Originally published in Asia IP December 2008 / January 2009 issue
As the world goes through a slowdown emanating from the shake up of the financial sector in the USA and wakes up to the ripple effects of globalization, it is natural to believe that the onslaught of recessionary forces will have their due bearing on Intellectual Properties ("IP") and the strategies involving their protection, enforcement or commercialization.
A credit crunch spells the true test of a Company and its IP since it is during this time that recognized and reliable brands will stand out even more. And to have recognized and reliable brands, companies will need to adopt a balanced and yet secure IP strategy.
The phrase 'when the going gets tough, the tough get going' fits aptly to the call of the hour as a tough IP portfolio will make the going easy. With a contracting market and an uncertain buying power, a balanced IP approach would be to earn market share from counterfeits and look-alikes and to use technology, product differentiation and advertising leverage in a way that stands out and further widens the gap with a financially stressed competition.
Some of the effective and immediately rewarding strategies would include:
a) CUSTOMS RECORDAL: India has recently amended the Customs Act in order to provide for the recordal of trademark with the Custom Authority. This is being done through the incorporation of the IP rights (Imported Goods) Enforcement Rules, 2007 which provide that if any rights holder has reasons to believe that import of certain goods into India may infringe the rights holder's intellectual property, then the rights holder/complainant may approach the concerned Commissioner of Customs by giving him a notice, on a prescribed form along with the requisite fees that import of such goods may infringe the complainant's intellectual property rights
Under the Rules, brand owners can now fill-in forms with minimum documentation such as registration certificates to intimate to the Custom Authority on the possibility of parallel imports being brought into India. When such goods are detected, the Customs would give a notification to the brand owner to inspect the goods and to initiate proceedings against such counterfeit. This is a handy tool since this ensures an effective policing strategy with minimum costing
b) EXPLOITATION OF IP IN TIMES OF SLOWDOWN: The activity of exploitation of IP has come to the forefront. Several tools of exploitation are being deployed such as through joint-ventures, distribution agreements and licensing of IP to third parties. The pros and cons are specific to each case.
In the case of franchise/license agreements it becomes obligatory on the Indian partner to pay royalty or an outright franchise fee for tying up with the foreign brand. Such a business module enables a foreign entrepreneur to establish a presence in India with no capital investment and to test the waters in terms of business potential. Franchise and license agreement can be worded in a manner that the tenure of the agreement is kept at the short duration so that viability of the business can be re-evaluated depending upon the success of the business model in India, the dynamics of the economy and the extent of involvement of the local partner in contributing to the protection and enhancement of the owners IP.
In the case of licenses the obligation to police can be transferred into the hands of a licensee. However in India for a licensee to assert rights over a mark he must be on the Register as the registered user (licensee) of the mark. A licensee by the submission of minimum documentation such as the license agreement, affidavit of the registered proprietor and details of goods and services to which the agreement applies can register itself as the registered user.
Since in India there still exist areas were 100% foreign direct investment is not permitted, subsequently a joint venture would always be in the interest of the local party. Therefore it becomes sine qua non that a partner search along with a due diligence is conducted before entering into a joint venture.
In contrast, in a distribution agreement the basis of the agreement is sales, therefore stricter and stronger agreements would assist in monitoring the sales, any breaches in contract, quality and quantity controls.
c) IP AUDITS: Slowdowns are also good time to conduct audits not from the perspective of valuation to leverage such assets but from the perspective of identification of core IP as against non-core IP. The budgets can then to allocated to core IP matters such as oppositions, cease and desist letters and rectifications petitions to be conducted on a more rigorous basis while non-core IP can be given a back seat.
The point to be considered here is the fact that the term of validity of a registration in India has been enhanced from 7 years to 10 years and there is a grace period of 1 year upon the expiry of a registered trademark to seek renewal. Consequently, the process of renewal can be deferred in line with the budget by a maximum of one year.
In the instance of a rectification petition against any mark on the grounds of non-use, brand owners must remember that the law in India provides that there has to be a use although the quantum of use may not be relevant. Further, the courts have liberalized their interpretation of what constitutes use in an action for rectification and even advertisements or caution notices released can circumvent the third party claim for a removal of a mark.
Consequently, the focus of brand owners can shift to the minimus programme for non-core brand as opposed to the core brand.
d) PRINCIPLE OF ACQUIESCENCE: It must be taken into consideration by brand owners that the law in India provides a period of 5 years to take an action against an infringing mark from the time of first knowledge of the same. Therefore, in slowdown a brand-owner can avert an action against the infringing mark but, not for more than 5 years.
e) SHARING THE COST OF MAINTAINING AN IP PORTFOLIO: Since many of the international brand owners have Indian operations of subsidiaries, another strategy to be deployed at the time of slowdown is to make it incumbent upon the local business to bear the financial cost of IP portfolio that relates to India. Not only does it allow the local company to claim tax reductions through expenses incurred on the IP portfolio but also has the effect of creating sensitivity in the minds of the local management towards better protection of brands. In addition, as there is an outflow of funds through expenses in the hands of local Indian company, there is also a greater vigilance of third party violation and thus an overall better protection of the IP portfolio. It is, however, important to ensure that in doing so, the ownership of the brand should continue to vest in the hands of the global entity and should not be diluted in the hands of Indian company.
f) EVALUATION OF THIRD PARTY PILFERAGE: By similar analogy, it is also a good time to evaluate third party pilferage of brand by slotting third parties based upon the complexities of the matters and degree of contest. It may make a better sense in times of slowdowns to concentrate on easier targets and to obtain relief from them so that against tougher opponents, the evidence of trade recognition and compliance can be used effectively.
g) PRIORITY ACTIVITIES OF THE COMPANY: A company must identify the activities that are central to the company, this would outline the key areas for expansion for the company while it could consider licensing the brand for other activities and create a revenue stream in troubled times. The licensing of the brand would assist the company to test newer fields without any actual input of their own capital and at the same time see the brand equity rise.
h) WELL KNOWN MARK: The provision of section 11 of the Trade Marks Act recognized well known trademarks. The law stipulates vide section 11(2) that a well known trademark can also be invoked if adopted for unrelated goods or services and to this extent, if effort can be made to collate evidence to try and have some of the core brand considered as well-known, it will significantly ease the ability to enforce a brand against unrelated goods or services.
