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Trademark issues vis-à-vis style and brand names in the world of fast fashion

By
Rachit Garg
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0

It has been written by Anjali Baskar, pursuing a Diploma in Intellectual Property, Media and Entertainment Laws from LawSikho. It has been edited by Ruchika Mohapatra (Associate, LawSikho).

It has been published by Rachit Garg.

Introduction

Trade or brand names are generally confused with trademarks, whereas they differ from a legal standpoint. A person may name their brand or company differently from the mark they register officially. Another term that has been colluded with these two is style name, which is how consumers can differentiate between their products within the same collection having different patterns, cuts and washes. Style names like “Birkin” (by Louis Vuitton) and “Speedy” (by Hermès) are increasingly being used by fashion brands as part of their social media strategy, creating campaigns with hashtags bearing these names. They usually are names of men, women and geographical indications. 

The fast fashion world with retailers like H&M and Zara has been criticized for its tendency to quickly copy high fashion pieces, while the many lawsuits being filed against them for copyright, trademark and design infringement are in vain, because US law does not prohibit brands from copying each other. This debate, however, often overlooks the fact that brand and style names are also being slightly altered and sold as the real brand name. Luxury or designer brands also are greatly appreciated in the fashion industry because the name of the creator is attached to it, so using their name/goodwill or the established brand name without their authorization is a major problem happening all over the globe. Currently, India does recognize copyright, trademark, patent (for its functional aspects, which has been disputed) and design protection for clothes and accessories. Interestingly, the US does not grant copyright protection to fashion apparel, because they believe it does not include any artistic expression.

Is Style Name a Trademark?

Sections 27 and 29 of the Trademarks Act, 1999 can be used to sue for trademark infringement for registered and unregistered trademarks, but this only includes brand and not style names. Sections 2(zb), 11, 13, 14 make no mention of style names being included or excluded as a trademark, so we can assume the present Indian legal position to not consider style names as a trademark. A landmark case in Australia held that most style names cannot be entitled to trademark protection, and thus even if other companies use the exact same name for their products, it would not be considered an infringing use. 

Swimwear brand Triangl released their bikini collection with the style name “Delphine”, which Pinnacle had already trademarked. Pinnacle contended that style names are sub-brands, and sub-brands are considered as marks, and thus style names should be protected, which the Court disagreed with. Pinnacle explained that a brand hierarchy paradigm usually consists of several brands within the company, like a head brand, family brand, individual brand and a modifier. Triangl did acknowledge that they used the word “Delphine” for their bikini line with a different style than their other ones, but that it was simply used to distinguish product lines between the same company and not distinguishing their goods from another person’s company as it did not indicate commercial origin. Thus, they claimed the word was not used as a mark, but simply a designation. The Court agreed with this, because the word “Delphine” did not use a different font size from the names of the colors and floral patterns. The Court stated that the word DELPHINE was not used without a more prominent display of TRIANGL. “Delphine” products had different names and were part of a wider range of thirty-five styles, which also possessed different titles, as seen on their website under the “View All” tab. Thus, the Court clarified that the brand name TRIANGL was used as a mark to identify the origin or source of the bikini. Therefore, the Court laid down the rule that style names are not to be protected unless they are specifically used in the context of a trademark.

When it comes to who exactly files these cases, it is mostly smaller or individual trademark owners and not competitors, who might not be in the business of selling clothes or bags, because they want to scour the market looking for infringers, to file suits and collect damages in case someone uses their style name. In case the style name is owned by a smaller chain of a big brand, they will sue other chains in order to get the company’s attention, even if they lose this case. In Europe, trademark infringement suits do not only require the condition that the defendant’s mark is identical to that of the complainant. They also want evidence that using this mark would cause consumer confusion, such that the mark would be conflated with that of the established brand. The problem is that style names have already been registered as trademarks, which leads to disputes regarding the same in other countries. In Germany, courts have conflicting decisions, wherein some say style name falls under the ambit of a (secondary) mark (in Hamburg and Frankfurt), whereas some consider it to be a mere article designation, so the position is far from settled. The judgments in favor of recognizing style names were generally observed to be older decisions from the German Federal Court of Justice. The Appellate Court of Hamburg ruled that “USHA”, which is also a female first name cannot be considered a primary trademark, as it was not descriptive, but since it indicates origin, it can be considered a secondary mark, also agreed upon by the appellate court in Frankfurt. The District Court of Hamburg and the first and appellate courts of Cologne opined that names like “USHA” and “MARLO” would be identifiable by the customer as belonging to a brand’s product line, but they felt that even if the name was functional and had an indication of origin, they would not be able to protect it as a mark. Interestingly, even in India, hashtags or brand taglines are more likely to be trademarked as they are distinctive and established, like Nike’s #makeitcount being registered in the USA. 

Evolution of style names into style codes like Levi’s “501” have become successful brands, so it makes sense to trademark them only after extensive use by a well-established company, because worldwide trademarking is a highly costly process. As mentioned earlier, the Federal Courts in Germany took a lenient approach to consider a style name as a trademark and even laid down some tips which help companies increase their chances of getting a style name trademarked. They have stated that mere first names or common first names are just model designations and cannot always act as (unregistered) trademarks, unless it is directly associated with the product, example: a name on the button of a shirt or a leather piece fastened on the waistband. Using a first name doesn’t have to mean it is a style name; it could be even a normal brand name as well. It should be prominently seen on the apparel such that customers can spot it and visualize which brand it is associated with. Some also argue that style names are more likely to be trademarked if they are placed on a hangtag, where information about its use and proper care are highlighted. 

The Courts also looked at whether a style name was being used in a catalog or online and their “eye-catching emphasis” while advertising the brand as a factor in deciding whether they should be trademarked. Even when it comes to advertising, designations like the cost, size, apparel description and delivery technique, details of the advertising campaign, like the layout of the ad and the relationship between the style mark to the brand of the company and all other qualitative factors should be taken care of, in order to be trademarked successfully. 

Trademark Infringement for Brand Names (and Their Creators’)

Two COVID-19 face mask-manufacturing companies based in Tamilnadu, India used American corporation Tommy Hilfiger’s brand name as well as their logo and sold it on e-commerce sites like IndiaMart. The Delhi High Court granted an injunction in favour of Tommy Hilfiger. This is also evidence that Indian courts explicitly recognize trademark protection for brand names, besides their inclusion within the Trademarks Act. A personal name is also considered a proper mark, but it is vital to remember that all personal names cannot be considered brand names or style names. In the US, the company making knockoffs is allowed to use the original designer’s name in their advertisement to increase sales, which leads to a lot of brands losing out on protection and should not be followed. Christian Louboutin, one of the world’s most renowned fashion designers in the world has trademarked his name such that it is not used without authorisation on a brand by a company he is not legally associated with.

Conclusion

We can understand from the courts’ views in Australia and Germany that though there are some general factors they look for while deciding whether a style name can act as a mark, like prominence of the brand and prolonged use, the scenario also depends on the facts and circumstances of each case. The general consensus is that it is not likely to be protected under intellectual property laws, and India has also been silent on its recognition. When it comes to brand name, it is recognized mostly in all parts of the world, but recognition of the creator’s name is still disputed unless it is a famous international brand. One proposed solution is for Indian courts to lay down guidelines regarding use of style names, as it is becoming prominent in the age of digital marketing. When it comes to brand names, the US should crack down more heavily on the fast fashion industry who are using names of brands as well as that of their creators and designers on their counterfeit products, thus infringing upon their trademark, goodwill and reputation established in the market. In the author’s opinion, not expanding trademark protection to style names or even designs lead to people losing out on recognition, which gives them less incentive to be creative and innovative. Obviously, if the counterfeit brands are less established than the big brands, they might not have the money to spend on litigation, so they can pursue a faster and cost-efficient alternative route to settle.

References

  • Allison B Pitzer, ‘Unfashionably Late: Protecting a Designer’s Identity after a Personal Name Becomes a Valuable Trademark’ (2011) 35 S Ill U LJ 309 
  • Ashley E Hofmeister, ‘Louis Vuitton Malletier v. Dooney & (and) Bourke, Inc.:
Resisting Expansion of Trademark Protection in the Fashion Industry’ (2008) 3 J Bus & Tech L 187 
  • Chavie Lieber, ‘Fashion brands steal design ideas all the time. And it’s completely legal.’ (Vox, 27 April 2018) <https://www.vox.com/2018/4/27/17281022/fashion-brands-knockoffs-copyright-stolen-designs-old-navy-zara-h-and-m> accessed 16 November 2021
  • David A Westernberg, ‘What’s In a Name – Establishing and Maintaining Trademark and Service Mark Rights’ (1986) 42 Bus Law 65 
  • Dr Sandra Müller, ‘An Ongoing Challenge for Fashion Brands: Legal Issues with Style Names’ (The Fashion Law, 22 October 2020) <https://www.thefashionlaw.com/an-ongoing-challenge-for-fashion-brands-legal-issues-with-style-names/> accessed 15 November 2021
  • Dr Sandra Müller, ‘Germany: Tough Times For Fashion Brands In Germany? A Brief Update On The Legal Issues With Style Names’ (Mondaq, 19 December 2014) <https://www.mondaq.com/germany/trademark/361754/tough-times-for-fashion-brands-in-germany-a-brief-update-on-the-legal-issues-with-style-names> accessed 16 November 2021
  • Elizabeth Vulaj, ‘Will Fast Fashion Go out of Style Soon? How Couture Designers, Celebrities, and Luxury Brands Fighting Back May Change the Future Legal Landscape for Mass Affordable Retailers’ (2020) 36 Santa Clara High Tech L J 65 
  • Erica S Schwartz, ‘Red with Envy: Why the Fashion Industry Should Embrace ADR as a Viable Solution to Resolving Trademark Disputes’ (2012) 14 Cardozo J Conflict Resol 279 
  • Floyd A Mandell, ‘Personal Name Trademarks – Your Name May Not Be Your Own’ (1980) 70 Trademark Rep 326 
  • Julia Brucculieri, ‘How Fast Fashion Brands Get Away With Copying Designers’ (Huffpost, 4 September 2018) <https://www.huffpost.com/entry/fast-fashion-copycats_n_5b8967f9e4b0511db3d7def6> accessed 16 November 2021
  • McCarter & English, LLP, ’Fast fashion and IP regulation: will fast fashion kill the golden goose?’ (World Trademark Review, 24 May 2018) <https://www.worldtrademarkreview.com/anti-counterfeiting/fast-fashion-and-ip-regulation-will-fast-fashion-kill-golden-goose> accessed 16 November 2021
  • Michelle Brownlee, ‘Safeguarding Style: What Protection Is Afforded to Visual Artists by the Copyright and Trademark Laws’ (1993) 93 Colum L Rev 1157 
  • Paige Holton, ‘Intellectual Property Laws for Fashion Designers Need No Embellishments: They Are Already in Style’ (2014) 39 J Corp L 415 
  • Pinnacle Runway Pty Ltd v Triangl Ltd [2019] FCA 1662; ‘No, (Most) Style Names Are Not Trademarks, Says Australian Court’ (The Fashion Law, 23 October 2019) <https://www.thefashionlaw.com/style-names-are-not-trademarks-says-australian-court/> accessed 15 November 2021; Jonathan Feder & Bianca D’Angelo, ‘Style is Everything, But Style Names Aren’t “Trademarks”’ (The National Law Review, 18 October 2019) <https://www.natlawreview.com/article/style-everything-style-names-aren-t-trademarks> accessed 16 November 2021
  • Robin M. Nagel, ‘Tailoring Copyright to Protect Artists: Why The United States Needs More Elasticity in its Protection for Fashion Designs’ (2020) 54 U Rich L Rev 635
  • Safia A Nurbhai, ‘Style Piracy Revisited’ (2002) 10 JL & Pol’y 489; Kevin V Tu, ‘Counterfeit Fashion: The Interplay between Copyright and Trademark Law in Original Fashion Designs and Designer Knockoffs’ (2010) 18 Tex Intell Prop LJ 419 
  • Seth DiAsio, ‘Fashion Has No Function: Diminishing the Functionality Bar to Trademark Protection in the Fashion Industry’ (2019) 38 Miss C L Rev 28 
  • Tiffany din Fagel Tse, ‘Coco Way before Chanel: Protecting Independent Fashion Designers’ Intellectual Property against Fast-Fashion Retailers’ (2016) 24 Cath U J L & Tech 401 
  • Tommy Hilfiger Europe B.V. v M/s Taqua Textiles & Ors, CS (COMM) 160/2020, http://delhihighcourt.nic.in/writereaddata/orderSan_Pdf/mug/2020/66504_2020.pdf
  • Will Fast Fashion Go out of Style Soon? How Couture Designers, Celebrities, and Luxury Brands Fighting Back May Change the Future Legal Landscape for Mass Affordable Retailers, 36 Santa CLARA HIGH TECH. L. J. 65 (2020). 
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Right to be forgotten

