IP Ownership, Licensing & Technology Transfer in JVs in India: Structuring Rights for Growth & Exit

Introduction

Joint Ventures (‘JVs’) are the most suitable mode of entry for foreign entities planning to enter Indian markets. While the commercial and operational aspects of a JV are structured carefully, the Intellectual Property (‘IP’) ownership, licensing, and technology transfer aspects are not amongst the prime focus of negotiations and discussions at the JV structuring stage. Resultantly, the parties lose ownership/ control over their IP.

The Indian IP laws provide flexible means of structuring such arrangements. However, in the absence of clear provisions regarding rights and obligations in JV agreements with respect to IP aspects, standard provisions under the Indian IP laws become applicable, which may not necessarily align with the commercial intention of the parties. It is thus imperative that a JV transaction is structured in such a way that ownership and control of IP remain aligned with business objectives of the parties to a JV.

Defining background IP and foreground IP

Distinguishing background IP from foreground IP is essential for a structured JV. Background IP refers to the IP that is already owned by JV parties individually prior to entering into the JV. This includes technology, patents, software, designs, trade secrets, or trademarks that are necessary for the operations the JV. Foreground IP, on the other hand, refers to IP that is developed or created during the course or as a result of the JV.

For parties in a JV, it is important to clearly define background IP and foreground IP while structing the JV as the ownership and rights to the IP under the Indian legal regime depend on its origin i.e. vests with the creator. This means in the absence of clear terms, there could be conflicts over whether the development or enhancement of IP belongs to the JV or to the original owner. Moreover, without proper agreements, ownership and rights related to IP may fall under default provisions of the law as under the Patents Act, 1970 which stipulates that unless an agreement to the contrary is in force, co-owners of a patent are entitled to an equal undivided share in the patent.[1] These outcomes often diverge from commercial expectations in a JV arrangement.

Licensing background IP and not losing ownership

Foreign entities typically allow the JV to use their background IP through licensing instead of assignment. This is because the former allows the JV partner to retain the ownership of the IP, while the latter transfers the ownership and control to the JV, and the JV partner would no longer control the technology or brand assets, which may be the core of its business worldwide.

The key legal and business risk lies not in the licensing itself but in how the same is accomplished. This means if the rights and obligations related to use of IP are not defined properly in a license then this may result in exploitation of the IP i.e. use of IP for purposes beyond the intended use or create uncertainty over sublicensing and use after the termination of the license. Therefore, for a well-structured JV, it is essential for the parties to consider limiting the license in terms of territory, field of use, exclusivity, and time. This is done to ensure that the JV has the required operational rights while maintaining ownership of the IP.

Structuring royalty clauses

Where background IP is licensed to a JV, the royalty structure is the primary means of assigning economic value between the IP owning partner and the JV. While the Indian IP laws allow a considerable degree of freedom in structuring the royalty, disputes often arise due to the inconsistency between the royalty obligations and the growth of the JV’s revenues and business expansion.

These issues can be mitigated through cautiously drafted royalty provisions. Revenue-linked or performance-based royalty structures are often preferred, and this is especially common in technology and growth industry JVs, where the payment of royalties is tied to the commercial success of the JV. Such arrangements are usually coupled with clear definitions of “net sales” or “revenue”.

From structuring point of view, strong reporting and audit rights allowing the IP owner to review royalty calculations from time to time through independent audits should be incorporated in the JV agreements. This is especially important in long-term JVs, where lack of transparency can easily erode trust between the JV partners. In addition, the royalty provisions should also provide for survivorship and termination adjustments, which would outline whether the payment of royalties should continue, cease, or be converted to a lump sum or buy-out payment in situations where the post-termination use of the IP is permitted.

Foreground IP and derivative rights: Navigating the IP developed within the JV

One of the most contentious issues in JVs is the ownership of IP developed during/as a result of the JV. This is not only limited to new inventions and works but also includes derivative rights such as improvements, adaptations, or modifications made to the background IP. Even though the derivative IP is functionally dependent on the background IP, under Indian laws, it may be considered as a separate and distinct intellectual property unless otherwise provided for in the agreements.

In cases where the JV agreement is silent on the allocation of ownership and control of foreground IP, default rules under the applicable IP laws will apply, which may result in independent exploitation by one party or co-ownership without adequate governance. To address this issue, parties may either consider assigning the ownership of all foreground IP to the JV entity, which helps to align legal ownership with business reality and enable commercialisation, or divide ownership among the parties while clearly governing use, licensing, assignment, and enforcement by contractual restrictions.

Post-exit IP rights and exit reprioritisation

Post-exit IP rights are often the most litigious aspect of a JV, especially in situations where termination, restructuring, or exit is involved. Although in such circumstances, each party retains the IP that it first brought into the JV, disputes arise when the JV operates on licensed background IP and due to lack of clear provisions, the IP owner may be forced to continue the license on unfavourable terms. To counter such issues, it is essential to specify if the license will continue post-termination, for how long, and on what terms.

The complexity of exit is higher in the case of foreground IP as disputes often arise between parties in ascertaining whether such IP will be retained in the JV, assigned to a party, or licensed to the both parties for concurrent use. Thus, incorporating specific provisions in this regard is essential for parties to eliminate such issues that may arise upon termination. Although the Indian IP laws allow assignment and licensing of IP through contracts, however, structuring of such rights remain uncertain, resulting in leverage-driven negotiations at the time of exit. The same applies to derivative IP and improvements, which are normally resolved by specifying that ownership of improvements is based on ownership of the underlying IP, while granting the JV or the non-owning partner a license to continue using them if that is necessary for business.

Lastly, from a structuring standpoint, to prevent abuse of confidential information related to IP and further restrict the use of know-how post-termination of the JV, it is important to incorporate clauses specifying that such confidentiality and restricted use clauses survive post-termination of the JV.

Conclusion

IP ownership, licensing, and technology transfer clauses in a JV agreement plays a central role in the success of the JV. Loosely drafting such clauses may result in unintended outcomes varying from exploitation of IP rights to losing ownership of the IP. Thus, parties while entering into a JV should ensure that the JVs are structured with a clear understanding of what constitutes background IP and foreground IP. Further, licensing and royalty structures should be consistent with business realities for the JV to operate in a smooth and seamless manner while also providing for a clean exit.

[1]             Section 50 of the Patents Act, 1970.