Satyam evam Upaid: Who paid?

This is of relevance not only because it involves an Indian IT company, but also because of implications it might have for other companies in the IT-outsourcing sector generally. This was not an outright IP dispute, e.g. on the patentability of the product or the ownership of the patent, but more about the contractual agreements surrounding the transfer of IP. Nevertheless, this is an opportunity to revisit some issues brought up Shamnad on innovation in the Indian IT sector here and here.

Essentially, as Shamnad points out, Indian companies (like Satyam; Infosys) operate on a ‘services’ model – where products are created for and on behalf of other clients (like Upaid). As a result, it is the clients who own the IPRs. This services model is surviving as is because of the assurance of a continuous revenue stream; and of course, cheap labour! As a result, IT in India seems to have gotten entrenched in a risk-averse ethic, and has created for itself an environment that dis-incentivizes innovation.

So companies like Satyam continue to remain predominantly ‘service’ providers, with insignificant IPR of their own, even though most of the software is developed is done by their engineers. Given that, the company should at least ensure that the terms of reference are reasonably lucid and straightforward. The case at hand seems to have come about because of poor, or indeed absent, IPR Assignment- and general Service- Agreements between Satyam and Upaid, its client company. Arguably, this could have been entirely avoided if only there had been some foresight (but that is a moot point, eh?) in timing and drafting the agreements by both parties.

Anyway, just to run you through the case (the judgement is in fact available here):

Upaid, a UK-based IT company, is a mobile payments specialist. In 1996, Upaid developed the idea of converting any telephone into a de facto pay-phone by using a pre-paid account and a caller personal identification number (PIN). Software development was outsourced to Satyam, and in 1997, they reached a “short and relatively informal memorandum of understanding”.

In 1998, when Upaid went about applying for a US patent on this product, it had to demonstrate ‘unity of ownership’ of the IPR in its invention. (Now Satyam normally transfers IPRs of products it creates to its customers, but there was no formal agreement stating this. The MoU itself “dealt only briefly with the ownership of inventions and was silent as to any intellectual property rights”, the order says.) To meet USPTO requirements, the parties finalized an Assignment Agreement transferring Satyam’s IP to Upaid for cash consideration. This agreement referred also to a Service Agreement, for which negotiations had begun contemporaneously, but were concluded only in 1999.

The 1999 Service Agreement, which related to a dedicated unit at Satyam working exclusively on Upaid products, retroactively dated the commencement of activities to September 1998 (around when the Assignment Agreement was concluded), suggesting that the two Agreements were to be read together. The Service Agreement also contained a clause that reverted rights to Satyam on non-payment for services rendered.

All was well for some time. Satyam even acquired a quarter of Upaid in a debt-equity swap. But by 2002, things got messy: Upaid complained about Satyam’s quality of work; Satyam said it had not been paid, and that the IPRs reverted to it; there were issues about Satyam’s representation on the Upaid Board; and allegations of IP infringement all around.

Proverbial wisdom having dawned at last, by end 2002, Satyam and Upaid finalized a Settlement Agreement that superseded all previous agreements, and was under exclusive jurisdiction of English courts.

But all was not over: In 2005 Upaid began patent infringement proceedings in Texas against two other parties, and sought Satyam’s assistance. After an interlude of allegations of forgery by the Texan defendants and Upaid on Satyam (which threatened the validity of its original patent), Upaid eventually had to settle that case, it says, on unfavourable terms.

There’s more yet: Presumably sore with its last case, Upaid then applied to the Texas courts for inter alia damages for Satyam’s alleged fraud in the earlier proceedings, and for the consequent alleged breach of the Assignment Agreement in 1999.

In this English case brought by Satyam, it sought an injunction, counter-arguing that either:
1. Upaid’s claims against it in Texas were in breach of the Settlement Agreement, which compromised all such claims, or
2. The exclusive jurisdiction clause in the Settlement Agreement meant the claims had to be brought before English courts.

The court eventually refused the injunction and held that the Settlement Agreement did not deprive Upaid of future rights to sue for breach of Assignment or for alleged fraud in relation to that Agreement. And after a lengthy discussion on the jurisdiction issue and conflict of laws generally, the court decided that the claims for damages did not concern the validity of the patent itself and there was no clause in the agreement that required these particular claims to be mandatorily litigated in England.

So the curtains fall in England. Presumably now Satyam has to return to Texas to deal with things. But hopefully it will have learnt from this not to enter into MoUs that are “short and relatively informal”, without assessing the costs and risks of future litigation!

Endnote: One company’s poison is another company’s meat? Upaid hasn’t exactly lost favour with the back-offices in Bangalore… I found the company in the list of Wipro’s telecom clients here. But at least, I hope they have their agreements sorted out!