry about Indian patents. They also made clear that India might just prove to be fertile ground for patent licensing.

Ericsson’s first target was Micromax, India’s largest domestic handset maker (at the time, it trailed only Samsung in total sales). Ericsson sued in March 2013 over eight patents spanning the 3G, EDGE and Global System for Mobile Communication standards. Claiming that it had tried unsuccessfully to negotiate a licence on fair, reasonable and non-discriminatory (FRAND) terms since 2009, the Swedish company obtained an ex parte injunction from the Delhi High Court restraining Micromax from manufacturing, importing or selling products which used the technologies in question. Rather than be frozen out of the market, the Indian company chose to make a deposit of interim royalties between 1.25% and 2% of the sale price of every unit, depending on the standard. The court subsequently intervened in November 2014, reducing the rate to between 0.8% and 1% of “net selling price” (basically, the sale price in an arm’s-length transaction), but ordering Micromax to pay Ericsson directly rather than making a deposit. Importantly, the court stressed that it was not a FRAND determination and purely an interim measure. Still, it imposed significant costs on Micromax. The case is still awaiting trial.

The next company to find itself in the crosshairs was Intex, another local phone maker. Ericsson claims to have spent over five years trying to sign a FRAND licence with the company. In the course of these negotiations, Intex initiated proceedings before the Competition Commission of India (CCI), arguing that Ericsson was abusing its dominant position. Finally, in March 2014 Ericsson sued; this time the court did not issue an ex parte injunction, hearing arguments from both sides. The verdict was not as Intex would have hoped. Ericsson summarised the decision’s key points in a statement: “The Delhi High Court considered the issue of interim relief over the course of 50+ hearings and issued its 257-page order on March 13, 2015. Among other things, the Court found Ericsson’s eight suit patents to be prima facie valid, essential, and infringed. With regard to Ericsson’s licensing practices, the Court found that non-disclosure agreements were common practice needed in every licensing deal, that Ericsson did not demand discriminatory royalties from different parties, that charging royalty on the end-device was non-discriminatory, and that a chipset need not be used for calculating royalty. The Court also found that Intex had been unwilling to execute a FRAND license and had initiated proceedings before the CCI solely with the view to prolong litigation and avoid paying royalty.”

The judge ordered Intex to pay royalties along the lines set out in the Micromax case (half directly to Ericsson, half as a deposit) until conclusion of the trial. According to Prathiba M Singh, the senior advocate who argued the Micromax and Intex cases on behalf of Ericsson, the court’s royalty jurisprudence is developing: “In the past two years, courts have looked at royalty rates internationally in detail, and that’s a very good thing; they haven’t made these types of judgements until they have looked at FRAND rates around the world.”

One measure of a globally important patent litigation venue is whether foreign companies find it worthwhile to sue competitors from a third country there, on neutral ground. Here again, Ericsson has taken the lead, filing suit in India against Chinese mobile phone manufacturers Gionee and Xiaomi. The Gionee case of 2013, which involved a relatively small firm, attracted little notice outside India. But when the Delhi High Court slapped a ban on the manufacture, import and sale of Xiaomi phones on December 8 2014, it sent shockwaves through the wider industry. Xiaomi – the seemly unstoppable low-cost high-performance smartphone maker – has always been notably light on patent protection, and has focused its expansion outside of China on developing markets such as Russia and India. At the time of the order, India was already the company’s second biggest market, even though it had only commenced sales in the country five months earlier. The ex parte injunction made plain that Xiaomi’s road to expansion outside of China might be more challenging than it had anticipated. It was lifted nine days later, on condition that Xiaomi deposit 100 rupees ($1.57) for each device sold.