By
Sneha Mahawar
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0

This article is written by Pulkit Chaudhary and pursuing an MBA with a Specialisation in Data Protection and Privacy Management from the Swiss School of Management. This article has been edited by Ruchika Mohapatra  (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

With the advancement of technology in the last few decades,  businesses have reached levels that no one could have thought of. In order to reduce the burden of personnel on miscellaneous tasks such as sending automated emails/calls, bot chats, etc. businesses are now switching to and are deploying AI (Artificial Intelligence) and ML (Machine Learning). In order to carry out these tasks, an enormous volume of data is processed which includes the personal data of the data subjects.

The world of data, data protection, and compliance offer a bundle of rights to the data subjects whose data is collected and processed by the companies for the betterment of the services they offer to data subjects with the ultimate motive of earning huge profits. This can range from improving the product, services, market analysis, and surveys to the sale and purchase of the data as data brokers or information brokers (organizations/individuals who are specialized in collecting and circulating the data for processing).

In order to deal with such a situation and retention of some control over the data by the data subjects, the European Union General Data Protection Regulation (hereinafter “GDPR”) came up with provisions providing substantial protection to the rights of the data subjects against the unauthorized and unlawful use of their personal data which is now has become the benchmark and grundnorm for many data protection legislation around the globe.  

Some of the rights of data subjects as stated above are as follows:

Right to access information (Article 15 of GDPR) 

This right enables that data subject to access the personal information provided by her to the data controller for the purpose of processing.

Right to rectification of the information (Article 16 of GDPR)

This right enables the data subject to get her information corrected/rectified if incorrectly provided by the data subject or incorrectly recorded by the data controller.

Right to restrict processing (Article 18 of GDPR)

The data subject can also restrict the processing of her personal data in exceptional circumstances such as mentioned below:

  1. Where there is unauthorized use of the data collected i.e., other than the purpose for which it was initially collected.
  2. Where the data processing is the inaccurate data 
  3. Where the data is being processed after fulfillment of the purpose for which it was collected.

Right to be informed (Article 12 of GDPR)

The data controllers are obliged to provide the relevant information to the data subjects as and when required (for example in case of a change of privacy policy/data breach etc.) or requested by the data subjects (for example-request to know the status of a complaint made to the DPO).

Right to be forgotten under the EU GDPR

This right can also be termed the “Right to erasure”. The right to be forgotten emerged for the very first time in a decision by the European Court of Justice in the year 2014. The court observed that the data protection law of Europe enables the data subjects to question the web search engines to remove certain personal information relating to the data subjects. There are some relevant factors under which the right to erasure can be enforced by the data subjects.

The Right to be forgotten is defined under Article 17 of the GDPR as:

The right to be forgotten is the most important right available to the data subject where she can oblige the data controller to erase her personal data completely which is collected by the data controller for the purpose of processing. However, this can be exercised in the following circumstances:

  1. When the data collected by the processor is not required anymore for the purposes of processing 
  2. Where the erasure of personal data is necessary to meet a legal obligation.
  3. Where the data has been processed unlawfully.
  4. Where the data subject objects to the processing of her personal data being used for profiling for the purposes of direct marketing.
  5. When the processing of the personal data overrides legitimate grounds and the rights of the data subjects 
  6. Where the data subject withdraws her consent given for one or more specific purposes of processing within the meaning of Article 6 (1)(a) of GDPR or where the consent is for one or more explicit and specific purposes relating to revealing of racial or ethnic origin, political opinions, religious or philosophical beliefs, or trade union membership, and the processing of genetic data, biometric data for the purpose of uniquely identifying a natural person, data concerning health or data concerning a natural person’s sex life or sexual orientation is withdrawn within the meaning of Article 9(1)(a) of GDPR. 

Situations where the right to be forgotten cannot be exercised (exceptions)

  1. Where the data is used for the purpose of exercising the right to freedom of expression and information. (Article 17(3)(1) of GDPR).
  2. In the case of legal obligations imposed by the state or the union law to which the controller or processor is subject or in the case of processing activities that are undertaken in the interest of the general public or while exercising the official authority vested in the data controller.
  3. The right to be forgotten cannot be applied to the situation where a special category of personal data is processed in relation to and for the purposes of preventive or occupational medicine, medical diagnosis, the assessment of the working capacity of the employee the provision of health or social care or treatment or the management of health or social care systems and services on the basis of Union or Member State law or pursuant to contract with a health professional. (Article 9(2)(h) of GDPR).
  4. Where the processing of such personal data is necessary for healthcare like protection against cross border health threats or securing/maintaining standards of healthcare products and medical devices in compliance with the union or state laws providing for the measures safeguarding rights and freedoms of the data subjects with emphasis on professional secrecy. (Article 9(2)(i) of GDPR)
  1. For enforcing and defending the legal claims. 
  2. For the purposes of scientific or historical research or when such processing is necessary for the public interest.

Position in India 

During the last few decades, privacy was not an important issue in India. With the evolution of technology and the emergence of smart devices, the amount of personal data which is being processed in order to deal with competitive markets and for providing a better user experience to the data subjects, the dominance of big tech giants/ government agencies against the data subjects and for protection of their rights, the situation called for recognizing the right to privacy as a fundamental right.

Hence, addressing the issue of Privacy in the case of Justice K.S Puttaswamy v. Union of India (2017) 10 SCC 1, the Supreme Court of India came up with the observation of recognizing the right to privacy as a fundamental right as part and parcel of the right to life and personal liberty within the meaning of Article 21 enshrined in Part III of the Constitution of India.

It is pertinent to mention here that the Data Protection and Privacy are not codified as of now but the Personal Data Protection Bill, 2019 (Now Data Protection Bill) was referred to Joint Parliamentary Committee and now after rounds of discussions, the bill can be tabled in the Parliament of India any time soon, most probably in the Monsoon or Winter Session. Therefore, at present, though there is no straight-jacket formula for enforcing the right to privacy or the right to be forgotten in particular, the same is enforced via Writ Petitions before the Constitutional Courts of India. Some of the landmark cases where the different High Courts and Hon’ble Supreme Court dealt with the right to privacy and also enforced the same are as follows:

X v. & Ors. (Delhi High Court)

In the aforesaid case, the Hon’ble High Court of Delhi dealt with two principles of Data Privacy namely data anonymization and the right to be forgotten. 

Facts of the case

In this case, the petitioner was approached by a movie production house and she was lured into a movie trailer that consisted of complete frontal nudity, with a promise to give her the lead role. However, the aforesaid movie project failed and was never produced.

The producer of the project after some time uploaded the impugned video on YouTube which was discovered by the petitioner in December 2020 aggrieved by this incident, the petitioner approached the Hon’ble Delhi High Court.

Observations

In the present case, it is explicit videos that are being circulated, having a clear and immediate impact on the reputation of the person seen in the videos in a state of nudity.

“Right to privacy includes the right to be forgotten and the right to be left alone as “inherent aspects”, this Court is also of the opinion that the right to privacy of the plaintiff is to be protected, especially when it is her person that is being exhibited, and against her will.”

W.P.(MD). No.12015 of 2021 (Madras High Court)

Facts of the Case

In this case, the accused was charged with various offenses of the Indian Penal Code, 1860 (IPC) where he was convicted by the trial court and was eventually acquitted by the Appellate Court on merits. However, the petitioner in this instant case was aggrieved by the fact that although he was acquitted from the aforesaid case even then, if anybody types his name on a Google search and is able to access the judgment wherein his name is displayed as accused it has caused damage to his reputation. Hence, the petitioner approached the Hon’ble Madras High Court for adequate relief.

Observations

The Hon’ble High Court in this case observed that, If the essence of this Judgment [(K.S Putthaswamy (supra)] is applied to the case on hand, obviously even a person, who was accused of committing an offense and who has been subsequently acquitted from all charges will be entitled to redacting his name from the order passed by the Court in order to protect his Right of Privacy. This Court finds that there is a prima facie case made out by the petitioner and he is entitled to redact his name from the Judgment passed by this Court in Crl.A. (MD). No.321 of 2011″  

The Court also observed that “It is also informed to this Court that a new Right called as Right to be Forgotten is sought to be included in the list of Rights that are already available under Article 21 of the Constitution of India”.

Xxx V. Union Of India And Connected Matters (Kerala High Court)

In a very recent development relating to the Right to be forgotten under the Indian Data Protection Regime and Justice Dispensation System, the Hon’ble Kerala High Court came up with the idea of drafting an Information Management Policy that could resolve the issue of masking parties’ names in its orders and judgments which can lead to infringement to the hard-earned reputation and social status of the parties.

Conclusion

In the present era of the digital world, social media and throat cut competition of businesses including aggressive marketing strategies, expectations from the Indian Personal Data Protection Bill, 2019 (Now Data Protection Bill) are sky-high. Though the general public/ data subjects may not be much aware of the personal data, its misuse, compliance requirements, or their rights relating to personal data, the Data Protection Bill of India, hopefully, will address every data protection and privacy issue extensively like the GDPR. Even without any codified legislation relating to Data Protection and Privacy, the Indian Courts are brilliantly dealing with many sensitive issues of Privacy through their proactive approach towards enforcement of the Fundamental Right to Privacy of the subjects under various circumstances as discussed above.

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All about 91st amendment of the Indian Constitution

By
Rachit Garg
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0

This article is written by Astitva Kumar, an advocate. This article is the result of extensive research and analysis of the Constitution (Ninety-first Amendment) Act of 2003, in which the author also attempts to outline the defection laws in our country.

It has been published by Rachit Garg.

Introduction 

The 91st Amendment to the Constitution came into force on July 7, 2004. As per the amendment, the size of ministerial councils at the Centre and in the states could not exceed 15% of the number of members of the Lok Sabha or state legislatures from then on. 

Defection laws have become a major source of concern in recent years, because of leaders’ full disregard for the country’s defection guidelines. Given that defection has always been a contentious topic in India since the country’s independence.

Consider the example of the Madhya Pradesh Government’s crisis in March 2020, when Jyotiraditya Scindia and 22 members of the Legislative Assembly resigned, causing Congress to lose the floor test, and the BJP, which had the most seats came to power, and Shivraj Singh Chauhan was elected as the Chief Minister of Madhya Pradesh.

