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IPR ISSUES IN DEFENCE PROCUREMENT

Emerging markets, such as India, have made incremental gains and embraced positive rhetoric with their IP policies, but they have not yet followed up with the legislative reforms innovators need. Author analyses —

The stupendous 30-point jump in the global ease-of-doing business index this year, catapulting India to the 100th position, has overshadowed many factors that impact the business climate in India both for the domestic industry as well as the foreign companies. This jump has been made possible by a substantial improvement in regard to paying of taxes, resolving insolvency and getting credit in Mumbai and Delhi.

Notwithstanding the question whether these two cities constitute a fairly reasonable sample, it is ironic that in regard to 'starting a business', which is one of the ten parameters comprising the index, India has moved down one rank from 155 last year to 156. This is indicative of the risk in being dazzled by the statistics.

This also brings into focus the need to identify and deal with the real sector-specific factors impacting the business climate in India. All these sector-specific factors are not captured by the constituent parameters of the ease-of-doing index, though it is these factors which have a more immediate bearing on sectors such as defence which is thriving not in cities like Mumbai and Delhi but in states like Karnataka and Telengana. These states are increasingly becoming hubs of defence innovation, services and manufacturing.

One sector-specific factor that does not even figure among the ten parameters that comprise the ease-of-doing-business index concerns the Intellectual Property Regime (IPR) in India. Presumably it is subsumed in some other parameter like 'starting a business' or 'enforcing contracts'. It is also possible to draw the inference that the quality of the IPR regime is not considered to be among the factors that have a direct bearing on ease of doing business but such a view could induce a false sense of complacency.

What is Intellectual Property?

Intellectual property (IP) is a set of laws that protect creative and innovative products through legal rights called patents, copyrights, and trademarks. It is sometimes described as property that is a product of the mind or a product of intellectual capital. While the source, goals, and forms of IP are different, they can all be seen as protecting and encouraging creative efforts.

In short, copyright protects creative expression, a parent protects a new invention, and a trademark identifies and distinguishes the source of goods of one party from another. IP encourages new works and new products by protecting the ability of creators and innovators to make a living from those new works and products. IP is the promise that those who combine the spark of imagination with the grit and determination to see their vision become reality in books, technology, medicines, designs, sculpture, services, and more will have opportunities to reap the benefits of the innovation.

Whether there is some substance to it or not, it would be unfair to overlook the fact that the IPR-related issues figures prominently in the context of defence manufacturing in India. While the Indian companies have also been raising this issue, it is largely the foreign manufacturers, particularly the US companies, who seem to be more concerned about it.

More to the point, in the IPR index of 45 countries released in February this year by the US Chamber of Commerce, India is placed at the 43rd position, with some other countries like Algeria, Venezuela and Pakistan figuring at the bottom. Unsurprisingly the US itself tops the list, followed by UK, Germany and Japan. China which is considered to be the US's  major violator of the IPR of the American companies is placed at the 27th position in the same list.

Talking about India, Mark Elliot, Executive Vice-President of the Chamber's Global Intellectual Property Center said “Emerging markets, such as India, have made incremental gains and embraced positive rhetoric with their IP policies, but they have not yet followed up with the legislative reforms innovators need”. While conceding that the new national IP policy announced by India in May 2016 involves speeding up of the patent registration process, he said the policy “resisted the calls from the Western countries to tighten its patent laws”.

The US Chamber of Commerce report of February 2017 also observes that “While the Indian government issued the National Intellectual Property Rights Policy in 2016, IP-intensive industries continued to face challenges in the Indian market with regard to the scope of patentability for computer implemented inventions, Section 3(d) of the Indian Patent Act, and the recent High Court of Delhi decision regarding photocopying copyrighted content”.

The decision of the High Court permitted photocopying of the copyrighted books for use by the students of the Delhi University, leaving the publishers dissatisfied. While this judgement does raise questions about the sanctity of the copyright of the authors and publishers, it is equally questionable to characterise the IPR regime of the country based on one judgement. After all, one swallow does not make a summer.

The Special 301 report on IPR for the year 2017 released by the office of the US Trade Representative in April this year has gone a step further by retaining India on the priority watch list 'for lack of sufficient measurable improvements to its IP framework on longstanding challenges and new issues that have negatively affected U.S. right holders over the past year, particularly with respect to patents, copyrights, trade secrets, and enforcement'.

These reports could possibly be reflecting a prejudice arising from the self interest of the US companies but it would be wrong to dismiss these reports completely out of hand. The India-US trade has grown exponentially in the past few years, touching around USD 15 billion, largely on account of defence purchases under the Foreign Military Sales (FMS) programme of the US Government but the future of this relationship lies in co-development and co-production projects, where the IPR issues will be a major factor.

