Ring-fencing IP in e-commerce investments

The last 2 (two) decades have seen the rise of multiple e-commerce business unicorns from the Indian start-up ecosystem, assisted in no small measure by venture capital from developed markets. While, investor capital may support the practice of deep discounting for some more time, the eventual winners would be the ones that can provide a superior end customer experience. In any e-commerce business, the overall experience of the customer is undoubtedly an important differentiating factor from their competitors. The crux of most business to consumer (B2C) internet ventures is the application (App) and the software that goes behind ensuring a seamless and hassle-free experience for the end customer. This article analyses, from an Indian context, the nature of the intellectual property (IP) embedded within such software and the measures that one must ensure to effectively protect the IP within such App or software.

‘Contract of Service’ and ‘Contract for Service’

Venture capital investors and founders of e-commerce businesses should take special care to ensure that IP is either originally owned by the investee company or was effectively assigned to the investee company. Given that during the initial stages of an App’s development, most of the work is likely to be outsourced to developers for a fee. Such an arrangement, in all likelihood, will be a ‘contract for service’ as opposed to a ‘contract of service’. This jurisprudential difference is significant to determine the primary owner of the IP generated in such an arrangement. Under Indian law, software / source code is not patentable and is protected under copyright laws. The primary ownership of a copyright vests with the creator of such copyright, unless the creator was developing the copyright as part of his employment. Arrangements of employment or akin to employment, are considered as ‘contracts of service’ and all IP generated during a ‘contract of service’ vests with the employer or the person engaging the services of the professional. However, in a ‘contract for service’ the IP generated during the arrangement vests with the original creator. But, the ownership of copyright that vests with an original creator can be effectively assigned to a third party for valid consideration, subject to certain conditions. It is therefore of utmost importance that all IP for the product developed by the outsourced developer or a founder is assigned comprehensively to the investee company.

Assignment in Writing

The word assignment means transfer of ownership of work by way of an agreement. Assignment agreements are of considerable importance since they allow owners (assignor) to validly transfer their intellectual property to others (assignee). An agreement to assign copyright will be valid only if it is in writing and signed by the assignor or his duly authorized agent. The law does not prescribe a specific format for assignment and the parties can prepare the assignment agreement in any written form.

Duration and Territorial Extent

To carry out an effective assignment one must specify the duration and territorial extent for which the assignment is applicable. If the term of assignment is not specified in an agreement to assign copyright, the default period of assignment will be 5 (five) years. Similarly, if no territory is specified in the assignment agreement, the territorial right of the assignee will be limited to India. Further, an assignee should exercise the rights assigned to him within a period of one year from the date of assignment. In case of non-usage of the rights within this period, the assignment will lapse after 1 (one) year, unless otherwise specified in the agreement. Lastly, to constitute a valid ownership of copyright work the assignment of copyright in any work should also specify the amount of consideration payable to the author.

Registration

In addition to the above, registration of a work in which copyright subsists is not necessary to claim copyright. Copyright subsists as soon as the work is created and given a material form. There is no provision under copyright law which deprives an author of his rights merely because of non-registration of copyright. Similarly, registration of a deed of assignment is also not necessary for its validity. However, registration of the assignment in the statutory ‘register of copyrights’ has some evidentiary value in a dispute.

Diligence Points

Any investor contemplating an investment in a B2C internet business must ensure the above basic requirements during their legal and commercial diligence. There have been instances in India where developers have claimed IP on the software developed for a client, since the agreement inadequately addressed the above points. Due to the specific language under law, courts were compelled to uphold the rights of the original developers. The provisions underlining the duration and territorial extent will be applicable strictly when an agreement is silent on the duration and territory of assignment. Therefore, some points that investors should consider while contemplating an investment in an e-commerce venture are:

  • Where founders have developed the IP, all rights over the IP should have been effectively assigned by the founders to the investee company;
  • If the initial software development was outsourced to third party developers, appropriate assignment agreements should have been executed in favour of the investee company for all IP that was created;
  • While IP generated by employees during the course of employment will vest with the employer, it would be useful to have some language assigning all moral and legal rights on the IP to the investee company. This is to hedge against any future dispute on whether the arrangement was that of an employment or of a ‘contract for service’;
  • In each case, the IP assignment agreement should (a) be in writing, (b) assign IP in perpetuity, (c) assign IP for territory all over the world; (d) be for a valid consideration; (e) specify that irrespective of usage of the IP it would not revert to the original author in any case; and (f) be stamped for adequate monetary value.

The e-commerce industry in India is maturing and as the market completes a cycle, instances of investor – founder disputes, investor – investor disputes, investee company – employee disputes etc., have all begun to surface. It is therefore imperative and in the interest of all market participants to tighten possible loopholes, during investments, to avoid unforeseen giveaways in future disputes.

Ajay Joseph 

Partner, Veyrah Law

Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.