Justice R. K. Gauba of the Delhi High Court passed a 95 page order yesterday in the patent and trademark infringement lawsuit filed by Monsanto against Nuziveedu Seed Ltd., Prabhat Agri Biotech Ltd. and Pravardhan Seeds Pvt. Ltd.
To briefly recap the origins of dispute, Monsanto licensed its Bt. Technology to Indian seed companies like Nuziveedu which incorporated this technology in its cotton seeds so as to render them resistant to attacks by boll-worms. The Indian seed companies sell these seeds and pay a “trait fee” to Monsanto. In October, 2015 a group of 8 Indian seed companies, Nuziveedu being the largest amongst the pack stopped paying Monsanto royalties that were due to the company because Monsanto had refused to lower its “trait fee”. The seed companies had demanded a reduction of the “trait fee” because state governments were passing new price control orders fixing “trait fees” and retail prices of seeds. Monsanto responded by terminating its contracts with the seed companies and also initiated arbitration for recovery of Rs. 400 crores from the Indian seed companies. In addition, Monsanto also initiated the present lawsuit in 2016 before the Delhi High Court against three companies, mentioned above, seeking an injunction against them for patent and trademark infringement.
To put it briefly, Justice Gauba’s 95 page order has held Monsanto’s termination of the contract to be prima facie illegal and has allowed Nuziveedu and the others to continue using the technology provided that the trait fee is paid in accordance with the prevalent laws till the suit is finally disposed. I assume this means that the parties will have to adhere to the central government’s price control order which not only fixes the retail price of the seeds but also the “trait fee” or the royalties payable to Monsanto by Nuziveedu.
There is little doubt that the order is a significant setback for Monsanto.
Patent infringement and validity
As is normal in such cases, the defendants responded to the infringement allegations by filing a counter-claim seeking revocation of the suit patent. It appears that the defendant raised arguments based on Section 8, Section 10(4) and other grounds in the Patents Act, 1970. Justice Gauba refuses to get into the issue of validity at the interim stage on the grounds that the matter requires evidence to be led through trial. This is a sensible strategy on the issue of validity.
The order does mention some of the infringement related arguments made by Nuziveedu but the submissions aren’t very clear. Take the following paragraph which is actually a single sentence that runs into 119 words!!!
“113. It is the defendants’ argument that sub-license granted by the plaintiffs permitted the nucleic acid sequences made available in the form of donor seeds to be introduced into a cotton plant cell and once such implanting was done, the claim of the plaintiffs concerning a suit patent in so far as the defendants is concerned, stood exhausted and the rights under the suit patent do not extend to inhibiting the development of new varieties or cells or tissues or plants or seeds through biological processes as the same are excluded by the provisions contained not only in Section 3(j), as noted above, but also Section 3(h) which excludes “a method of agriculture or horticulture” from the definition of “invention”.”
The remaining IP arguments made by Nuziveedu are not very inspiring. It tried arguing that it has the right to use Monsanto’s invention under Section 30 of the Plant Varieties Protection Act – this provision provides for a researcher’s right and operates vis-à-vis registered plant varieties – the provision has no application to patents. The Court rejects the argument pointing out that ‘research’ is different from ‘using’ a patented invention.
Nuziveedu also tried shifting focus to Section 26 of the Plant Variety Protection Act – which is a benefit sharing provision. The provision kicks in only when a new variety is registered under the Plant Variety Protection Act. In such a case, the Authority under this law is required to advertise the application and invite claims from those whose genetic material has been used in the invention. The motivation behind this provision was to protect traditional knowledge related to plant varieties i.e. if a farmer had developed a new variety and the genetic material from this new variety was used by somebody to create another plant variety and register it under the law, the farmer could seek benefit sharing of potential benefits. The law is of course silent on details of how exactly ownership of genetic material is to be determined in such cases. Thankfully, the court rejects Nuziveedu’s claim related to Section 26.
Was Monsanto’s termination of the contract illegal?