Detailed analysis of the Constitution (91st Amendment) Act, 2003

The Constitution (91st Amendment) Bill was proposed by a committee led by Pranab Mukherjee, who noted that the exception granted by allowing a split, stated in paragraph three of the Schedule, was being extensively abused, resulting in several divisions in numerous political parties. Furthermore, the committee found that the promise of personal benefit influenced defections and resulted in political horse-trading. The Lok Sabha passed the Bill on December 16, 2003, and similarly, the Rajya Sabha passed the Bill on December 18, 2003. On 1st January 2004, Presidential approval was gained, and the Constitution (91st  Amendment) Act, 2003 was notified in the Indian Gazette on 2 January 2004.

Article 75 and Article 164 of the Indian Constitution were amended to include two additional clauses (1-A) and (1-B). The new Clause (1-A) limits the size of the centre and state ministries. As per new Clause (1-A), the number of total ministers in the Central Council including the Prime Minister, shall not exceed 15% of the Lok Sabha’s total members.

Article 75 Clause (1-B) provides that a member of either House of Parliament belonging to any party who is disqualified for membership in that House due to defection under paragraph of the Tenth Schedule is also disqualified for appointment as a minister under Clause (1) of Articles 75 and 164 of the Constitution until he is elected again.

The amendment deleted paragraph 3 of the Tenth Schedule, which provided that if one-third of a political party defected, they would not be disqualified under the defection statute.

The above amendment also added a new Article 361-B to Part XIX of the Constitution that stated: “A member who has been disqualified to be a member on the ground of defection under paragraph 2 of the Tenth Schedule shall be disqualified to hold any remunerative posts (Chairman of incorporated bodies) during the timespan of his disqualification.”

The term “remunerative political post” refers to any position under the Central or State Government for which the payor remuneration is paid from the public revenue of the Government of India or the Government of any State. It also covers anybody, whether incorporated or not, that is completely or substantially owned by the Government of India or a State Government that pays the salary or remuneration for such post.

Key aspects of the 91st Amendment Act

To limit the number of the Council of Ministers, prohibit defectors from holding public office, and tighten the anti-defection statute, the 91st Amendment included the following provisions:

  1. The overall number of ministers in the Central Council of Ministers, including the Prime Minister, should not exceed 15% of the Lok Sabha’s total strength.
  2. Any member of either House of Parliament who is disqualified from serving as a minister due to defection is likewise barred from serving as a minister.
  3. The total number of ministers in a State Council, including the Chief Minister, cannot exceed 15% of the legislative Assembly’s total strength. The total number of ministers of a state, including the Chief Minister, shall not be less than 12.
  4. A member of either House of a state legislature who is disqualified from serving as a minister due to defection is likewise prohibited from serving as a minister.
  5. A member of either House of Parliament or the House of a State Legislature from any political party who is disqualified for defection from any political party is also barred from holding any remunerative political office.
  • Any office under the Central Government or a state government where the salary or remuneration for such office is paid out of the concerned government’s public revenue; 
  1. The exemption from the disqualification clause in the Tenth Schedule (Anti-Defection Act) has been abolished. This means that the divides no longer shield the defectors.

History of anti-defection law 

The word “defection” is derived from the Latin word “Defectio.” Defection is defined as quitting or changing one’s loyalties to a political party in which one was formerly a member. The defection of elected officials from one political party to another political party is prevalent in almost all democratic regimes across the world. India is the world’s largest democracy, is no exception to the problem of defection

Defection has a longstanding history in India, dating back to the time of pre-independence, when Shyam Lal Nehru, a member of the national legislature, shifted allegiances from Congress to British India. Another notable instance came in the year 1937 when a member of the Uttar Pradesh Legislative Assembly defected from the Muslim League to join the Congress.

Aaya Ram Gaya Ram (Ram has arrived, Ram has gone) is a popular Indian political term that refers to political horse-trading, usually turn into coat, and floor crossing. Gaya Lal, a Member of the Legislative Assembly from Haryana’s Pataudi Vidhan Sabha Constituency, coined the term in 1967. He ran as an independent candidate and won, then joined the Indian National Congress (INC), changing his political allegiance three times in one day. Even after this occurrence, Gaya Lal, a regular floor-crosser, switched parties and stood for office under several banners, including the Akhil Bhartiya Arya Sabha in 1972, the Bharatiya Lok Dal under Chaudhary Charan Singh in 1974, and became the inspiration for the name Aaya Ram Gaya Ram. Rajiv Gandhi proposed the Anti-Defection Bill, which was passed overwhelmingly by both houses and went into force on March 18, 1985, after getting the president’s assent.

By the 52nd Amendment to the constitution in 1985, the Anti-Defection clause was inserted into the Constitution through the Tenth Schedule. The law’s principal goals were to combat political corruption, which was viewed as a vital first step in combating other types of corruption in the country. 

According to former Central Vigilance Commissioner U. C. Aggarwal, the political arena must be free of corruption in order to motivate others at lower levels to do the same, to strengthen democracy by bringing stability to politics, ensuring that the Government’s legislative programs are not jeopardized by a defecting parliamentarian, and to make members of parliaments more responsible and loyal to the parties with which they were aligned at the time of their election. Many people feel that their party affiliation is crucial to their electoral success. Following its enactment, certain politicians and political parties took advantage of the law’s flaws. There was evidence that the legislation failed to achieve its goal of preventing political defection and, in fact, legitimized widespread defection by exempting activities that it labelled “splits” from its prohibitions. The Speaker of the Lok Sabha refused to allow the defecting members of the Janata Dal’s breakaway section to explain their position. Another component of the statute that has been criticized is the Speaker’s involvement in judging instances involving political defections. When it came to awarding official status to various factions of political parties, the Speakers of several houses were questioned about their impartiality. Due to his or her political past with the party from which he or she was elected as Speaker, questions have been made concerning the Speaker’s nonpartisan duty. The Janata Dal (S) was accused in 1991 of undermining the anti-defection law’s spirit by maintaining defecting members in cabinet positions. Later, all of the opposition members of parliament presented an affidavit to India’s President, pleading with him to fire the ministers. Finally, in response to efforts to restore the Speaker’s and House’s dignity, the Prime Minister relieved the defecting members of their ministerial jobs. Soon after, the Chavan committee proposed that a member who switches parties for monetary gain or other types of greed, such as a promise of an executive post, be dismissed from parliament and prevented from contesting elections for a certain period of time. Member Parliaments and Member Legislative Assembly are disqualified under Articles 102(2) and 191 of these rules. If legislators are disqualified under the Tenth Schedule, they may also be disqualified under these provisions of the Constitution.

Significance of anti-defection law 

  1. It improves the stability of Parliament and state legislatures by preventing legislators from switching parties.
  2. It reduces political corruption, which is a critical first step in combating the country’s other forms of corruption.
  3. It strengthens democracy by establishing political stability and guaranteeing that the government’s legislative programs are not harmed by a defecting member.
  4. It makes members of parliament more accountable and faithful to the parties with which they were aligned at the time of their election, as it is a belief that many believe that party allegiance plays a significant role in their election success.

Concerns regarding anti-defection law 

  1. The Anti-defection statute has failed to prevent defections in the past. This is due to the fact that it does not distinguish between disagreement and defection. For the sake of party loyalty, it limits the legislator’s right to dissent and freedom of conscience.
  2. The distinction drawn between individual and collective defection is completely irrational. Even the distinction it creates between independent and nominated members is illogical. If the former joins a political party, he is disqualified, whereas the latter is permitted to do so.
  3. It encourages horse-trading of legislators, which clearly contradicts the values of a democratic system.

The way forward

  1. To eliminate political pressure and to protect the political system’s democratic values, an independent body for deciding defection cases is required.
  2. The Supreme Court has proposed that Parliament should establish an independent panel, led by a retired judge from the higher judiciary, to decide defection cases quickly and impartially within a predetermined time frame.
  3. Since the majority of defections are caused by dissatisfaction among political party members, therefore actions must be taken to strengthen internal party democracy.
  4. Reforms such as bringing political parties under RTI, improving intra-party democracy,  are required.
  5. The Chairman/Speaker of the House, as the final authority in cases of defection, does have an influence on the doctrine of separation of powers. As a result, delegating this authority to the higher judiciary or the Election Commission may reduce the possibility of defection.

Anti-defection law under 10th Schedule of the Indian Constitution

The Statement of Objects and Reasons of the 52nd Amendment to the Constitution outlined the reasons for the addition of this Schedule as follows, “The evil of political defections has been a matter of national concern. If it is not combated, it is likely to undermine the very foundations of our democracy and the principles which sustain it. With this object, an assurance was given in the address by the President to Parliament that the government intended to introduce in the current session of Parliament an anti-defection Bill. This Bill is meant for outlawing defection and fulfilling the above assurance.”

The (52 Amendment) Act 1985 added the Tenth Schedule to the Constitution, and the reasons behind the amendment were to prevent political defections motivated by the lure of office or other similar considerations that potentially harm the fundamentals of our democracy. The proposed solution was to bar any Member of Parliament or the State Legislature who was proven to have defected from continuing to serve in the House. The grounds for disqualification are specified under Paragraph 2 of the Tenth Schedule. 

Overview of the 10th Schedule 

This short piece of legislation has eight paragraphs: the first lays out definitions, the second lays out disqualifications, the third (now deleted by the 2003 amendment to the constitution) lays out splits within the party, the fourth layout a disqualification that does not apply in the case of mergers, the fifth lays out certain exemptions, the sixth and seventh lays out the person who will resolve disputes, and the eighth lays out the person who will decide disputes and bars courts from hearing.

Almost all of these provisions have been brought before the courts of the land for adjudication and interpretation. Paragraph 2, which sets forth a member’s disqualifications, is perhaps the one paragraph that has been analysed by the courts the most. The courts have adopted strong stances against acts of defection, keeping the uncertainty of Indian politics in mind.

Power of review to Speaker under Tenth Schedule

The Supreme Court held in Dr. Kashinath G Jalmi and others v. the Speaker and others (1993) that the Speaker/ Chairman has no authority of review under the Tenth Schedule and that the Speaker order is finally subject to judicial review, as held in Kihoto Hollohan. 

Lacunas in defection machinery

Rivalry among members of a party can occur for a variety of reasons, including internal disagreement against senior leaders’ beliefs or a fight for dominance, and as a result, elected members and other elected members leave these parties to join the opposition. This has the potential to undermine our nation’s democratic character because democracy requires a stable administration. Frequent political crises can breed distrust among the public and pose a threat.

The defection mechanism in India has a number of shortcomings, especially with the recent example of the Madhya Pradesh government crisis, in which Jyotiraditya Scindia and 22 MLAs left the party, leading to the fall of the Kamal Nath government, and the Kerala legislative assembly case in 2019.

In order to promote Parliamentary Democracy, anti-defection rules were established in the Indian Constitution as a set of guidelines for elected officials to follow. When a person is nominated as a member of a political party and stands for office using that party’s symbol, he owes that party his allegiance. However, many leaders are leaving their parties to join the opposition, which can lead to the collapse of the government in that state, causing political instability. As a result, lawmakers must behave in accordance with the whip and the values of the party.

Suggested reforms before 91st Amendment

Dinesh Goswami Committee (1990) on electoral reforms

  •  This Committee proposed the present disqualification provisions.
  • The President/Governor was suggested as the determining authority (acting on the opinion of the Election Commissioner).

Haleem Committee (1998)

  • It requested a full clarification of the terms “voluntarily giving up political party membership” and “political party.”
  • Expelled members will face certain limitations, such as the future prohibition on holding government posts.

