Case Notes – Fall 2010

Poorvi Chothani

 

FM Stations Pay Reduced Royalty to Broadcast Music

A long-standing revenue related dispute between FM radio stations and music labels, which had been pending before the Copyright Board, part of the Ministry of Human Resources Development, India, has been adjudicated. The Copyright Board passed an order in the matter of Music Broadcast Private Limited and Others v. Phonographic Performance Ltd., F.No.20-2/2001.CRB (WZ), where the applicant was granted a compulsory license under Section 31 (b) of the Copyright Act, 1957.

Phonographic Performance Ltd. (PPL) is a copyright society that administers the rights on behalf of about 137 recording companies. Several FM radio stations filed applications before the Copyright Board because the radio stations and PPL could not agree on the amount of royalty for use of PPL’s content. These applications were filed under Section 31 (1) (b) of the Copyright Act, 1957, which provides that the Copyright Board has the power to grant compulsory licenses when it finds that the owner(s) of published Indian works or of works that have been performed in public refuses to allow the communication or broadcast of the works to the public. Indian works include artistic works, cinematographic films, or a record made or manufactured in India, the author of which is a citizen of India. The Copyright Board is required to issue a notice to the owner of the work(s) refusing such access and, after conducting an inquiry, can require the Registrar of Copyrights to grant a compulsory license if it finds that the grounds of refusal are not reasonable. Such a license is on payment of fees that the Copyright Board prescribes.

The Copyright Board issued a directive (the Directive) to the Registrar of Copyright to grant to each of the nine applicants a compulsory license to PPL’s collection of music and requires FM stations to pay 2% of their net advertising revenues (total advertising income minus agency commission and government taxes) to music labels by way of royalty. Earlier FM radio stations had to pay Rs. 1,200 to 1,600 (approximately US$ 27 to US$ 36) per hour.

When assessing the compulsory license applications, the Copyright Board considered the profitability and revenue streams of the FM radio stations, the promotion of music by the radio stations, public interest, international standards and the terms of the license or Grant of Permission Agreement (the Agreement) between the Ministry of Information and Broadcasting, the Government of India and the radio stations among other things. The Agreement mandates that the FM radio stations will be “free to air” services and they cannot impose subscription fees on the public. When arriving at the revenue model, the Copyright Board also considered the interests of all the stakeholders in the matter including the public and the advertisers that use the medium of FM radio stations.

Importantly, the Directive could affect the royalty collections of other music owners who were not a party to the proceedings before the Copyright Board and might have a bearing on the rights of the owners of musical and lyrical works.

Are transactions involving the transfer of shares in offshore companies taxable in India if the underlying assets are located in India?

The international business community has been watching India anxiously for the outcome of what has been called the Vodafone case.  The issue was whether Indian tax authorities had jurisdiction over Vodafone’s acquisition by way of a transfer of shares of mobile phone operator Huchison Essar. In Vodafone International Holdings BV v. Union of India and Anr., MANU/MH/1040/2010, Vodafone International Holdings BV, a Netherlands entity, had acquired 100% shares in CGP (Holdings) Ltd, a Cayman Islands company from Hutchison Telecommunications International Ltd. for US $11.2 billion.

The Bombay High Court did recognize that the shares of the foreign company were located outside India but observed that the transfer of the attendant commercial rights situated in India would be subject to Indian tax.  There is some ambiguity about this as the decision suggests that the transfer of the shares per se, including the shareholder rights and controlling interest should be treated separately from the value of the commercial interest in India.

India currently does not have laws that tax the profits arising from the transfer of shares outside the country even if the underlying assets or properties are situated in India.  However, the Vodafone decision of the Bombay High Court changes the situation that might be further formalized as and when the Direct Taxes Code Bill, 2010 is passed, which is now pending before the Parliament, and which contains a provision that will tax the transferor of an offshore company’s shares outside India in proportion to the fair market value of assets located in India.  It is important to note that this rule will apply only when the fair market value of assets in India is more than 50% of the value of all assets owned by the offshore company.

In the meantime, the Vodafone ruling is likely to be challenged in the Supreme Court of India and if the apex court confirms the Bombay High Court judgment, it could have far-reaching ramifications with retrospective effect on certain large deals with similar transfer of shares in offshore companies.

Do parties to an investigation by the Competition Commission of India (CCI) have a right of appeal against every order of the CCI?

In Competition Commission of India v. Steel Authority of India Ltd. and Anr., MANU/SC/0690/2010, the Supreme Court of India on September 9, 2010 passed its first decision in a matter arising out of the Competition Act, 2002 (as amended) (the Competition Act) in an Appeal filed by the Competition Commission of India (CCI) against an order of the Competition Appellate Tribunal (COMPAT).  The Supreme Court of India ruled that parties to an investigation by the CCI do not have a right of appeal against every order of the CCI.

The matter before the CCI concerned an arrangement between Indian Railways and the Steel Authority of India Limited (SAIL) for the supply of rails to Indian Railways. SAIL is the exclusive supplier of rails to the railways.  Jindal Steel and Power Limited (JSPL) challenged this arrangement before the CCI as being anti-competitive.  The CCI initiated the process to establish whether there was any merit in the complaint as per its standard norms. On finding that there was some substance in the complaint the CCI referred the matter to its Director General (Investigations). Before the Director General could begin its investigations, SAIL filed an Appeal with COMPAT, challenging the order passed by the CCI requiring the Director General to investigate the exclusive arrangement, which stayed the investigation and ruled that the CCI need not be a party to the Appeal.

