This article is written by Swathi Vajjhala who is pursuing a Diploma in Business Laws for In House Counsels from LawSikho.

Introduction

Fintech is regarded as one of the most encouraging trends of the recent past. Growing customer expectations, expanding risk capital, removing entry barriers, and technological innovations have made Fintech one of the most sought-after in all industries. It is gradually in a state of progression.

It has become a watchword in recent years, and everyone wants to work on it or wants to be part of it. Organizations realize that they may lose their customer base without them, as it creates a unified experience for customers in today’s fast-paced and evolving connected world. Fintech is part of daily money transfer, currency exchange, funding, and personal funding through applications. This paved the way for the significant rise of Fintech companies and start-ups in the Indian market.

FinTech expands to Financial Technology. The term “FinTech” was first coined in 1972 by a New York banker. However, there is no generally accepted definition of the term Fintech. Fintech offers mobile and web-based payment options, crowdfunding, peer to peer lending, cloud computing, foreign exchange and remittances, distributed ledger technology, digital currencies, artificial intelligence and robotics, Big Data, insurance, and wealth management.

IPR for FinTech

As with any effort or invention, intellectual property is protected by law so that people working on the invention can receive acknowledgment or financial benefit for their designs or creations. IP rights protect software, hardware, and the branding associated with fintech inventions, which are essential for competitive technology. An IP strategy is especially crucial for Start-ups as they seek funding from investors who want to know that the fintech company they are investing in is protected by law. Besides, there is nothing more attractive to potential buyers than a strong IP portfolio in the event a founder decides to sell its business.

FinTech converting finance to complement or replace traditional services, business models, and providers. It can create brand new market opportunities or provide a competitive advantage over conventional offers, which can have far-reaching implications. The implications can be on various stakeholders, including large financial institutions, insurance companies, hedge funds, institutional investors, credit rating agencies, accounting and auditing firms, regulators, technology companies, consortia, not-for-profit organizations and Start-ups. Large institutions may make significant investments to improve older technology systems or replace them with new FinTech products.

Over the years, the Government of India has made honest efforts to raise awareness of the importance of intellectual property rights among Start-ups by highlighting their need in the modern-day and providing various incentives for Start-ups to protect their intellectual property rights, e.g., Tax incentives.

Importance of IPR

The importance of IPR is well known to big companies, and they take all the required steps to protect them from being misused by others. However, the IPR protection strategy often takes a back seat and is sometimes completely forgotten by various Start-ups. Some Start-ups usually fail to protect their IPR due to the rush to enter the market to benefit from the instant market opening. In this unreasonable rush, Start-ups often completely forget to protect their fundamental IP rights, which many competitors then unfairly exploit, exploiting their ideas and brand equity. Therefore, a step-by-step approach undoubtedly costs more but equally helps Start-ups protect their valuable intangible rights, not only in the present but also in the future.

Most Start-ups must develop an adequate IPR strategy and techniques related to various other modalities like finance and sales. They must consider important concepts before disclosing any Confidential information such as IPR. They should consider entering into nondisclosure agreements (NDA) with each and everyone (even prospective investors) with whom they will be sharing their technology and innovation to prevent any misuse of their intellectual property rights and assets. Any person/organization/company willing to use their IP assets can apply for a legal license to use them in any form. In many situations, a start-up reveals the core idea and invention to investors to raise capital. However, if the intellectual property is not adequately protected, the investor or partner may derive undue advantage by using a similar idea in a different form. Therefore, sound legal advice from the start can help Start-ups protect their intellectual property rights, which can gradually turn into assets for them in the future.

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Protection of IPR 

India being a signatory to the agreement on trade related aspects of IPR has established a robust IP regime pursuant to Patents Act 1970, Copyright Act 1957, Designs Act 2000, Trademark Act 1999 along with recognition being provided under creator’s moral/common law rights. Each of these legislations seek to identify the true creator/author of the product and thereafter provide protection depending upon the uniqueness of the innovation.