170th Law Commission Report (1999)

  • It was suggested that pre-election electoral fronts be treated as political parties under the anti-defection statute.
  •  The use of whips should be limited to situations where the government is threatened.
  • It also suggested that the rule exempting splits and mergers from disqualification be removed.

Constitution Review Commission (2002)

  • It urged that the defectors be barred from entering the public office or any other political position for the remainder of their mandates.
  •  A vote cast by a defector to overthrow a government shall be regarded as void.

Judicial pronouncements pertaining to Anti-Defection Law

In Ravi S Naik v. Union of India (1994)

The Supreme Court in this decision granted “resignation by willingly giving up membership” a broader meaning. The Court stated that a person can voluntarily leave a political party even though he has not formally resigned from such party. Even in the absence of a formal resignation from membership, it is possible to conclude from a member’s actions that he has willingly resigned from the political party to which he belongs.”

In G. Viswanathan and Others v. Hon’ble Speaker Tamil Nadu Legislative Assembly and Others (1996)

It was suggested that the act of voluntarily resigning from a political party might be either stated or inferred. When a person who has been kicked out or expelled from the political party that nominated him as a candidate and elected him joins another (new) party, he is willingly giving up his membership in the political party that nominated him for election as such a member.”

Rajendra Singh Rana and Others v. Swami Prasad Maurya and Others (2007)

The speaker in this case had not reached a conclusion on the divide and had accepted it based on a claim made by the members. The Court went on to say that disregarding a petition for disqualification is a violation of constitutional responsibilities, not just an irregularity.

Shri Rajeev Ranjan Singh (Lalan) v. Dr PP Koya JD(U)(2009)

Dr. Koya disregarded a party whip who ordered him to vote against the motion of confidence in this instance. He did not vote because he was absent, and the proof of his sickness was not judged adequate to justify his absence. When a member is bound by the whip, there must be a valid explanation to satisfy the speaker regarding his absence from the house.

Shrimanth Balasahib Patil v. Hon’ble Speaker of Karnataka Legislative Assembly (2019)

In this case, 15 MLAs and members of the Janata Dal Secular resigned from their positions in the legislature. The government was dissolved as a result, and the speaker disqualified the MLAs for a period of time until the assembly’s expiration.

In Kihoto Hollohan v. Zachillhu and others (1992)

The Supreme Court ruled that judicial review could not be obtained prior to the Speaker/Chairman making a decision. Interference would also be prohibited during an interlocutory stage of the proceedings presided over by the Speaker/Chairman. Prior to this case, the Speaker/decision Chairman was regarded as final and not subject to judicial review. The Supreme Court ruled that this clause was unlawful.

Conclusion

To summarise, the 91st Constitutional Amendment Act, 2003 was enacted in the Indian Constitution in order to limit the massive budgets made by states as a result of jumbo cabinets. Despite the fact that the law has had some success but due to some of its flaws, it has not been able to attain the best possible results.

References

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The positive effect of third party involvement in arbitration

By
Rachit Garg
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0

The article has been written by Pooja Gandhi, pursuing a Certificate Course in International Commercial Arbitration and Mediation from LawSikho. It has been edited by Prashant (Associate, LawSikho).

It has been published by Rachit Garg.

Introduction

Arbitration has become the most preferred method to resolve disputes in international commercial transactions and transactional contracts. This is the result of the flexibility provided by this method regarding the choice of the forum that provides control to both parties and provides them an equal opportunity to be heard. It is also an attempt to avoid potential national bias as possible in litigation. More importantly, it’s easier to enforce an international arbitral award as it is well regulated in comparison to a judgment of a domestic court. The other factors that make arbitration a widely preferred dispute resolution mechanism are neutrality, faster procedures, reduction in costs, and confidentiality. 

In the realm of increasing multi-party transactions, the effect of the proceedings on the third party is becoming an increasing problem. This issue was considered in the case of Siemens v. Dutco Construction Company wherein third-party was given the right to intervene in the constitution of the tribunal and it was given the status of “public policy” wherein refusal to include the third party could be a sole ground to overturn the arbitral award. However many commentators have argued that third-party intervention defeats the principles of “procedural party autonomy” as promised by arbitration.

The objective of this article is to provide an insight above joinder and intervention of third parties and its benefits in spite of the barriers associated with it.  

Joinder & intervention

In the case of a multi-party contract, several parties are involved in the subject matter of the dispute. The arbitration arising out of such a contract affects the rights of all the parties involved in it. This will result in concurrent arbitration or non-compliance of arbitration proceedings arising out of an underlying transaction. Therefore it is important to recognize the right of the third party in a multi-party contract. They can be involved in the proceedings either through joinder or intervention. 

Joinder of the third party refers to a situation where the third party is asked to join the proceedings and Intervention of a third party is a situation when the party seeks to join the proceedings on its own motion. This can be either before the commencement of the proceedings or after it. This definition is in pari materia to the definitions in U.S federal practice. It is now clearly understood that joinder is when the existing party involves the third-party in the proceedings in contrast to intervention where the party to the agreement involves itself in the proceedings.

While the distinction in both the scenarios can be clearly understood, the effect rendered on the proceedings by third-party involvement is the same as they enjoy similar rights over enforcement of the arbitral award, i.e.; third-party rights. In both these cases, the third party does not participate in the constitution of the arbitral tribunal. In case of intervention, the party on its own will waive the right but in case of a joiner, the third-party is left with no option, thereby defeating one of the important features of arbitration of actively participating in the constitution of the tribunal. 

Barriers to joinder and intervention

Constitution of the arbitral tribunal

arbitration

The foremost barrier comes at the stage of the constitution of the arbitral tribunal. One of the important features of arbitration is the appointment of the arbitral tribunal by the parties which is done as per the agreed method in the contract. Parties argue that joinder of third-parties can prejudice their right to appoint an arbitrator, and thereafter, their chances of equality and fair decision, since the new party doesn’t get a right to participate in the constitution of the arbitral tribunal.

It is important to understand that such a conservative belief disrupts the confidence of the public at large from arbitration. Irrespective of the appointing authority, the arbitrators provide an unbiased decision towards the dispute, which is also why it is legally enforceable. The arbitrators rule on the fact of the issue and its legal principles and not in accordance with their relationship with the parties. More importantly, in certain scenarios like institutional arbitration, the parties are obligated to limit their choice from a list of arbitrators provided. Therefore the process of joinder or intervention must not be disregarded for this reason. 

Costs

The costs associated with the arbitration, including the cost of arbitrators, are borne by parties. When the parties are joined or intervened- in the absence of any contract, an issue arises whether the cost of arbitrators is split among them or not and up to what extent. The question is easier to answer in case of intervention as it is done by their-party at its own will, thereby cost can be split to the extent of their proceedings. However, the cost in case of joining a third party can prove  to be a scrupulous burden cast on them, without their will. In such a scenario, the party joining them must bear the cost of the proceedings up to their extent.  

Confidentiality

Confidentiality is a key feature of arbitration as most parties choose arbitration to resolve their dispute in a private sphere. And protect their trade secrets, revenue, sensitive data, etc. It is argued that when a third=party joins or intervenes in the proceedings; they become privy to such information that might be private to companies. However, it is important to understand that the parties subject to the proceedings already have knowledge of such information or the affairs at issue ab initio. Alternatively, the third party can be excluded from such proceedings as required by disputing parties. 

Arbitral award

Third-party right over challenging the final award passed by the tribunal is one of the major challenges. Enforcement of arbitral awards is strongly recommended by most states and vacating or challenging the award by disputing parties is not encouraged. It can only be challenged in specific conditions, where misinterpretation of law or fact in issue can be proved or if the award is passed by unfair means. 

To identify such misinterpretation, the parties need to be actively present in the arbitration proceedings, which is not possible by third parties in case of joinder and misinterpretation. Their role is limited to the extent of subject matter involving them, however the award rendered is for the issue at large. In such a case, questioning the award cannot be effective although the award irrevocably affects their interest. 

Third-party rights

Passing an award that visibly affects the rights and interests of third-party without involving them in the proceedings is not just and equitable. Arbitration awards directly affecting the third party cannot be passed as per accepted international law and practice. The problem arises when they are indirectly affected by it. 

The arbitrators are restrained from involving third parties to produce documents or witnesses. However, this precedent must be restrained to involving unwilling parties. It is important to understand that if the tribunal is considering a third-party’s interest in discovering evidence or documents, they must also consider their interest in the outcome of the proceedings. If the third parties are willing to participate in the proceedings and the award will subsequently affect their interest- directly or indirectly, they must be given an equal chance for representation of their case.

Conclusion

Participation of third parties in the arbitration proceedings is not necessarily a negative thing. It can be very fruitful if the basic legal principle such as the principle of equity is rightly followed. There are barriers associated with it, some of which are covered in this article. However it can be rightly interpreted that there is a way out for every problem and there are methods that can be used to overcome them. A creative solution is all that is required to make the proceedings efficient and successful with third party involvement. After all, doing justice is its core principle and if the same is done, there is no scope for objection and all the parties get a happy ending, as deserved. 

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Strategic v. financial buyers in M&A

By
Rachit Garg
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0

It has been written by Samidha Hegde, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions from LawSikho. It has been edited by Ruchika Mohapatra (Associate, LawSikho).

It has been published by Rachit Garg.

Introduction

There are various types of buyers in the market. They can typically be categorized as “Strategic Buyers” and “Financial Buyers”. Both Strategic and Financial Buyers buy equity in companies but this is where the similarities end. There are many fundamental differences between Strategic and Financial Buyers.

When you want to sell a business, it is important to find buyers keeping in mind the goal of the transaction; buyers who align with the long term objectives of the seller, buyers who pay more etc. The seller should take into account all these factors and market their business to the optimal buyers to accomplish the goal of the transaction.

Who are strategic and financial buyers?

Strategic Buyers are companies that operate a similar business or in the same industry as that of the Seller and hence they have the benefit of knowing the industry closely and they don’t tend to diversify or risk buying a company outside of their industry which limits the options available to them. Strategic Buyers can be suppliers, customers or competitors that are looking to expand their business. They tend to acquire for reasons like- growth opportunities, eliminating competitors, removing their existing weakness, improving efficiencies, and enhancing business.

Strategic Buyers are often willing to pay more than financial buyers because they instantly realize synergistic benefits and the underlying profit that can be generated when the businesses are combined, which could not otherwise be possible for the Strategic Buyers on their own. Another reason why Strategic buyers are willing to pay more is that they tend to be well-positioned and have easier access to capital and can make purchases easily in stock or cash. [1]

Financial buyers

Financial Buyers are often Private Equity Firms, Venture Capitalists or Individuals with high net worth. These types of buyers are engaged in the business of investments and have committed capital which is used for acquisitions; they view acquisitions as investments and expect to generate a satisfactory return.

Financial Buyers are usually open to investing in different industries even if that is diverse from existing operations this provides them with several options to choose from [2] and they can conduct extensive financial analysis and a good network of bankers, advisors and lawyers which helps them to swiftly identify potential targets.  However, most Financial Buyers don’t have an existing management in place and are not equipped to run the business therefore they look to buy businesses with strong management. Financial Buyers are ideal if the Seller intends to manage the business after the sale. [3]

Different approaches used for evaluation by strategic and financial buyers

Since Strategic and Financial Buyers have different motivations behind the transaction, one of the key differences between Strategic and Financial Buyers lies in the way they evaluate the business.

What do strategic buyers look for in a business?

