The Mint’s Jayshree P. Upadhyay, recently published a detailed report on how an American company, Modulus Financial Engineering Inc. has sued Financial Technologies (India) Ltd. before the Bombay High Court for infringing the company’s copyright in its trading software and has claimed $480 million dollars or Rs. 3,190 crores, in damages. FTIL is a company which has developed a reputation for being the rare Indian company to successfully develop software products for the financial markets. Its main clients are brokers who trade in financial exchanges. The lawsuit by Modulus severely threatens FTIL’s reputation as an innovative company apart from destroying client confidence in the company. As most of our readers may also be aware, FTIL is also under investigation for its role in the massive scandal involving its subsidiary NSEL. The company is also battling a government order forcing the merger of the company with its scam ridden subsidiary NSEL.
Breach of licence – Did FTIL breach Modulus’s copyright licence?
The crux of the recent lawsuit is that Modulus had issued an end-user licence to FTIL for the use of some of its software products but rather than use the software as an end user, FTIL redistributed to its clients some of Modulus’s software products, along with its own software platform products in breach of the licence terms. Software products unlike CDs/DVDs or books are usually licensed and not sold. These copyright licences for software can be of different kinds. For example, the licence for home use will be entirely different from a licence issued for professional use. In the case of enterprise use, the licence will specify the numbers of systems on which the software can be deployed. In this case, it appears that the allegation is that FTIL purchased a copyright licence from Modulus to use the software products within the company but then went onto violate the terms of licence by redistributing Modulus’s source code to its clients.
According to the Mint’s report, which is based on Modulus’s pleadings filed before the Bombay High Court, the American company examined FTIL’s source code before making the allegations in question. In simple English, source code is basically a set of computer instructions written in a human readable computer language. This source code is then converted into a computer readable language. The Copyright Act, 1957 protects computer programmes as “literary works”. To prove copyright infringement, Modulus will have to prove that the source code being distributed by FTIL is substantially similar to the original code provided to FTIL by Modulus under the licence agreement. My guess is that both parties will lead expert witnesses to establish the similarity or lack thereof. Any ultimate determination of copyright infringement will depend not only on the similarities in the source code but also the terms of the license. Did FTIL have the right to redistribute/modify any of the code provided by Modulus? If the case does go to trial, it will be interesting to see how an Indian court approaches these issues – as far as I am aware this will be the first time an Indian court examines these issues in such detail.
Indian software companies and IP infringement
Questions of law aside, this case once again raises the issue of IP management by Indian software companies. Allegations of impropriety against Indian software companies on issues of IP are rather frequent and they often turn out to be true. Readers may remember the UPaid-Satyam case that Sumathi had covered in detail on the blog. That lawsuit ended when both parties agreed to settle after Satyam paid $70 million in damages. That lawsuit was filed before a Texas court. The Indian leg of litigation in that case was limited to the execution of letters rogatory allowing for Upaid to cross-examine Satyam’s witnesses in India.
Another interesting case is that of Epic Systems v. Tata Consultancy Services (TCS) which Aparajita had covered earlier on this blog over here. An American jury found TCS liable for $ 940 million dollars for stealing trade secrets and confidential information belonging to Epic Systems.
The decision to sue in India
The key difference between the above cases and the present lawsuit filed by Modulus is that both those cases were filed in the United States. Modulus on the other hand has filed this present lawsuit before the Bombay High Court. Most American litigants will do anything to ensure litigation against Indian litigants takes place only in the United States and not India. American companies have a mortal fear of getting bogged down in India’s snail paced judicial system. American judges appear to share this fear and on occasion have declared the Indian legal system to have broken down and incapable of delivering justice. It was a few such cases that provided the inspiration for the 188th Report of the Law Commission of India which proposed the new law for dedicated commercial courts.