Not everyone is pleased with the recent string of orders emanating from Delhi. “They are dishing out ex parte injunctions on the house. I think it’s a terrible practice,” says IP lawyer Prashant Reddy. “How can you take a complex patent like a pharmaceutical or a telecom SEP and form an opinion without even hearing the other side?” In Reddy’s estimation, such cases are too complex for such a powerful form of relief to be granted on a prima facie view of the case. “Everything is happening at the injunction stage. Trials just aren’t happening”. Of course, that might be an attractive feature to a licensor which is trying to bring a defendant to the negotiating table rather than endure a lengthy trial. “The system works a little differently in India,” says Singh. “A lot of issues get sorted out at the interlocutory stage; you may not necessarily have to go full fledged into a trial.” Anand adds that a key consideration in seeking injunctive relief should be whether goods are already on the shelves: “I think the concept of an ex parte injunction is relevant where goods have not been launched in the market.” The granting of interim relief in complex patent cases, he says, is very fact dependent. “If there are clear facts to indicate that infringement has taken place, then even though the technology is complex, that has to be taken into consideration.”

The subject of interim royalties has also caused some controversy. In Reddy’s analysis, “when the money is paid directly to the plaintiff for a past action, it amounts to a damage, and in common law countries at the interim stage, you never give a positive relief”. The Indian Cellular Association has called on regulators to rein in the rates being sought from domestic companies, alleging that they threaten the country’s competitiveness in manufacturing. In fact, the interim rates established by the Delhi High Court do exceed court-ordered FRAND rates awarded to US SEP holders including Motorola and Innovatio, as pointed out by frequent commentator Florian Mueller. But judges in India have made clear that the interim rate is a temporary measure, not a FRAND determination regarding the portfolios in dispute. In Anand’s view: “These rates of deposit are an interim arrangement intended to cover the eventuality that the defendant goes bust. This does not mean that the rates must be what would be paid if the defendant had come along and asked for a licence. You cannot have a situation where a defendant is better off than a licensee. Why would anybody take a licence in the first case?”

In the early analysis, it looks as though the availability of interim injunctions could be a key factor attracting more plaintiffs to file suit in India, particularly in Delhi. Of course, we have to inject a note of caution and reiterate that many of these cases are sub judice or on appeal, and plaintiffs’ gains could be reversed. But given that the courts are usually more reluctant to enjoin SEP infringers than defendants in run-of-the-mill patent trials, the outlook appears promising for plaintiffs seeking injunctive relief in India.

Neutral court

As powerful as interim royalties can be, they are not the only reason why the Indian courts may soon become Asia’s premier patent litigation venue. For Singh, the calculus is straightforward: “What gives companies the confidence to litigate in India? It’s a simple answer: a fair judicial system. It’s absolutely fair and there are no concerns about political interference or bias.”

This, of course, is something that should be expected of every legal system, not exactly a unique selling point. But comparisons are bound to be drawn with the other Asian jurisdiction seeing a big uptick in patent cases: China, which has explicitly rejected ‘Western’-style judicial independence. In that context, India’s unimpeachable common law system is a crucial advantage, removing as it does one layer of uncertainty. “Respected, efficient and fair” were the three words Ericsson used to sum up the Indian judiciary in a statement provided to IAM.

Pravin Anand suggests that the single biggest reason why more and more foreign companies are moving to file suit in the country is the talent and intellect to be found on the bench. “The judges are so bright, you cannot even imagine. They are curious and keen to learn; they want to go on the Internet, read up on the issues. They are young, energetic and very smart.”

But a chief IP officer at a US company told IAM that India’s renowned judges face significant challenges in trying to deliver justice. “When they are able to devote the necessary time, in our experience Indian judges are quite sophisticated and knowledgeable about all manner of patent litigations.” The problem is, he says, they rarely do have the time. “Judges are overwhelmed with matters and do not allocate – likely because they simply cannot – enough time to deal with each case at a given time.” In his telling, judges often can devote only 15 minutes at a time to any one case, forcing both sides to reargue points continuously. This state of affairs “guides judges to a superficial understanding of the case and tempts the parties to make superficial arguments”.

“Litigation is a recent trend and cases can take three to four years easily,” according to Singh. Several initiatives aim to improve the speed and efficiency of civil litigation, including patent cases. India’s Parliament will soon consider a bill to establish special commercial courts in the high courts – a move that should hopefully speed up the disposal of cases. “In the near future, they’ll have a system in place, and IP is going to be a big part of that,” says Singh, adding that the Delhi High Court has already announced that it has segregated a certain part of its bench as commercial courts. That the nation’s most important IP forum is acting so proactively on its own is a good sign. “Policy ideas rarely get translated into reality, but chief justices of the high courts have quite a lot of autonomy on how they run their courts,” says Reddy. “Change has to come from within the judicial system.”