  • Strategic Buyers are largely focused on synergies and integration capabilities; they spend a great deal of time evaluating the acquisition based on how well the Seller’s business will integrate into the acquirer’s existing operations and business units. 
  • Strategic Buyers consider how dependent the business is upon the Owner/Seller. How strong is the management? Can the management remain in place and run the business in the absence of the Owner? Can the business survive without the Seller/Owner? A general rule of thumb is that no more than 10% of the sales of your business should be dependent on the efforts and connections of any one person—particularly the owner. The less dependent the business is on the Seller, the higher the value. [4] 
  • Strategic Buyers don’t pay much regard to target company’s existing infrastructure, because generally the acquirer company already has them in place and therefore many back office functions like- HR, IT, Legal etc. of the target company will be eliminated in order to cut cost.
  • Strategic Buyers commonly buy 100% of a company; post-transaction they do not allow the Sellers or other investors to control all or any part of the acquired company. [5]
  • Strategic Buyers long-term plan is to hold on to the business indefinitely post-acquisition and completely integrate the business into their own business to realize synergies.

What do financial buyers look for in a business?

  • Financial Buyers do not aspire to integrate the business into a larger company; they view the business as an independent entity and are mainly interested in the cash flow generated by the business.
  • Financial Buyers do not recognize the synergistic benefits and make the acquisition based on expected future earnings and cash flow; hence they thoroughly examine the financial statements of the company and ensure that the company exhibits a record of consistent earnings.
  • Most often Financial Buyers don’t have a team or necessary back-office infrastructure to run the day to day operations, they seek to buy companies that are well managed and therefore many a times the senior management or the Seller of the target company is required to stay and continue the business or at least remain involved for a while post-acquisition. Alternatively, the Buyer may even look for new management before the investment. [6]
  • Financial Buyers often have an exit plan while entering the acquisition. They follow the principle “buy, improve and sell” [7] and consequently exit the investment typically within 5-7 years of time.

Who pays more between strategic buyers and  financial buyers?

Generally Strategic Buyers are willing to bid more than Financial Buyers because of their ability to quickly capitalize on synergies. “Synergies” also include the intrinsic benefit of possibly eliminating a competitor or gaining new customers, removing redundancies and eliminating duplicate roles, this creates extra cash to pay to the Seller. 

Even though Facebook acquired WhatsApp for $19 billion, it had first offered a similar company (Snapchat) $3 billion for the same deal; this shows that the more synergies a strategic buyer can find between their company and Seller’s company, the more they are willing to pay. [10]

However, in recent trends, Financial Buyers have upped the amount they are willing to pay in order to remain competitive with Strategic Buyers. If the recurring earnings and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) are higher than 20% then they will readily offer a significant amount of cash.

So it is better not to always assume that Financial Buyers tend to offer less, they may sometimes be willing to offer much more and a quicker exit and so it is important to keep an open mind and consider both the types of Buyers.

How to choose between strategic and financial buyers?

There is no straightforward answer to which type of buyer is the best for your business, it all depends on the Seller’s goals. One thing is certain that regardless of the type of Buyer the Business is bound to change post the transaction. Certain factors need to be considered to help determine the right type of buyer-

  • Seller wants maximum price possible:  If the Seller’s only goal is obtain the highest price possible without any concern about what happens to the business, employees or the property then an open auction is the most fitting choice. In this case, Strategic Buyers will be the most suitable type of Buyers as they are more likely to offer a higher amount.
  • The Seller wants a higher price but has certain concerns: If the Seller wants a high price but also wants to protect certain aspects of the business per say, employees, culture or all the infrastructure that the Seller has built etc. A Strategic Buyer may still be the best fit however; the Seller may need to make some concessions in the price. Despite this the Seller may get a high price but not the highest possible price.
  • The Seller wants to cash out but would like to remain involved in the business: In these cases, a Financial Buyer might be the most appropriate type of Buyer because Strategic Buyers already tend to have the expertise to run the business and are not likely to continue with the top-level management of the Seller’s Company or in other words eliminate duplicate roles while Financial Buyers lack this expertise and require Seller to stay and manage the business. And Sometimes the Seller has a significant amount of the deal structure tied up in earn-outs and in these cases the Seller may want to remain as long as possible to attain the earn-outs. [11]

Conclusion

Both Strategic and Financial Buyers offer advantages and disadvantages. Whether to choose a Strategic Buyer or a Financial Buyer is a decision unique to each firm. Sellers should carefully consider the types of Buyers and their intentions before entering the transaction. It is obvious that Seller wants to get the best possible price, but there are other factors and considerations that come into play depending on the buyer who’s sitting across the table and therefore it is advisable that Seller engage in a large number of both Strategic and Financial Buyers and see what they are willing to offer and assess the benefits and hazards that will ensue as a result of the deal with each type of Buyer.

References

  1. https://www.lutz.us/buyers-strategic-vs-financial/ 
  2. https://rosebiz.com/financial-vs-strategic-buyers-which-one-is-right-for-you/ 
  3. https://www.middlemarketcenter.org/expert-perspectives/4-key-differences-between-financial-and-strategic-buyers 
  4. https://www.keglerbrown.com/publications/strategic-buyer-vs-financial-buyer/ 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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Key issues with respect to exclusive jurisdiction clauses in a contract

By
Sneha Mahawar
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0

This article is written by Anmol Prakash and pursuing an Introductory Course: Legal Writing for Blogging, Paid Internships, Knowledge Management, Research, and Editing Jobs. This article has been edited by Ruchika Mohapatra  (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

Exclusive Jurisdiction is a clause present in a contract saving time and money for the parties. The clause defines and restricts the jurisdiction of the parties where they can refer to and resolve the disputes arising out of the contract. Through this clause, the parties to a contract waive their rights to go to any other civil court which has the jurisdiction to take the matter. It is vital for a contract to have a pre-decided clause regarding jurisdiction to avoid any extra conflict in approaching the court. 

We all are well aware of the situation and the fact of how tiring the process of court additionally fact how badly the litigation process got affected during the pandemic. The pandemic made us realize how badly we all need this clause. The clause helps in smooth hassle-free litigation avoiding such a forum which will be inconvenient and time-consuming moreover more expensive to parties to the contract due to various unfavorable circumstances.

The clause is vital to a contract and is needed to avoid any conflict; moreover, if the clause is absent, it is dealt with by other provisions of the CPC, but for this article, we are focusing solely on key issues of exclusive jurisdiction.

Sections affecting exclusive jurisdiction 

Section 9 of CPC precisely talks about the court’s jurisdiction to try all civil nature suits except suits of which their cognizance is either expressly or impliedly barred, whereas Section 20 of CPC lays down the right for the plaintiff to institute a suit proceeding at a place where the defendant(s) are actually and voluntarily residing or carrying on the business for gain or where any part of the cause of action arises.

Section 23 of the Indian Contract Act, 1872 talks about how there cannot exist any contract which is forbidden by or defeats any provision of law. Moreover, Section 28 of the Indian Contract Act, 1872 puts an absolute restriction on a legal recourse or ability to enforce rights under a contract. 

“However, through a combined reading of Section 20 of the Civil Procedure Code 1908 and Sections 23 and 28 of the Indian Contract Act, 1872, there is scope for a partial restriction by limiting parties’ recourse to one forum.”

Landmark judgments with the key issues the clause has dealt with

In Hakkam Singh v. Gammon (India) Ltd (1971)

In the case of Hakkam Singh v. Gammon 1971, the contractual validity of the choice of forum was the issue and was deeply scrutinized. In this case, the Petitioner had approached the Court of the Subordinate Judge at Varanasi for an order transferring the parties to the arbitration. The parties to the contract had a proviso that the Courts of Mumbai alone will have jurisdiction. The trial court determined that the entire cause of action arose in Varanasi and that the parties could not confer jurisdiction on the Bombay Courts by agreement because they did not have it otherwise. 

The Supreme Court declared in this decision that when two courts have jurisdiction to hear a dispute, choosing one by agreement does not amount to a constraint of legal procedures or the offending public policy under Sections 28 and 23 of the Contract Act, respectively. The parties, on the other hand, could not confer jurisdiction on a court that would otherwise lack legal authority to adjudicate the matter in question. This stance has been upheld by the Supreme Court in different other cases.

A.B.C. Laminart Pvt. Ltd. & Anr vs A.P. Agencies, Salem (1989)

In the case of A.B.C. Laminart Pvt. Ltd. & Anr vs A.P. Agencies, Salem, the contract between the parties specified that any issues arising from the contract would be adjudicated by the Courts of Kaira.

Clause 11 of the said contract precisely states that the Courts of Kaira will have jurisdiction over any dispute resulting from this sale and because of clause 11, the trial court determined that it lacked jurisdiction to hear the case. Since the contract was partially executed in Salem, the Madras High Court upheld the legal standing vested in the Salem Court, after which the Appellant filed a special leave petition in the Supreme Court.

The appeal was dismissed by the Supreme Court. The contract does not exclude the jurisdiction of other courts. The apex court stated that when terms like “alone,” “only,” “exclusive,” and other like terms have been used, there should be no difficulty in construing the ouster clause unless there is no consensus ad idem (meeting of minds). 

However, in the absence of such words, implicit exclusion of other jurisdictions would have to be inferred from the facts and circumstances of the case and would not be automatic. The Court went on to say that the inclusion of particular words did not exclude jurisdictions other than Kaira in relation to the transaction and that the contract’s general terms do not indicate exclusion of other jurisdictions.

Albeit the clause was found to be valid and enforceable, the Court went through it and ruled that the Salem Court had jurisdiction. As a result of ABC Laminart, courts were obliged to conduct a factual examination into whether a court’s jurisdiction was impliedly excluded. It gave the party seeking to deviate from an exclusive jurisdiction clause a lot of discretion.

Swastik Gas (M/S Swastik Gases Pvt. Ltd v. Indian Oil Corp.Ltd (2013) 

In the case of Swastik Gases Pvt. Ltd v. Indian Oil Corp.Ltd, a dispute arose between the parties and the parties made several attempts to resolve the dispute amicably, but they all failed. The Respondent eventually filed a case against the Appellant in the Rajasthan High Court, whereas Clause 18 of the agreement stipulated that the Agreement would be subject to the jurisdiction of the Calcutta courts. The same was dismissed by the Rajasthan High Court, instructing them to approach the Calcutta High Court, which had exclusive jurisdiction over the issue. When the parties moved to the Supreme Court, it was dismissed and it was ruled that only the Calcutta High Court had the authority to hear their concerns.

The Supreme court provided clarity that the lack of words such as “alone,” “only,” “exclusive,” or “exclusive jurisdiction” is neither conclusive nor significant in determining a court’s jurisdiction. 

The parties’ intention by including Clause 18 in the contract is obvious, that the courts in Calcutta shall have jurisdiction, which means that the courts in Calcutta alone shall have jurisdiction. In such cases, the principle of expressio unius est exclusio alterius (expression of one is an exclusion of the other) would apply, according to the ruling.

The above-mentioned decision was followed in B.E. Simoese Von Staraburg Niedenthal v. Chhattisgarh Investment Ltd. and Indus Mobile Distribution (P) Ltd.  v. Datawind Innovations (P) Ltd. 

Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited and Ors (2017)

In the case of Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited and Ors 2017, a dispute emerged between the parties, as a result of which the respondent invoked the arbitration agreement and the appellant disputed the respondent’s claims. After the appellant raised the issue of the sole arbitrator’s appointment, the respondent filed petitions in the Delhi High Court, seeking interim relief under section 9 and the appointment of an arbitrator under section 11. Clauses 18 and 19 of the agreement constitute the Dispute Resolution Mechanism.

Clause 18 of the agreement stated that if a dispute between the parties could not be resolved through discussion between senior officials of the parties, the matter would be settled through arbitration, headed over by a sole arbitrator, and conducted under the provisions of the Arbitration and Conciliation Act, 1996, with the seat of the arbitration in Mumbai whereas the Clause 19 of the same stated that all disputes arising out of or in connection with the Agreement will be decided solely by the Mumbai Courts.