The crux of the dispute was whether or not Monsanto had terminated the contract as per the provisions of the contract. For its part, Monsanto argued that Article 9.02 of the contract allowed for the termination of the contract if royalty payments due to it were not made to within a fixed period. Nuziveedu appears to have argued that because the state governments were revising the rates of the seeds and fixing the trait value, Monsanto was required to renegotiate the rates since Article 11.03 of the contract required the contract to be in adherence to the local laws. This provision states the following:
“If, during any time during the term of this Agreement, any provision, terms, conditions or object of this agreement may be in conflict with laws of the country of any Party hereto, the Party concerned shall notify the other Party thereof and appropriate modifications of this Agreement shall be made by the Parties hereto to avoid such conflict and to ensure lawful performance of this Agreement”.
Justice Gauba appears to disagree with Monsanto’s refusal to renegotiate its contractual rates stating the following:
“The plaintiffs, it appears, refused to even acknowledge the effect of the State government legislations or notifications on the cotton seed prices and only asserted the right to receive the trait fee as settled “through mutual consent” under the contract. This, positioning, prima facie, was not correct.”
He then continues to state:
“the plaintiffs were duty bound to consider the request of the defendants as made by the communications beginning July 2015, for modification of the terms as to the rate of trait fee payable under the 2015 sub-license agreements for which the mechanism had earlier been agreed upon in the form of Article 11.03. Since the plaintiffs did not adhere to their obligation under the contract, the demand of payment under the contract terms being not lawful, it apparently being higher than the trait fee permitted by the law in force, the defendants could not have been found to be in default or to have breached their obligations within the meaning of Article 9.02.”
The problem with this conclusion is that it doesn’t really offer an interpretation of Article 11.03 of the contract. In specific, there is no discussion on whether Monsanto can refuse to negotiate further and terminate the contract. None of the state price control orders forbid Monsanto from refusing to licence its technology at the rate prescribed in the price control orders. Therefore if neither party can agree to a new rate, it is obvious that the contract will stand terminated. Why should Monsanto be forced to accept a new rate under a contract if it disagrees with such a rate?
The other issue with the order is the nature of remedies ordered by Justice Gauba. Monsanto filed this case for patent and trademark infringement. The applications being heard by Justice Gauba related to the simple issue of an interim injunction. The appropriate remedy in this case would have been to simply deny an interim injunction. There was no need to put in place an elaborate mechanism to ensure payment of trait fees to Monsanto. The danger of creating a mechanism as elaborate as the one in Justice Gauba’s order is that it opens the door to even more litigation on interim issues because everytime one of the directions in his order is violated one of the parties will file a contempt petition.
Arbitrability of the present dispute
One of the interesting issues that this case throws up is whether the dispute is arbitrable? Although the court doesn’t really dig into this issue, let me just skim through the issue with a superficial analysis.
The heart of the dispute in this case is a contract wherein Monsanto licensed its patent and trademark rights to Nuziveedu. The infringement claims in this case arise out of the termination of the contracts between both parties. The contract had an arbitration clause and Monsanto had already initiated arbitration proceedings for recovery of the monies due to it under the contract. Monsanto had also moved a Section 9 application before the Bombay High Court for interim relief. The arbitral tribunal that finally hears the dispute will therefore be required to interpret the contract, determine whether there is a violation of contract and pass a decree. The lawsuit before the High Court, as obvious from Justice Gauba’s order, is also primarily a contractual dispute between both parties because the essential question as framed by the judge is whether Monsanto lawfully terminated the contracts. If the termination was not lawful and contract continues to exist, there is no patent and trademark infringement.
It is not clear why two different forums (the arbitral tribunal and the High Court) are interpreting the same contract because there are precedents which have held that it is impermissible to split a cause of action in an arbitration between the parties i.e. the entire dispute has to be heard by the arbitral tribunal and cannot be split between an arbitral tribunal and a court of law. Justice Gauba’s order does make some references to this issue in para 96 and 117 but isn’t really clear.
It is also not clear why Nuziveedu did not file a Section 8 application under the Arbitration & Conciliation Act to get the entire dispute shifted to the arbitral tribunal. The dispute in my opinion is certainly arbitrable since the infringement claim arises from an interpretation of the contract and is a claim in personem i.e. against only some private parties and not against the world.
The danger now is that both arbitral tribunal and the High Court are going to interpret the contract in different ways. What happens then?