To understand the protection of intellectual property rights, let’s understand intellectual property’s nature and how it is protected under Indian laws. Indian IPR law is divided into different categories that offer unique protection. The categories are as follows:

Patents

Extremely important aspect for companies and mostly Start-ups is the protection of their inventions under the Patent Act of 1970. Applying for Patent should be the first step for start-ups to obtain protection for their unique product. If the idea behind the invention is new, not obvious and has industrial application, the same can be patented under the Patents Act 1970. It is an extremely important step in the process of protecting intellectual property rights, as if the invention were registered, no other company can use it without authorization. Patents can offer a competitive advantage and can also be used defensively as a negotiation tool. However, patent protection is difficult to obtain since an algorithm, a business or mathematical method or computer program is not pre se considered patentable subject matter in India.

In the United States, business methods used to be considered patentable, but this has become increasingly difficult in recent years, as case law shows. In the Alice v CLS Bank International case, the US Supreme Court ruled that the patents relating to certain claims with regard to a computer-implemented electronic escrow service to facilitate financial transactions were invalid because the claims related to an abstract idea and the implementation of those claims on a computer was a far fetched idea and not enough to transform that idea into patentable subject matter.

In Europe, patent law expressly excludes computer programs and business methods from patent protection unless the invention defines technical features that solve a technical problem in an unobvious way.

Filing Patents to gain access in the fintech sector is a good strategic move. Walmart and other important business entities just file patents with two viewpoints. One viewpoint is very obvious to create a playing field for all other players in the market. Another not so discussed pointer is defensive publication of the technology so the publication itself becomes prior art and no other patent applicant is able to bag the coveted prize of owning a patent.

Freecharge, a digital payments firm owned by Snapdeal, has applied for patents for its technological innovation. It has created an alternative to the OTP authentication process. The authentication solution named ‘On The Go Pin’ aims to make both online and offline transactions faster by cutting the delay caused in receiving the OTP through text message with a pin that is within the phone and keeps changing every few seconds. 

Freecharge’s patent filing is regarded as a welcome token for India’s modern online industry, represented by big companies like Flipkart, Snapdeal, and Paytm. All of these companies invest much money in research and development to develop various breakthrough technologies. However, this is the first time anyone has patented technology. 

The trend of patenting new technology is slowly catching up, not only to protect it against theft, but also because a patented technology, even with pending registration, becomes a highly valuable intangible asset for the company during fund raising.

Trademarks

A start-up should protect its brand from the beginning if it wants to grow big. The Trademark Act, 1999 provides that every individual/owner/company should have a trademark for the name/logo/brand. Fintech companies are strongly advised to invest in their trademark’s reputation, as they ensure high-quality customer service. A strong brand/name/logo enables fintech companies to differentiate their product from their competitors’ products.

It also helps a fintech company to acquire or merge or to get acquired based on a ‘proposed use’. The importance of trademarks is of the utmost importance as they prevent third party use and help ensure that the trademark has an economic value that can be used commercially to obtain benefits.

Investors looking to capitalise on the industry boom are funding the development of more and more new products and solutions. According to research from London & Partners, over £825 million was pumped into UK fintech companies in 2017, while Forbes reported that US-based fintechs raised $6.2 billion in 2016. This increase in fintech products has unsurprisingly caused a similar increase in trademark registrations. In 2016, UK fintech companies registered 4,228 trademarks in total – a figure that has risen by more than 25% since 2011. The rate at which fintechs are registering trademarks shows no sign of slowing. Recognising how easy it is for emerging competitors to copy financial products in what is a highly competitive industry, these businesses have sensibly decided to protect their intellectual property before it’s too late. 

This focus on IP protection pays off when fintech companies are looking for investments or negotiating acquisitions. Potential investors or buyers will carefully consider what brand protection is in place during the due diligence process, as these companies’ IP assets are often their most valuable assets. Hence, a fintech company’s intellectual property will have a huge impact on market valuation.

Copyrights

Copyright automatically extends to computer code, visual user interface functions, audio, video instructions, application programming interface (API) structure, and other works. Computer code can cover details such as source code, pseudocode, machine code, and specially developed hardware or firmware. Copyright is a significant intellectual property asset for a FinTech company, especially if the program design offers efficient computation and ease of use.

FinTech companies may also benefit from placing digital locks on copies of their works to provide additional security. Circumvention of digital locks is an offence in some jurisdictions and may provide relief against unauthorised parties. FinTech companies should be vigilant with policies for developers incorporating third-party copyright, even if inadvertently, as it may impact ownership of the technology and freedom to operate. Employees or a contracted developer, for example, may incorporate third-party source code without authorisation which may impact ownership.