The legal services market presents its own strengths and weaknesses. The cost of litigation is low compared to that in developed countries and other advanced developing countries (a 2012 analysis in World IP Review put the average cost of a patent suit at between $22,000 and $47,000, but did not distinguish between district court and high court cases). But with such a small number of patent suits being filed, only a handful of Indian firms can genuinely claim to specialise in the practice area. Singh – one of six people selected by the Department of Industrial Policy and Promotion to draft a national IP rights policy for her country – believes that the main challenge is the lack of human resources: “We need more quality patents being filed in India and moulded as per Indian law and procedures; the cut and paste job will not work. We need to create a pool of lawyers who can service the innovation that’s going to take place.”

The perception problem

Fair or not, another major hurdle facing the Indian IP system is persistent negative perceptions abroad. Some may be based in fact, others not; but there is little doubt that this image problem has deterred at least some foreign companies from protecting and enforcing their intellectual property in the country. In addition to concerns over the speed of the judicial process, a common refrain is that India’s laws do not afford sufficient protection to intellectual property, especially in areas such as pharmaceuticals and software. For some local practitioners this is a bitter irony, considering the uncommon degree of accommodation that the Indian courts have shown foreign owners of SEPs and other patents over the past two years. If stakeholders cannot get this message out, it is unlikely that foreign rights holders will go out of their way to pursue infringers in India.

India’s policy regarding pharmaceutical patents perhaps attracts the most criticism from developed countries. Much of the controversy centres on India’s obligations under TRIPs. A full 20 years after accession, disagreement persists over whether local rules and regulations are in compliance. Particularly controversial are compulsory licences and Section 3(d) of the Patents Law, which holds that new forms, properties or uses of a known substance are not patentable unless they can be shown to increase the therapeutic efficacy of the original.

Novartis took aim at that provision in a landmark battle in India over its Glivec cancer drug, an amended form of the known compound imatinib. The Indian Patent Office’s 2006 decision to reject the Glivec application sparked a seven-year dispute which included an unsuccessful attempt to convince the Madras High Court that Section 3(d) fell foul of TRIPs and the Indian Constitution. In 2013 the Supreme Court finally upheld the patent office’s rejection of the patent. A statement issued by the Swiss company following the ruling lamented the “growing non-recognition of intellectual property rights that sustain research and development for innovative medicines”.

“Their argument is that we are not TRIPs compliant; we are adding another layer to patentability of chemicals and drugs and therefore we are discriminating,” Singh recently told Live Mint. “My reaction is that a review of all patents goes to show that multiple patents are being sought for the same compound or molecule. In the case of imatinib, for example, more than 15 patents were filed on different forms.” Singh, who represented CIPLA and Ranbaxy in the Glivec case, tells IAM that focusing criticism on India is somewhat unfair. “My own experience of litigation internationally shows that most pharmaceutical cases are hotly contested all over the world, not only in India. In the cases I have seen, it is not unusual for courts to revoke and narrow claims, so I don’t know why India is singled out for it.”

In point of fact, it has not been all doom and gloom for pharmaceutical innovator companies over the past year: they too have been beneficiaries of high-profile injunctions. Since April 2014, Novartis has been able to secure court orders enjoining the likes of Bajaj Healthcare, Alembic Pharmaceuticals, Ranbaxy Laboratories and CIPLA from manufacturing and selling various drugs to which it holds patents in India; it secured undertakings to a similar effect from Glenmark and Cadila over the same period. Novartis’s very public reservations about India’s IP regime have not prevented it from aggressively asserting its rights there, and its strategy of persistence looks as though it may be starting to bear fruit.

“I think there’s a lot of media bashing about India on patents and intellectual property which is mostly unjustified,” laments Singh. “In the past two years there have been 15 to 20 injunctions across the country in pharma cases which have been contested very hotly. But I didn’t see any major media coverage of the rulings in favour of innovators.”