The Delhi High Court, in dismissing the two petitions, stated that because no portion of the cause of action occurred in Mumbai, the Mumbai courts would have no jurisdiction over the case and that only the courts of Amritsar, Chennai, and Delhi would have jurisdiction. The Delhi High Court will retain jurisdiction over the case because it was sought first. The Court further prohibited the Appellant from transferring, alienating, or creating any third-party interests in the Appellant’s Chennai property, and appointed the sole Arbitrator.

The case was moved to the Supreme Court in which the Hon’ble Court was asked if Mumbai, which has exclusive jurisdiction under the agreement and has no cause of action, has legitimate jurisdiction over the dispute. Furthermore, while overturning the Delhi High Court’s order concerning its jurisdictional power, The Supreme Court ruled that because the parties agreed to hold the arbitration in Mumbai, the courts of Mumbai would have exclusive authority to regulate arbitral proceedings resulting from the parties’ agreement. 

Moreover, the Supreme Court referred to its earlier judgments, stated in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc, Enercon (India) Ltd. v. Enercon Gmbh, and Reliance Industries Ltd. v. Union of India that it has been repeatedly restated in its previous judgments that once the seat of arbitration has been determined, it will be like an exclusive jurisdiction clause as to the courts that exercise supervisory powers over the arbitration.

Shridhar Vyapar v. Gammon India (2018)

In the case of Shridhar Vyapar v. Gammon India, a petition to pay taxes on collected bills was heard by the Calcutta High Court. The bills stated that any disputes would be resolved by the Raipur and Nagpur courts.

The Hon’ble High Court held that the parties can be bound by an agreement comprising a clause vesting exclusive jurisdiction on certain courts if it can be shown that the parties are aimed at giving effect to the agreement in their subsequent actions. The exception is when, despite the existence of such a clause and an agreement to abide by it, the cause of action originated entirely and completely in another jurisdiction, and second, dragging the parties to their chosen forum would be oppressive in light of other facts. The Calcutta High Court decided that the party challenging the exclusive jurisdiction clause had failed to explain how the contractually designated court would be burdensome or oppressive based on these findings. The exclusive jurisdiction clause was upheld by the court.

EXL Careers v. Frankfinn Aviation Services (2020)

In another recent case “EXL Careers v. Frankfinn Aviation Services”, The Supreme Court ruled that “it is always open for parties to confer exclusive jurisdiction by consent on one of the two courts in a dispute between parties when two or more courts may have jurisdiction.” The clause in the agreement makes it clear that the parties intended for just one court to have exclusive jurisdiction over any dispute arising out of the agreement, and that no other court would have jurisdiction over the same.

Conclusion

An exclusive jurisdiction clause in an agreement is a portion of a contract in which the parties agree to refer any disputes arising out of the agreement to a certain Court.  As a result, an exclusive jurisdiction clause specifies a certain Court to which the parties may bring their dispute to the exclusion of all other Courts. Such a clause allows the contracting parties to prevent other courts from hearing any issues arising from the contract they have agreed to. In the above-mentioned landmark verdicts, the Hon’ble Courts have provided clarity on the subject matter.

References 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

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How can a prepaid forward contract help you save/defer taxes

By
Sneha Mahawar
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0

This article is written by Vaibhavi S U and pursuing a Certificate Course in Advanced Commercial Contract Drafting, Negotiation & Dispute Resolution. This article has been edited by Zigishu  (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction 

If your best friend loans you money, is it taxable? Nope. How about a sale? If you receive money for selling your stock, it is income. Can you get money upfront that is not a loan, but that also isn’t income when you receive it? The answer to this riddle is “yes,” – with a variable prepaid forward contract.  A Prepaid Variable Forward Contract is a mechanism used by stockholders in market equity transactions to cash in portions of their stock and defer the tax on capital gains.

It’s a method used by investors who desire to generate liquidity from their huge stock holdings. A PVFC is a contract in which an investor promises to sell a specific number of shares at a discount, typically between 75 and 90 percent of the current market value, but the buyer does not take possession of the shares immediately but rather at a later date. The amount of shares owed at maturity is not always the same as the fixed sum and is variable.

How does PVFC work

A variable prepaid forward isn’t really a loan; it’s a sale of a variable number of shares that will be delivered at a later date in exchange for a cash advance today. However, the number of shares—and consequently their exact cash value—isn’t known until the stock’s price reaches maturity. It’s because of this uncertainty that these transactions don’t trigger the constructive-sale regulations, which allow you to postpone paying taxes while hedging your equity position. The downside protection comes from the fact that even if the stock price falls, the investor only loses the shares pledged. Variable prepaid forwards can be constructed in a variety of ways since they are individually negotiated.

This method works well for a client who is already planning to sell the stock. He generates more money upfront than he would in after-tax proceeds from an outright sale, defers capital-gains tax for at least the life of the contract, and doesn’t lock himself into a sell decision because, at maturity, he can create a cash settlement and retain his shares or roll them into a new trade. 

A prepaid variable forward contract is an open transaction similar to a stock option. because both involve a future commitment. To better comprehend a PVFC, we’ll break it down into component phrases. First and foremost, it’s a contract, normally between an investor and a financial institution or brokerage firm. Second, the agreement specifies that the shares will be given by the investor at a later period, making it a forward contract. There’s also the option of paying cash instead of stock. Furthermore, it’s a prepaid forward contract because the investor often receives all of the money upfronts without giving up ownership of the stock. Because the transaction is not completed, the prepayment is handled as a loan or debt, with the underlying security acting as a contingency. Furthermore, the payment is made at a discount, which might be considered a sort of loan interest expense. Finally, the prepaid forward contract is variable since the number of shares that the investor must provide is determined by the current share value at the time of expiration or maturity. A floor, or lower strike price, and a threshold, or upper strike price, are normally set at the time of contract execution. These strike prices serve as a guide for calculating the number of shares due on a sliding scale.

The goals and benefits of Prepaid Variable Forward Contracts (PVFC)

Prepaid variable forward contracts (PVFCs) are popular among investors for a variety of reasons, including: 

  • Hedging against the risk of a bear run, could result in significant losses, particularly for executives who own large amounts of stock and are unable to sell due to public relations.
  • To obtain liquidity from a high unrealized gain in a stock position.
  • To delay capital gain taxes, which would otherwise be paid as a result of gains from the sale of securities.
  • It is a simpler way to secure a loan with a lower interest rate.

Disadvantages of  Prepaid Variable Forward Contracts (PVFC)

The usage of variable prepaid forward contracts is divisive, eliciting opposing views from many sectors. Arguments against it centre on corporate ethics violations, such as investors’ desire to delay capital gains taxes, protect voting rights, keep a limited upside gain, and decrease litigation risk.

However, in some situations, the strategy is useful. For example, in some cases, CEOs are prohibited from trading their shares for a set length of time. Insiders can also unwind company-specific risks by selling a big chunk of a company’s assets through hedged transactions.

The technique also provides a share or cash settlement option, meaning that the transaction is either a zero-coupon loan with a zero-cost collar or the sale of an underwater call option with a deferred and prepaid stock sale. Similarly, a trading strategy can shield a corporation from expected future performance declines while also hedging against future uncertainty.

A variable prepaid forward contract is likely to reflect private information in any instance. It is due to the fact that the transaction involves a significant amount of company-owned stock. In comparison to the Center for Research in Security Prices value-weighted index, the CSRP’s equally-weighted index, an industry average, and a matched sample on size and industry, the method is associated with a relatively average drop in excess returns.

Technically, it’s a zero-cost collar transaction, with the stock represented by a short call option and a long put option.

The third feature is a prepaid variable forward contract that is monetized by taking out a loan against the underlying stock. Financial engineering advances are reducing the complexity of off-market transactions. The complex current elements are inserted to make it easier to incorporate insiders’ sensitive information into the transaction.

For example, in 2010, billionaire Philip Anschutz made headlines after losing a high-profile case concerning the use of PVFCs to avoid paying capital gains taxes on over a hundred million dollars. The Tax Court held that a prepaid forward sale of a security, combined with a loan of that security to the forward purchaser, triggered a taxable sale of the underlying security upon receipt of the up-front payments. Philip Anschutz challenged the finding, but the United States 10th Circuit Court of Appeals in Denver affirmed the tax court’s 2010 decision that Mr. Anschutz had transferred the benefits and burdens of ownership to the forward purchaser in late December. Because the PFC was improperly treated as an open transaction, he owes the IRS at least seventeen million dollars in capital gains taxes.

Later, in 2011, Ronald Lauder, the heir to the Este Lauder cosmetics company, was the subject of a front-page article in the New York Times about how he and his family had evaded taxes since the company went public in 1995. According to the paper, Mr. Lauder obtained $72 million in cash from an investment bank via a prepaid variable advance, but the contract was cleverly structured to evade taxes. Furthermore, the PVFC protected his extraordinarily high executive salary in relation to the typical employee compensation level.

This isn’t to say that using a prepaid variable forward contract will always get you in trouble with the IRS. There are a few things to keep in mind before proceeding. The contract, for example, should be well-drafted in accordance with the stock lending provision.

Let us consider a hypothetical situation where an investor owns a relatively large number of shares in Company X. The shares are priced at $9 each, and the investor commits $100,000 in a variable prepaid forward contract and trades them at $9.5 per share with a maturity of three years. The cap floor and upper floor prices are set at $8 and $10, respectively. The total sale, including the principal, would amount to $950,000.

At the end of the third year, the investor will deliver all the pledged shares if they sell below $8. In such a case, the investor is under no obligation to compensate for the loss through financial consideration or additional shares.

Nevertheless, if the shares are trading at the preset values of $8, $9.50, or $10, one can obtain the due share by dividing the principal ($950,000) and the current market value of the stock (either $8, $9.5, or $10).

If the share price is $8, the investor pays $118,750 ($950,000 / $8).

If the price per share is $9.50, the investor will deliver $100,000 ($950,000 x $9.50).

If the price per share is $10, the investor will deliver $95,000 ($950,000 x $10).

At the other end of the spectrum, the investor will deliver a sum of the principal ($950,000) plus the excess of the share above $10 if the shares are traded at a value that exceeds the preset upper strike.

It then follows that:

If the price per share is $12, the investor will deliver $1,150,000 ($950,000 + 100,000) ($12 – $10).

Alternatively, the investor can deliver approximately 95,833 shares ($1,150,000/12).

The deferred capital gain tax only becomes due relative to the previous gains after the shareholder delivers the shares and settles the transaction.

Conclusion

Prepaid forward contracts will very certainly always be considered exotic. At the same time, they can be a legal way to generate money in a tax-efficient and financially prudent manner. A forward contract is an agreement to sell something in the future. The upfront cash acts as a tax-free deposit between the signing and closing of the deal. A prepaid forward contract, like a loan, offers cash to the seller without immediate taxation if specific conditions are met. Obtaining the proper documentation, on the other hand, is crucial.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

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Everything to know about the patent of drugs

By
Rachit Garg
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0

The article has been written by Hemnaag I, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. It has been edited by Ruchika Mohapatra (Associate, LawSikho).

It has been published by Rachit Garg.