To have a brand considered as well-known either by the Tribunal or by the courts, the following factors are prescribed and the collection of documentary evidence in light of these factors may be as under :-
- knowledge & recognition of the mark in the relevant section of public must exist;
- duration, extent and geographical area of use of the trade mark;
- the area of promotion, including advertising, publicity and presentation of the trade mark;
- duration and the different geographical areas of registration or application of the trademark; and
- recordal of any successful enforcement of rights in the trademark especially with respect to the recognition of the mark.
Brand conscious companies such as Ford, Polo Sport and Yahoo have preferred to maintain their portfolios at lower cost-structures by moving the focus to India and have managed to declare themselves as a well-known mark in India.
i) NON- TRADITIONAL TRADEMARKS: The legal system in India is seeing consequential changes that have resulted in faster enforcement and prosecution of IP rights. With the introduction of non traditional trademarks such as sound marks, moving image marks, holograms, gesture marks and smell marks the maintenance of intellectual property has become rewarding and the scope unlimited for exploitation.
j) DAMAGES CULTURE: since the year 2005, the damages culture in India has taken off with the first damage being awarded in a matter titled Time Incorporated v. Lokesh Srivastva & Ors
In the said case, the damages to the tune of Rs.16 Lakhs were awarded on account of damages to the reputation, damages in the form of both exemplary and punitive damages. The quantum of damages awarded has been intensifying since then and higher amount of damages (to the tune of Rs.23.62 Lakhs) have been awarded. It must also be kept in mind that while the above cases are those involving the courts and the awarding of damages by courts, an effective IP policing also facilitates several out of court settlement which may involve payment of settlement fee by the defendants or defense's willingness to buy legitimate goods. This is a win-win situation for brand owners as it either has the effect of creating a financial pay back for initiating the law suit or creating additional business for the brand owner or its subsidiary.
k) ORIENTATION OF IP DEPENDING UPON THE COMPANY's NEEDS: It must be taken into consideration that the impact of Intellectual Property has to be gazed on a company to company basis or a sector to sector basis and accordingly device a strategy. Companies that have traditionally focused on high growth through new product launches, new trademarks and new patents but have also lived with instances of counterfeiting, parallel importation or look alike products must now direct the orientation of their Intellectual Property strategy to shift from searching and prosecution of marks and patents to enforcement.
In contrast, companies that are driven by technologies or are service oriented, would now discover that with a little bit of continued investment in their respective Intellectual Properties, it in the form of a patent or new brands or product launches, they would obtain a dual advantage, viz-a-viz, competition in the sense of not only strengthening and consolidating their own share but also striking competition, its budgets and its Intellectual Properties at a time when the market is stretched.
l) COST EFFECTIVE METHOD: Considering that in comparison to other developing countries India is in its nascent stages, this would be a good time to move the maintenance of an IP Portfolio to India, since it is relatively cheaper to manage and maintain IP in India.
With a growth rate second only to China, it is clear that India comes across as a developing country with the potential to sail through the credit crunch towards growth. Therefore this would be the best time to shift one's focus to India.
For a large chunk of foreign companies spread across sectors such as luxury, which would typically be assumed as impacted due to the slowdown, brand owners will realize that compared to saturated markets such as Japan or in Europe, the Indian market still has a huge appetite for brand entries on account of the fact that foreign direct investment in retail has only started recently.
This is one reason why despite the slowdown, the entry of foreign brands into India is rising and the difficult times are permitting brand owners to scout for more reliable partners and thus concentrating on creating wealth in Intellectual Properties as opposed to short-term incomes.
As it has been historically seen, ups and downs in economies are a robust part of business and thus it is said that a good strategy is to be greedy when others are needy. In light of this fact, it would now make sense for companies facing slowdowns in their respective countries to sharpen their focus on India. This can be done in a variety of ways including:-
a) Acquiring companies with a strong know-how of Indian markets at competitive prices. Thus Intellectual Property in mergers and acquisitions can be created at a cheaper price.
b) Facilitating transfer of technologies against royalties to a large section of the Indian companies that would now realize the value added proposition of technologies in order to scale up and to garner market share when the competition finds the going tough or simply by licensing brands to prospective Indian partners against a down payment and a royalty structure.
Another consideration is the fact that the law in India is expected to be amended around the year 2012 wherein brand valuation will set in balance sheets of Indian companies. Rather than to have just companies in India concentrate on enhancement of brand value at this juncture, it would thus make good sense to synergize brands such as their joint ventures or collaborations or even through co-sharing of the entire branding exercise such as by creating more hybrid brands.
Thus the fable of the Tortoise winning the race is a point to consider in relation to the current market scenario and thus a continuous investment in Intellectual Property is far better than a pull out.
Safir Anand is an intellectual property lawyer, a Senior Partner and Head of Trademarks and Contractual Law at Anand and Anand. A strategist on several IP portfolios, Mr. Anand also advises on issues including franchising and licensing, character merchandising, entertainment and media law, sports law, IP audits, due diligence, contractual agreements, packaging and advertising law, competition law, internet laws and IP valuation, oppositions and rectifications.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.