Legal Briefing

Copyright in outsourced software developed in India

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India | 01 September 2010

The Indian IT industry is one of the success stories of the Indian economy, and a large number of American and European corporations have been relying on Indian IT expertise to fulfill their IT needs, both in terms of software development as well as IT-enabled services. According to a report issued by the National Association of Software and Services Companies (NASSCOM), the Indian IT business process outsourcing (BPO) industry is estimated to aggregate revenues of $73.1bn in the year 2010, with the IT software and services industry accounting for $63.7bn of revenues. The export revenues are estimated to gross $50.1bn in 2010, of which software and services export (including BPO) are expected to account for a staggering 99% of total exports, employing around 1.8 million human resources.

The IT service offerings have evolved over the years from mere application development and maintenance to encompass testing and infrastructure services, consulting, and system integration.2 Over the years companies have also developed strong contractual framework(s) to deal with the issues arising in cross-border trade, including those relating to ownership of intellectual property (IP) created in such transactions. This article highlights a critical issue in outsourcing software development work. Companies expect the vendor or developer to assign all IP created under contract. However, often in such standard contracts, provisions of the Indian copyright law are overlooked, leading to problems vis-a-vis ownership later on. It is therefore imperative that such contracts comply with the provisions of the Indian copyright law.

Under the Indian Copyright Act 1957 (the 1957 Act), the author of the work is the first owner of copyright, notwithstanding the fact that someone else has funded the development of the work. Thus, the first title to the software program belongs to the developer who creates it. In these circumstances, it is all the more important for the company outsourcing such development to ensure that the contract transferring title to the software program from the author to itself is in place, and furthermore that such contract complies with the provisions of the Indian copyright law. While this theoretically sounds like a simple solution, it could become complicated for several reasons.

A recent case in the Delhi High Court, Pine Labs Pvt Ltd v Gemalto Terminals India Pvt Ltd & ors [2010] has brought to light the complications involved in such contractual arrangements. Pine was approached by Gemalto (previously ‘Axalto’) to develop certain software applications and provide related services to Gemalto’s customers. Accordingly, the parties entered into a Master Services Agreement (MSA) in 2004, which was to govern their relationship. As per the MSA, all results of development by Pine were defined as project materials, and Gemalto was entitled to all property, copyright and other IP rights in such project materials. The agreement also provided that:

‘Pine shall do all such things and sign all such documents or instruments reasonably necessary to enable Axalto to obtain, defend and enforce its right in the project materials.’

The relationship between the two parties continued smoothly for a few years, whereafter certain problems arose. Apparently, the parties were unable to reach a consensus on a new project and, on discovering that Gemalto had sub-contracted with another company to create software for the new project, Pine filed a suit for copyright infringement before the court. Pine alleged that the MSA was an automatic assignment document and was subject to s19 of the 1957 Act, and as ‘duration’ and ‘territory’ was not specified under the agreement, the duration of the assignment of the works created under the agreement was only for a period of five years and similarly the territory of the agreement was restricted to India as per s19(5) and s19(6) of the 1957 Act.3 Since the five-year period had expired for a particular version of the software, Pine alleged that the copyright in said software reverted to them and that Gemalto had no right to use it nor any other rights in the work.

Apart from filing a counter lawsuit inter alia claiming ownership in copyright, Gemalto challenged the ex-parte order and contended that the MSA was only an ‘agreement to assign’ future work(s), and not an assignment document in itself, thereby applicability of s19 would not be attracted. The attention of the court was drawn to the fact that Pine had also contracted to execute all documents and instruments to enable Gemalto to obtain, defend and enforce its rights in the project materials. Gemalto contended that it was the rightful owner of copyright in the software program, which it had commissioned and paid for, and therefore was entitled to have the assignment documents executed in their favour by Pine in law and equity.

The single judge, after hearing the parties, held prima facie that the MSA is an agreement to assign that creates an equitable title in favour of Gemalto and held it to be an ‘assignment in equity’, which exists independently from statutory legal assignments and is unfettered by the provisions of s19. The judge observed that an assignment in equity may be created by express agreement or by conduct of the parties and an agreement that contemplates that a future document of assignment is to be executed ought to take effect as an equitable assignment. Furthermore an equitable assignment exists in cases involving the agreement to assign future work and flows from contractual relations where work is commissioned. Therefore the equitable assignment is outside the purview of s19 and any question of reversion of rights does not arise.

The order of the single judge has been stayed by the division bench on appeal and the matter is yet to be concluded, as a result of which there continues to be a lack of clarity on the subject matter. However, as the order of the court gives us a sense of the emerging jurisprudence in this area, it is advisable that a deed of assignment is executed assigning all IP rights in the software to the person commissioning the work as soon as the actual software is developed and delivered by the vendor or developer. It is also important to ensure that the deed of assignment, as executed on completion and delivery of work, identifies the work assigned, specifies the rights assigned, and mentions the duration and territorial extent of such assignment.

It will be interesting to see how the division bench tackles this matter. It is certainly an important issue, and the development of strong jurisprudence in this area will be extremely helpful for all those who are involved in the creation, development and outsourcing of IP works in India.