Copyright is a crucial aspect of Start-ups.  They must protect their ideas, which can be expressed in any form. Many Start-ups put much creativity into developing the most attractive and productive website/software/applications that should be copyrighted under the Copyright Act, 1957. As their websites/applications/software is the backbone of most Form Start-ups, special care and attention need to be paid to their protection. If not protected within the correct time frame, the chances are that a rival or competitor may take undue advantage by copying the creator’s ideas.

Trade Secrets 

Registration is not necessary for Trade secrets, but companies must take reasonable steps to keep them confidential. The advantage of this form of protection is that it guarantees absolute security of secret information as long as sufficient confidentiality measures are taken.

Trade secrets include all confidential business information that gives the owner a competitive advantage over other market participants. Trade secrets include manufacturing secrets and trade formulas, practices, processes, designs, instruments, patterns, trading methods, or compilations of information that are not generally known or reasonably ascertainable to others. Unlawful or unauthorized use of the same is considered an unfair practice. India does not have a codified law regulating and protecting trade secrets India. However, trade secrets are regulated by various laws such as contract law, copyright law, principles of fairness, etc.

Industrial Design 

The term design as defined in the Designs Act of 2000 means the features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article and has some aesthetic value. Such a design can be registered according to the Design Law. Any start-up that registers a design from the start can prevent anyone from using it without proper authorization. For example, if a start-up is in the beverage segment, where the beverages are served in a uniquely shaped bottle that is developed through great mental effort. If such a bottle design is registered under the Design Act, the start-up has the right to prevent anyone from copying the design and can also use it commercially.

Enforcement of IP

There are three channels for enforcing intellectual property – police, customs, and justice. Trademarks and copyrights can be enforced under civil or criminal law, while patents and designs can only be enforced under civil law.

Problems with the enforcement of IP are:

• Systemic and capacity problems of the police force, compounded by a lack of awareness of the protection of intellectual property among the public;
• Delay by the judicial system in the dispensation of justice. In several cases, courts take years to come to a final decision. Indian courts issue temporary injunctions and, in some cases, permanent injunctions that give rights holders immediate relief against infringers.

Strategies for protection of IP for start-ups

Make IP protection the foremost priority

Start-ups cannot afford the full protection available under the intellectual property regime. The first step for a start-up is to assess and prioritize the IP rights involved in its business. Depending on the industry, IP rights play an important role. Failure to identify or prioritize IP rights can create problems for the start-up business, especially when negotiating with prospective investors or when getting out of business. Sometimes IP rights or registrations are the only assets available with the start-up.

Register IP

It is important to note that certain intellectual property rights, such as patents and designs, must be registered before protection can be claimed under the relevant laws. On the other hand, certain IP rights, such as trademarks and copyrights, do not have to be registered for protection. However, a registered IP right has a higher value and serves as evidence of the use of the IP rights in courts and before law enforcement authorities.

Due Diligence of IP Rights

It is essential for every start-up that does not violate another person’s IP rights. This ensures security against unjustified legal disputes or legal steps that could affect business operations. This makes it all the more important for Start-ups to make careful IP decisions in the early stages and to conduct proper due diligence on the IP rights they are using or planning to use.

Proper Documentation

It should be noted that proper documentation in the form of agreements such as nondisclosure agreements, employment agreements, assignment agreements, etc can make all the difference between the success or failure of any Start-ups. Typically, intellectual property is created either by the founders or a key employee, or a third party.  Accordingly, the Start-ups have to ensure that everything created on behalf of the start-up belongs to the startup and not to the employee or a third party. In addition, it is advisable to conclude detailed assignments, license or user agreements, and care should be taken to take precautions for any IP rights problems after termination.

Conclusion 

With the introduction of Atmanibhar Bharat by Govt of India, it is a once in a lifetime opportunity for setting up the business or starting new start-ups. However, the immediate need for an hour requires entrepreneurs to be aware of the extreme importance of intellectual property rights and the need for a proactive approach towards protecting their intellectual property rights. To change the entrepreneurs’ mindset, they must understand the importance of developing an intellectual property protection strategy right from the start. It cannot be denied that there might be a cost associated with protecting these rights. However, the price is more like an investment as IPR is an asset that provides numerous economic benefits for the entrepreneur when protected from the start.

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