Software is another area where some multinationals bemoan weak protection under India’s IP laws. Section 3(k) of the Patents Act holds mathematical or business methods, software per se and algorithms to be non-patentable. Here again, Singh questions just how different India really is from other jurisdictions and why the country is singled out for criticism: “There is a recent judgment in the Ericsson-Intex case where the judge has clarified the situation regarding software patents, and they are treated similarly to how they are treated in the United States and Europe”.

The exact meaning of ‘per se’ in Section 3(k) has been ambiguous and contested for some time. In the Intex order referred to by Singh, the Delhi High Court held that “it… appears to me prima facie that any invention which has a technical contribution or has a technical effect and is not merely a computer program per se… and … is patentable”. Analysis by Kartik Chawla of the popular SpicyIP blog observes that this is not so different from the standard used by the European Patent Office for distinguishing between non-patentable ‘software as such’ and patentable ‘technical software’. He writes that the decision “clarifies and consolidates the debate that has surrounded Section 3(k) of the Act” and “marks, perhaps, a new era in the realm of patenting software in India”. Again it is early days, and only a high court decision, but a move closer to the mainstream in software patent protection would be just one more factor that puts India onto the radars of a wider swathe of companies.

Litigation can never be viewed in isolation and the work of the patent office will always have a significant impact. According to the chief IP officer of a US company, delays at the patent office have a negative effect on patent quality and the prospects for litigation: “Since it takes so long for patents to issue, often the value of the patent once it actually issues is quite diminished. As a result, it is rare that ‘crown jewels’ emerge from the patent office.” He is encouraged, though, by the efforts being undertaken by the government to improve the efficiency, noting: “It may lead to a virtuous cycle of better patents leading to higher-quality litigation.”

Finally, as in a growing number of Asian jurisdictions, the spectre of regulatory attention will be high on the agenda for prospective licensors. As mentioned above, both Micromax and Intex have requested CCI investigations into Ericsson’s SEP licensing practices, including non-disclosure agreements and the setting of royalty rates and royalty bases. A statement provided to IAM by Ericsson noted that the Delhi High Court, in its Intex order, found various claims by Intex about allegedly unfair practices to be without merit, and that the court is currently hearing arguments in a separate matter as to whether the CCI has jurisdiction over those issues. There is not much to be said until the investigation has concluded, but it is an issue that warrants the attention of any party attempting to ink licensing deals in India.

Moving forward

A good barometer of how the patent market makers are looking at India will be the value of Indian patents and whether a significant secondary market could emerge. “It’s a huge market and I see licensing developing massively in the future,” suggests Anand. We have already seen Vringo assert former Nokia patents against ZTE and its distributors, but so far it has failed to secure an interim injunction; other patent acquirers will surely be watching how those cases progress with interest.

What is certain is that for India to move forward as a patent jurisdiction, domestic companies need to get involved. As we noted at the beginning of this article, filings among domestic enterprises remain low; it is clear that a significant amount of genuine innovation is not getting translated into intellectual property. Moreover, comments such as those of Infosys CEO Vishal Sikka, who said in January that patents are a “scourge” on the software industry, raise questions about whether the country’s most innovative companies have bought into the value of intellectual property. Nevertheless, progress is being made. “There is no decrease in the work when it comes to domestic companies,” assures Singh. “Their sensitivity to IP and its enforcement are rising. I can already feel the difference, and I already see a lot of patent litigation involving domestic companies, especially in the pharmaceutical, diagnostic, chemical and pesticide sectors.”

Predictions as to India’s ascendance as a major patent litigation venue run the gamut, suggesting that what happens next really is anybody’s guess. “I don’t see it happening for 10 years at least,” says Reddy. “There hasn’t been a single judgment where damages have been granted after trial. Until damages become a regular feature, it is not going to happen.” Singh is more optimistic: “On an ambitious side, it will be not more than two years before litigation really picks up. People are already looking here, testing the waters. So long as people understand that the system is fair, they will use India. That underlies everybody’s decision making.”