Introduction

In the pharmaceutical industry, patents are being used and are one of the major forms of intellectual property rights (IPR). A patent makes sure that a new medicine is protected for a specific  period, i.e., 20 years, and only the inventor is allowed to bring it to the market. As you can imagine, if everyone kept their ideas and results only for themselves and worked in secrecy, scientific progress would be much slower. Most importantly, a patent obligates the inventor to publish their invention so everyone can follow and learn from the new ideas. Still, sharing significant details about innovation comes with the huge risk of being copied. That’s why a patent also ensures that innovation is protected at least for a certain period. Once the term is completed, others are allowed to come up with their version of the product. This article will help you understand the specifications of drug patents in detail with reference to case laws as well as major amendments under the Patent Amendment Act, 2005 and other relevant provisions related to patenting of pharmaceuticals.

Meaning and characteristics of patents

The word “patent” is derived from the Latin term “patere”, which means “to lay open”, that is, to make available for public inspection. A monopoly or exclusive right that is granted over an invention to the patent holder. Patents are a form of contract that the inventor executes with the government of the country in which he agrees to disclose the entire invention, and in return, the government agrees to grant the inventor an exclusive right to stop others from using or making that invention.

However, not all inventions are patentable. The term “invention” is defined under section 2(1)(j) of the Patents Act, 1970, as “any new product or process involving an inventive step and capable of industrial application.” Such an invention is protected under patent law. A patent is a type of Intellectual Property Right (IPR) that protects the rights of the inventor from others who do not use or make the invention. The nature of patent rights is territorial rights.The Patent Law of 1856, The Patent and Design Act of 1911, The Patent Act of 1970 and Rules of 1972, and The Patent Amendment Act of 2005 comprise all the major legislations pertaining to patents. India being a signatory of the TRIPS agreement was under a contractual obligation to amend its Patents law to make it compliant with the provisions of the agreement.

The Patent Act’s objectives

-To grant a statutory right of the patent holder for a set period to prevent others from using, selling, or developing his invention and commercially exploiting it.

– To disclose the invention and practise that invention and make it work, thus encouraging scientific research and new technology.

– To stimulate new inventions of commercial utility and to pass inventions into the public domain after the expiry of the fixed period of the monopoly.

– To have sole ownership of the invention

– To ensure commercial returns to the inventor for the time and money spent on generating a new product.

Development of Patent Law in India

Pharmaceutical companies spend billions of dollars on development and research every year on new drugs. It is estimated that only 3-5 potential drugs reach clinical trials out of a thousand drugs, and only one gets approval for the market and marketing. The pharmaceutical companies patent the drugs they innovate and obtain exclusive marketing rights for 20 years. The cost of the development and research of the drug is recovered through the pricing of the drug, which is bought by the general public.

Once the drug invented by pharmaceutical companies is registered under the Patent Act, the company shall accrue a 20-year exclusive right to own the patent and the marketing rights of the drug shall also be exclusive during the term of 20 years. No other drug company is allowed to manufacture or produce the same drug. Once the period of 20 years is completed, the patent expires. In such an event, other drug companies are permitted to manufacture and sell the same drug. 

According to the early 1970’s Indian Patent Act, only process patents were recognised, not product patents. This allowed Indian drug companies to manufacture the same drug-using another process that is also called reverse engineering. However, only after the 2005 amendment act, product patenting was allowed in India for pharmaceutical inventions.

Pharmaceutical patent types in India

The pharmaceutical industry is an intense “knowledge-driven” sector, where the inventors in this sector must be aware of patenting their inventions. 

The various types of pharmaceutical patents are as follows:

Drug compound patents- The patents which claim a drug compound as per its chemical structure and are intended to provide the broadest protection, so they prevent other companies from preparing similar drugs.

Patents on formulations or compositions – A specific technology used to prepare a formulation or a number of its key ingredients.

Synergistic combination patents- The patent law of India states that the inventor can obtain protection for the new synergistic combinations of his drugs.

Technology Patent- It is related to the techniques used to resolve specific technology-based problems, which include an increase in solubility, stabilization, etc., and even the inventors can stop others from using the same approaches as they can claim the taste-masked formulation.

Polymorph Patents: The word “polymorph” refers to the different crystal structures of an already known compound, and these types of patents allow innovative firms to protect the improved versions of their original drugs.

Biotechnology patents- It involves the use of living organisms or biological materials in the preparation of pharmaceutical products.

Section 3(d)’s role in polymorth patenting patents

In India, the grant of polymorph patents is mainly governed under Section 13. The Indian Patent Office grants polymorph patent notwithstanding objections u/s. 3(d) of the Patents Act, 1970. Section 3 (d) states that “the mere discovery of a new form of a known substance does not result in the enhancement of the known efficacy of that substance; the mere discovery of any new property or new use for a known substance; or the mere use of a known process, machine, or apparatus unless such a known process results in a new product or employs at least one new reactant.” 

Explanation: For this clause, salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations, and other derivatives of known substances shall be considered to be the same substance, unless they differ significantly in properties concerning efficacy;

Section 3 (d) aims to prevent the “evergreening of patents” by providing that only those pharmaceutical derivatives that demonstrate significantly enhanced “efficacy” can be patented. Section 3(d) also ensures that new forms can only be patented if they are truly meritorious and that patents will not be granted for trivial inventions.

Invention, as opposed to discovery, is finding out something that has not been found out by other people. There are many instances in various branches of science of independent investigators making the same discovery. That does not prevent the person who applies and gets a patent from having a good patent, for a patent represents a quid pro quo. The quid for the patentee is a monopoly, and the status quo is that he presents to the public the knowledge that they do not have. Patents are granted to things that are developed, made, or produced by human intervention. 

Awarding of a patent to the inventor

Section 21 of the Indian Patent Act, 1970, constitutes the patent that is granted to an individual after they file a patent application. The inventor must ask the government by describing the invention in writing in order to get a patent, also known as a patent application. Only if there is no pre-granted opposition to the patent application will the patent be awarded. After being granted, the patent application can get a royalty from such inventions.

Transfer of patent rights

A transferable property can be transferred from the original patentee to any other person by assignment or by the operation of law. It can be licenced or assigned only by the owner of the patent, in which case co-owners or joint-owners can assign or licence the patent only with the consent of the other owner. The distinction between the two is that in a license, the person granting permission (i.e., the licensor) retains an interest in the property being licensed, while in an assignment, the assignor transfers his rights to the property being assigned. An assignment is a transfer of ownership and title while a  licence is a contractual right to do something that would otherwise be an infringement of patent rights.

Patent assignment 

A patent assignment is an agreement where one entity (assignor) transfers all or part of its rights, title, and interest in a patent or application to another entity (assignee). Section 68 of the Indian Patents Act, 1970, provides for the mortgage, license, or creation of any interest in the patent.  Section 68 also states that assignments, etc., are not valid unless in writing and duly executed. — An assignment of a patent or a share in a patent, a mortgage, licence, or the creation of any other interest in a patent is not valid unless it is in writing and the agreement between the parties is reduced to the form of a document embodying all the terms and conditions governing their rights and obligations and duly executed. There are three kinds of assignments, namely, legal assignments, equitable assignments, and mortgages.

Patent Licensees

Under section 70 of the act, the Patents Act allows a patentee to grant a licence by way of agreement. A patentee by way of granting a licence may permit a licence to make, use, or exercise the invention. A licence granted is not valid unless it is in writing. A licence is a contract signed by the licensor and the licensee in writing and the terms agreed upon by them include the payment of royalties at a rate mentioned for all articles made under the patent.

Licenses are of the following types:

  1. License granted voluntarily
  2. A Statutory License, also known as a Compulsory License, is a type of licence that is required by law.
  3. License, either exclusive or limited
  4. License, either express or implied

Important case laws

Bayer Corporation v. Union of India & Ors.

The case is related to the topic of compulsory license. Section 84 of the act states that after 3 years from the date of grant, a person can apply for a compulsory license. For getting a compulsory license, three conditions should be fulfilled: the reasonable requirements of the public have not been satisfied; the patented invention is not available to the public at a reasonable price, and the invention is not manufactured in India. The court held that medicine has to be made available to every patient at a reasonable cost, and the petitioner was required to pay a royalty to the patent holder under a compulsory license.

Dimminaco A.G. v. Controller of Patents Design

In the case of Dimminaco A.G. v. Controller of Patents Design, a vaccine was invented after examination under Section 12 of the Indian Patent Act, 1970. It was reported that the vaccine was not an invention under 2 (j). The court held that the process for the preparation of the vaccine was new, novel, and included inventive steps. If the end product is a new article, it is patentable.

 Novartis Ag & Anr. v Natco Pharma Limited

In the case of Novartis Ag & Anr. v Natco Pharma Limited, since the post-grant opposition was not decided by the Intellectual Property Appellate Board (IPAB), the court held that though the patent rights may be crystallised once the opposition is decided, during the pendency of the post-grant opposition, the rights of a patentee subsist. Thus, confirming that Section 48 of the Patents Act grants rights in favour of a patentee which is not affected during the pendency of a post-grant opposition.

Conclusion

Indian patent law is a significant piece of patent legislation that aims to balance the interests of both the consumer and the inventor, and it is regarded as an exemplary piece of patent legislation. In the present era, the owners can file patent applications for a wide range of pharmaceutical products and processes. There are many different types of pharmaceutical patents, depending on the drug they are protecting. The exclusivity of each patent can be extended by various lengths as well because drug discovery, marketing etc. Before filing, the researchers must consider the criteria of patentability and then the types of patents that best suit their pharmaceutical products or processes. 

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Download Now

Why do acquirers overpay

By
Rachit Garg
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0

The article has been written by Kunal Dodeja, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. This article has been edited by Zigishu  (Associate, Lawsikho). 

It has been published by Rachit Garg.

Introduction

The coalescence of two or more firms, entities, companies that may or may not be similar in size results in a merger. Wherein one such entity which has merged into another entity ceases to exist. Thus, all the assets and liabilities of the ceased entity are automatically transferred to the surviving entity either through a direct or statutory merger. There is another type of merger that does not lead to the cessation of an entity but in turn, makes that entity a subsidiary of the parent company. However, in the eyes of the public, it may seem that the target company is operated by itself under its own name, but the reality is that it is controlled, managed, and owned by the acquirer. As per the statutory route if two or more entities are coming together to incorporate a new entity then it is not technically a merger as a merger would also include all the legal entities which are dissolved or consolidated at the time of formation of a new entity which would have its own new name. The shareholders in a merger transaction exchange the shares held by them in the target company with the new company.

Today in the marketplace the most preferred strategy for firms to grow, expand and strengthen their position in their domain and make their presence felt is via mergers and acquisitions. In the recent past, we have seen a rapid and exponential growth in mergers and acquisition transactions,  regardless of the size of the firm – whether big or small. As per an academic research study, whenever a company gets merged or acquired, the value created by the shareholders created via the merger directly goes to the target entity and not the acquiring entity. We have also seen that the acquirers in such a transaction usually pay a premium ranging from 10% to 35% of the enterprise value to the target entity. On one side of the coin, the merged entity in almost every merger transaction gets benefits from the transaction but on the flip side of the coin the acquirer fails to achieve, whether in the short or long run, the desired benefits. In the recent past, there was a transaction where Gilead Sciences Inc had announced that they would acquire Immunomedics Inc at a price of $21 billion. $88 price per share was agreed to be paid by Gilead to Immunodmedics which resulted in a premium of a whooping 108%. Post the announcement, the stock price of the target company sky-rocketed whereas the stock price of the acquiring entity had a downfall of over 5% following days. The result and impact of this overpaid transaction still remain to be noticed.

Why do acquirers overpay?