India and the US have been talking about Transfer of Technology (ToT) to the Indian companies under the umbrella of the Defence Trade and Technology Initiative (DTTI). Several technology transfer proposals have been made by the US and projects like construction of an aircraft carrier in India have been making some progress.  Despite Trump's America-first policy, there seems to no reluctance to let manufacturing giants such as Lockheed Martin offer ToT for manufacturing single-engine F-16 fighter aircraft in India.

If the IPR issues have not come up in a big way in the dialogue on these projects so far it is probably because none of these have reached a stage where the two countries have got down to discussing the nitty-gritty of the projects. It will, therefore, be a good thing to take the issue, head on at this stage before it becomes a game spoiler. Three points need to be made in this context.

First, there is no history of IPR-infringement in the field of defence production in India. Till the disintegration of the erstwhile Soviet Union, India was not only importing defence equipment in a fully formed state from that country but also making it in India through transfer of technology to the Defence Public Sector Undertakings.  The issue of IPR infringement never figured in this relationship.

Even after disintegration of the Soviet Union, India has continued to buy as well as license-manufacture Russian equipment in India without any major issue being raised by Russia regarding IPR infringement. It is significant because the defence sector is now open to the private sector since 2001 and it is not just the public sector that the Russian companies have to deal with.

In fact, the Indian industry, especially the public sector, is often criticised for not even being able to absorb technology transferred by the foreign manufacturer, much less reverse engineer it. Historically speaking, therefore, the concern about IPR infringement in defence production in India seems to be grossly exaggerated which is in sharp contrast to the history of reverse engineering in China which, paradoxically, figures much higher in the IPR index.

Second, there is a lack of clarity about the specific concerns that the US defence companies have regarding the IPR regime in India. The US Chamber of Commerce report mentions the following key areas of weakness:

  • Overall, National Intellectual Property Rights Policy does not address fundamental weaknesses in India's IP framework
  • Limited framework for protection of life sciences IP
  • Patentability requirements outside international standards
  • Lengthy pre-grant opposition proceedings in place
  • 2016 High Court ruling on copyright infringement in the University of Delhi copy-shop case continues to weaken the enforcement environment for rights holders
  • Previously used compulsory licensing for commercial and nonemergency situations
  • Limited participation in international IP treaties

There are some references to the pharmaceutical sector in the report but significantly it bears no reference to the defence sector. It is not known if the US companies operating in India have articulated and conveyed their concerns to the Indian government. On the contrary, the recent tie-up between the Lockheed Martin and the Tata Advanced Systems Limited (TASL) for manufacture of F16 fighter aircraft in India seems to indicate that the US companies are not averse to the idea of working around the real or perceived limitations of the Indian IPR regime.

Even so, it will do no harm if the Government of India looks into some of the weakness pointed out in the US Chamber of Commerce report. For example, the report assigns a zero score to India on membership and ratification of the International Treaties, which is surprising because the government's makeinindia website claims that India is a member of the World Trade Organisation and committed to the Agreement on Trade Related Aspects of Intellectual Property (TRIPS), apart from being a member of World Intellectual Property Organization, a body responsible for the promotion of the protection of intellectual property rights throughout the world. The website also mentions at least ten international treaties of which India is a signatory.

While the US and other countries that may have similar concerns about India's IPR regime need to accept that being a sovereign country it is India's prerogative to sign or not to sign a particular international treaty, India also needs to make its position clear as regards the treaties it has not signed or does not intend to sign.

Third, while further review of the national IPR Policy is bound to take time, the Ministry of Defence owes it to the world as much as it owes it to itself to have a re-look at the provision related to IPR in the standard contract document used for capital and revenue procurement. Take, for example, Article 28 of the Defence Procurement Procedure 2016 which deals with patents and other industrial property rights, which is reproduced below:

  • 1 The prices stated in the present Contract shall be deemed to include all amounts payable for the use of patents, copyrights, registered charges, trademarks and payments for any other industrial property rights.
  • 2 SELLER shall indemnify the BUYER against all claims from a third party at any time on account of the infringement of any or all the rights mentioned in the previous paragraphs, whether such claims arise in respect of manufacture or use. The SELLER shall be responsible for the completion of the supplies including spares, SMTs/STEs, technical literature and training aggregates irrespective of the fact of infringement of the supplies, irrespective of the fact of infringement of any or all the rights mentioned above.

This is a fairly unilateral provision which covers the risk of the buyer against any third party claim concerning IPR infringement by the seller. Inclusion of a reciprocal provision in this article and an assurance against any IPR infringement by the buyer could a go a long way in mitigating any concerns that the sellers may have without having to bring about a large scale change in the overall IPR regime.

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