The company explained to us that it had initially sued FTIL in Arizona but had to withdraw the lawsuit because of problems that it faced in serving summons on FTIL. Apparently FTIL refused to accept the summons which meant that Modulus had to officially serve the summons on the company as per the procedure specified in the law. Usually, the service of summons in such transnational litigation is covered by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. Under this Convention summons are usually served through national governments. So in this case the summons would have had to be served through the Ministry of Law, Government of India except the Ministry apparently has such a huge backlog that the process can take several months. Some American courts have become so frustrated with the delays in India that they have allowed the service of summons through Facebook! The legality of such an approach is disputed. The other way to serve summons is under Section 26(c) of the Code of Civil Procedure provided the Central Government has recognised such a foreign jurisdiction through a notification in the official gazette. In such a case, it is possible to directly execute the summons through an Indian court without having to go through the Indian Government. I’m not sure whether the US is notified under Section 26(c). In any case, it is rather absurd that the government keeps talking about improving the ease of business in this country when it can’t even do something as simple as serve summons.
Since Modulus faced difficulties in serving summons in the American lawsuit, it chose to withdraw the lawsuit and file a lawsuit before the Bombay High Court – a decision no doubt influenced by the fact that FTIL was rapidly slipping into deeper trouble because of the number of criminal investigations initiated against the company due to the NSEL scam. In my opinion, FTIL has won half the battle by forcing Modulus to shift this litigation to India. Not only are Indian courts likely to take light years to decide such complex litigation but India unlike the US doesn’t allow for extensive discovery proceedings.
The $480 million dollar question at this stage is the possible timeline for this lawsuit. While Indian courts are pretty good at dealing with interim injunctions, this case looks like it needs a full-fledged trial and that is unlikely to happen for several years in India. For example take a look at the patent litigation between CTR and Sergi that is taking place before the Bombay High Court. It took the court three years to dispose the interim injunction application. This is even before trial begins. There is also the Roche v. Cipla case, where the proceedings took so long that the patent almost neared expiry by the time appellate proceedings were over. The court therefore denied an injunction and instead asked both parties to lead evidence on damages – Shamnad had written a piece on the issue over here. Another example is of course the famous Punjab Tractors case – it was instituted in 1999 and as far as I’m aware the case is still going on before the Delhi High Court.
The second challenge that Modulus is likely to face in India is the quantum of damages that it has sought. Indian courts are not known for granting large amounts in damages in either IP or contractual disputes. This case is an intersection of both. Damages will be crucial for Modulus because according to the Mint report FTIL’s software is widely used in Indian financial exchanges – any injunction would likely paralyze these exchanges and it would unlikely for a court to grant such a wide-spanning injunction. Thus if Modulus cannot get an injunction it is all the more important for the company to focus on damages.
The missing arbitration clause
The really surprising aspect of this case is the lack of an arbitration clause in the licence agreement between Modulus and FTIL. Most transactional lawyers insist on arbitration clauses in tech transfer deals where the recipient of the technology is located in India. The aim of such a clause is to make sure that arbitration takes place outside the purview of India’s snail paced judicial system and in an efficient jurisdiction like Singapore or London or Paris. I’m not sure of why Modulus did not have such a clause in its agreement.
The liability of FTIL’s clients
So far, from the Bombay High Court website, it appears that Modulus has not sued any of FTIL’s clients. We don’t yet know whether Modulus is going to sue all of FTIL’s clients also for copyright infringement. Technically every broker or exchange using FTIL’s allegedly infringing software is liable for copyright infringement. It’s possible that Modulus will seek client names in discovery proceedings and then institute legal proceedings against even the client in order to force them to purchase licences. While these clients can make FTIL indemnify them for any liability, they will have to necessarily defend themselves if they are made party to the lawsuit by Modulus – that would really ramp up pressure on FTIL.
We reached out to both parties for a comment. In an email statement Modulus’s CEO Richard Gardner said “We have a strong case and have suffered millions of dollars of financial damage due to FT’s IP Infringements. We have full faith in the Indian justice system and expect a favorable judgment which will allow us to get what is due and what has been denied to us for so many years.” FTIL never replied to an email sent to its media contact address.
The case is before Justice Gautam Patel of the Bombay High Court.