Why do acquisitions fail? Why can’t the acquirers achieve the anticipated and desired results? The reasons could be many but one such major reason is overvaluation or overpayment to a target entity. The acquirers typically share the anticipated and expected benefits or advantages or synergies resulting from the acquisition with the target entity in the form of a premium. Overvaluation often results in paying high premiums on the actual value. Overstating synergies often results in the overvaluation of the target entity. This makes acquirers vulnerable in the case of cash transactions as the risk of realizing synergies is assumed by the acquiring entity. In the event of economic expansion and especially when the market valuations are high the acquirers always tend to overvalue their targets. Even when the market is in an upward direction and is a bull market, the valuations on the transaction increase by multiples leaving no adjustment, which ultimately leads to overvaluation.

What about inflated synergies? Do they increase the valuation? Yes, they do! Further, the presence of competitors in certain industries may push acquirers to make a decision on acquiring the target entity on an urgent basis by paying more than their actual worth. But what about management? Does it also have any role to play in this overvaluation? Yes, it does. Their overconfidence which may be biased could also be one of the reasons for overvaluation. The solution to this is to get the valuation exercise done from an external advisor, who would carry out their own review process as per industry standards and develop an unbiased report which would help acquirers from over the cloud expectations. In today’s time, it is very challenging to accept one’s own biases but there is no denial on the fact that a formal and unbiased decision-making process would help to a great extent.

What really drives the synergies between the parties? Why do acquirers keep overestimating? Why do most acquirers overvalue the resulting synergies? Sharing of capabilities, abilities, forecasts and opportunities, the economics of scope and scale and adoption of best available practices and many more factors of like nature are the sources of synergies. It is to be noted that an accurate and precise estimation of synergies is extremely important and essential and even a minor variation can immediately influence valuation, and in turn, the outcome of the acquisition. Whenever any entity is looking for potential in a deal, they always tend to focus on cost synergies as they are easier and more straightforward to estimate than revenue synergies. Revenue synergies are more challenging and not as easy to evaluate and usually take long hours to capture. So, what do revenue synergies depend on? Well, they depend on the potential of growth in the industry along with the competitiveness of the acquiring entity. So, in order to increase the chances of success what does the acquirer really need to do? First and foremost,  the cost synergies could be realized relatively more straightforwardly and could be outside the benchmarks of the industry and be used routinely for estimation. In some scenarios, it could also be related to the reduction of cost and in some other scenarios, an increase in cost could also be incurred to achieve the projected synergies which should not be neglected. Lastly, it is very important for the managers to be realistic to understand the timelines for realizing cost synergies.

Let’s understand the challenges around revenue synergies. Well, these synergies are typically and entirely under the control of acquiring entities. Announcements pertaining to acquisitions often involve revenue synergies as the strategic rationale including expansion to new markets through new product offering and to access target customers across the globe. However, a significant impact on the value would be derived from not realizing revenue synergies. It is a common assumption among the acquirers in relation to market share, and pricing may contravene competitive realities and market growth. It is practically impossible for an acquirer to determine the change in pricing strategies of the competitors upon completion of an acquisition.

What if the market is not favourable? Then in such a case, the only way out for any acquirer will be to obtain market shares from its competitors. Hence, relying typically on and only on revenue estimates which are inflated could reduce the target valuation reliability and revenue synergies benefits. In addition to this, negative revenue synergies which result from a loss of focus on the existing business should not go unnoticed as time is spent on integration and in achieving expected synergies. Is there any loss to the merging entity? Yes, they might lose combined customers. The other thing that acquiring firms should consider is the sensitivity around their assumptions in relation to pricing, recovery time and market share of the revenue synergies. 

Apart from overpayment/overvaluation let us also quickly understand a few other factors  which could be a potential risk to an acquirer:

  1. Operating risk: The entity which has been acquired does not perform well as expected.
  1. Debt leverage risk: A debt was used to finance the acquisition, which hampers and chains the acquirer’s ability to bring in more funds for the operation as well as to repay the debt at the same time.
  1. Macroeconomic risk: The deal is closed at the peak of the business cycle of the target entity and the earnings take a blow because of the ensuing recession.

Conclusion

Today, in the marketplace, the most preferred strategy for firms to grow, expand and strengthen their position in their domain and make their presence felt is via mergers and acquisitions. In the recent past, we have seen rapid and exponential growth in mergers and acquisition transactions. No matter the size of the firm – whether big or small. So, when does a merger and acquisition event occur? They get triggered when the economic growth is at a sustainable level, when there is a downfall in the interest rates and when the stock markets are rising. Every merger wave has brought with it specific developments contributing largely to new technology, focusing on specific industries such as services, financial, oil, rail etc. The wave has also brought with it new sets of regulations and modes of transactions.  

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

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Top essential principles behind drafting commercial contracts in the UK

By
Sneha Mahawar
-
0

This article is written by Veerashwar Jadaun and pursuing a Certificate Course in Advanced Commercial Contract Drafting, Negotiation & Dispute Resolution. This article has been edited by Zigishu  (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

Contract law is one of the most commonly used laws in this world and can be traced back to the 12th century. Many countries have different types of contract laws governing their countries but the essence of each law is quite similar,  as the basics of contract cannot be changed. English contract law is formed on the foundation of Ancient Greek and Roman Thought, and these laws have been improved and amended by a thorough analysis of the precedents and have formed a set of coherent and well-defined rules.

The United Kingdom (UK) was one of the nations to use trade the most during the 15th century, and hence litigation, in the court of law, increased as practice. Many countries also have used English law viz. Common law is the foundation laws of their respective nations, for example, India Contract Act, 1872.     

The main purpose of contracts is to hold the right of enforcement of a contract if the other party refuses to perform his contractual obligations, to safeguard the rights of weaker parties.  International Contract Law governs any trade between nations, it ensures no unfair means, as the basic principle of International law during the early days was “do what you can get away with”, which means the powerful countries can exploit weaker nations and not face a consequence for the same. Thus, to regulate the freedom of these powerful countries, maintain employee rights and promote business ethics, Common law facilitates contractual relationships. 

What is Common Law?  It is the legal system developed in England throughout the centuries and it is the basic legal system enforced in Britain’s ex-colonies.  Before explaining the drafting principles in the UK commercial contracts, you must know the basics of Commercial Contracts in the UK.  

Commercial contracts in the UK

Commercial Contracts in the UK are governed under the Sale and Supply of Goods Act, 1994. It covers the sale of 3 types of goods i.e. Specific goods, Future goods & uncertain goods. 

The 3 basic essentials of a contract are to be binding in the court of the UK, namely- 

(i) Agreement, (ii) Contractual intention  (iii) Consideration. 

Agreement

Both parties come to an agreement when one of the parties makes an offer and the other party accepts it. An offer is an expression of the intention to form an agreement, which becomes binding on the parties once accepted by the other party.  Offer can be made either impliedly (by conduct) or expressly (by words). Acceptance is the assent to the terms of the offer; it’s the last step before forming an agreement. Both offer & acceptance are completed when it comes to the knowledge of the other party.  

Contractual intentions

The basic essential of forming a contract is to have the intention to create a legally binding agreement i.e. that the parties must be aware that in case they do not perform their part of the contract, they can be legally forced to do so. .  Commercial contracts are always formed with the intention of creating legal relations. The term “Subject to contract” can be understood as a denial to form any contractual relations, during the negotiation of the contract this term is used to make sure that no legal liability arises out of it. 

Consideration

This is the reason why the parties perform their obligations. For example, A promises to purchase a Candy from B for 5$, here 5$ is the consideration for A’s promise and Candy is the consideration for B’s promise. There are a few conditions for valid consideration. 

  • It must be something of value;
  • It must be sufficient, need not be adequate;
  • It must not be from the past;
  • It must move from the promisee.

Important tips and tricks

Although there are many templates and structures of a contract available, still it’s always suggested to start drafting from a blank page, many times any mistake in the initial draft can still remain in your work too.  Before you start writing, make a list of clauses that might be needed for that particular contract, this way you won’t miss out on any important point, and it’ll also be your checklist. As you build up the draft you can always look back and reflect and improvise. 

NOs in a Draft

  • No archaic terms may be present in the contract as it may be difficult to read and interpret the contract. This also may cause ambiguity in the contract, and they will also look out of place. s (e.g., hereinafter, hereby)
  • No Latin or Foreign expression should be used while drafting the contract. (E.g. ultra vires, bona fide)
  • No Legal terms should be used.  Plain English must be used in the draft as it has to be read by the parties and it would be difficult for the parties to understand the contract and would lead to miscommunication.  
  • No use of “Shall”, as it has several meanings and it can lead to ambiguity in the contract. Shall is used for certainty as well as in uncertainty, e.g. may or must. Many of lawyers are shifting to the Shall-less style due to its ambiguity. 

Use of the right verb

As a draft is a sensitive document every word is sensitive in the interpretation, so it is of utmost necessity to use the right verbs in the sentence. Here is a list of verbs and their meaning Order – must, will; Option- may; Ban- must not, may not; Recommendation- should; 

Things to keep in mind while drafting

Accuracy

All content should be accurately stated in the draft. No ambiguity should be in the sentences and all the terms should be correctly used. 

Readability

Keep the words in the correct order as the contract must be easily readable to the parties. Many times,  contracts are too complexly written which makes it impossible to read.

Revision

After completing the draft, revise each and every clause for any mistakes. Double-check the names and addresses of the parties as it may make the contract itself void. Keep polishing the draft until it’s close to perfect. Avoid revising without completing the draft, as it would keep you distracted and you would waste time while drafting. Put in all your ideas into the draft no matter how unpolished they are. 

Definitions

Here is a list of a few terms and clauses that you may encounter while writing/reading a contract. 

Alternative Dispute Resolution(ADR)

This is a term used in the Dispute Resolution Clause, which is mostly present in a contract as an initial method to be performed in case any dispute arises within the ambit of the contract.

Common-law

It is the legal system developed in England throughout the centuries and it is the basic legal system enforced in Britain’s ex-colonies. It is now the foundation law that is used in many countries and is also used in transactions under International Law. 

Condition precedent

It is a condition that must happen before any interest or obligation arises in a contract. 

Condition subsequent

It is a condition that on the happening of a certain event, the duty of the party to perform his obligation terminates.

Covenant

A literal interpretation of this term promises, if not performed, will cause legal actions. 

Execution

This term has various different meanings, in the contract it is understood as assigning of the agreement by the parties. 

Force Majeure

This is a Latin term which means an “act of God”, it is used in contracts in events when it becomes impossible for a party to perform his obligation, he can give the excuse of force majeure to get away from any legal liability.  

Preamble/Recitals

This is not such a clause in a Contract but it plays an important role in the interpretation of the contract. This is placed at the beginning of the contract explaining the purpose behind the contract. 

Term clause

The duration for which the parties are entering into the contract is stated in this clause, It states from exactly what date the contract is enforced and till a specific day, it will remain intact.   

Termination clause

This type of clause states the condition under which the contract may be terminated by any of the parties. This clause also guides the parties in the process after the termination of the contract. 

Dispute resolution clause

Due to any uncertain work or breach of contract, the parties may refer the matter to dispute resolution (ADR, Negotiation, Mediation, etc.). As the Courts have already burdened enough any matter would take years to solve, therefore, dispute resolution will make sure that both the parties work their way out themselves. 

Confidentiality clause

When parties share any confidential information during the process of a contract, this clause ensures that no party discloses that information to any party outside the contract. 

Conclusion

A majority of the laws have evolved from England and this has developed the laws to be Eurocentric and at times partial to the other parts of the world.  One of the good things about UK law is the foundational law, so if a person has understood the concepts of this law then it will become a piece of cake to learn any contract law from anywhere in the world. The skill of contract drafting is in danger of being somewhat underused due to the easy access of electronic precedents, however, one needs to keep in mind the essentials in order to draft an airtight contract as and when required. 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Download Now
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