COMPAT allowed the Appeal on the basis that “any order, decision or direction of the CCI” was appealable under section 53A of the Competition Act and such right of appeal was not limited to the orders listed in section 53A. The Supreme Court found that COMPAT had erroneously interpreted section 53 A (1) of the Competition Act to find that it had jurisdiction to entertain Appeals against all directions or decisions of the CCI. The Supreme Court was also of the opinion that the CCI was expected to record some reasons as to the existence of a ‘prima facie’ case. The decision clearly defines COMPAT’s appellate powers and enables the CCI to conduct investigations without being embroiled in long drawn Appeal proceedings at each stage. The Apex Court further ruled that the CCI has to be a party to all Appeals before COMPAT as it must necessarily be involved in Appeals arising from its orders.

Can two different entities use the same trademark in India?

The Delhi High Court in Lowenbrau AG and Anr. v Jagpin Breweries Ltd. and Anr., 157 (2009) DLT 791, found that two owners of the same trademark can simultaneously use the trademark when they did so in other countries without being granted any preferential rights. Lowenbrau AG and In Bev India International Pvt. Ltd. (Lowenbrau Bev) filed a suit for permanent injunction, rendition of accounts, mandatory injunction in form of delivery against Jagpin Breweries Ltd. and Lowenbrau Butterheim (Jagpin Lowenbrau). Lowenbrau Bev claimed exclusive right to use the mark/word LOWENBRAU, device of lion or any other trade mark or device mark identical or deceptively similar to it.

The Delhi High Court observed that a mark, which was commonly used at one time, might in course of time become distinctive while on the other hand such a mark might lose its distinctiveness. Additionally, word or words used by a number of entities as part of their identity may be considered to be words in common use. Further, 100 years ago both the parties were in litigation in Germany, which ended when a German Court found that the LOWENBRAU mark couldn’t be monopolized, as there were a number of breweries in Germany that had been using the same mark without any dispute.

The Delhi High Court held that both the parties are Germans and have been marketing their products worldwide using the mark/word LOWENBRAU without any dispute.  As a result, the balance of convenience was not in favor of Lowenbrau Bev., for the reason that when both the parties could sell beer all over the world with the common mark or word LOWENBRAU, they could continue to do so in India too. Both companies’ products had other distinguishing features in their marks and labels to help consumers distinguish between the products.

Are business plans and boardroom discussions protected as Trade Secrets in India?

Boardroom discussions and business plans do not merit protection as trade secrets while proprietary software and manuals are eligible for trade secret protection.

In Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh, MANU/MH/0955/2010, the Bombay High Court found that Mehar Karan Singh (Mr. Singh) had been appointed a whole time Director of the Bombay Dyeing Company (Bombay Dyeing) under an employment agreement dated August 22, 2005 for the period July 24, 2004 to July 23, 2009. Under this employment agreement, he agreed not to divulge or disclose confidential information of any nature. However, he divulged Bombay Dyeing’s information to its competitor. Mr. Singh had also exchanged several e-mails with the competitor containing information relating to Bombay Dyeing. According to Bombay Dyeing, the confidential information divulged by Mr. Singh included customized software for Bombay Dyeing’s real estate business and its manual as well as a Memorandum of Understanding and some business plans and strategies which were discussed in the board meeting of Bombay Dyeing. India does not have any specific law protecting trade secrets and parties are bound only by the contracts they enter into.

The Bombay High Court restrained Mr. Singh from divulging any information about the software and its manual prepared by Bombay Dyeing but refused to restrict Mr. Singh from disclosing Bombay Dyeing’s business plans discussed in the board meetings. The Bombay High Court found that boardroom discussions and strategic business plans are not eligible for protection as Trade Secrets, but proprietary software and software manuals were considered to be Trade Secrets.

Is the distributor of consumer products a necessary party when a complaint is filed before a consumer disputes redressal forum?

The Mumbai Suburban District Consumer Disputes Redressal Forum held that the manufacturer of a television set could not escape from its liability to a consumer even if the consumer who filed a complaint had not made the distributor, who sold the complainant the television, a party to the proceedings. The Court held that the complaint is not bad for “non-joinder” of parties.

The complainant, Mitesh Barot had purchased a Sansui television from Snehanjali Electronics, a distributor. The television malfunctioned within a month of purchasing it. The problem was reported to the dealer and the Sansui service center. Despite several attempts, the service center representatives were unable to solve the problem. Mr. Barot finally filed the complaint against Sansui Main Service Center but failed to file a complaint against Snehanjali Electronics, the distributor.  Mr. Barot was finally granted Rs. 10,000 as compensation for mental agony and hardship.

Does the export of books whose sale and distribution are subject to territorial restrictions amount to copyright infringement?

The Delhi High Court, in John Wiley  v. Prabhat Chander, 170 (2010) DLT 701, found that such exports violate the copyright laws of India in certain circumstances.

The plaintiffs were a group of international publishing houses that publish low price editions (LPEs) or low cost books to be used in schools and colleges in India.  The defendants included a company and its officers who sold books online, offering the plaintiffs’ LPEs to buyers all around the world in contravention of the territorial notice on the books.

The court did not agree with the defendant’s arguments based on an earlier decision in Warner Bros v. Santosh VG, 2009 (2) MIPR 175 (Del) that India follows the principles of the “first sale doctrine” applicable to literary works whereby literary works that are already in circulation cannot be controlled by the copyright owners. The court also disagreed with the defendant’s argument that India follows the principle of international exhaustion whereby the copyright owner exhausts its rights once the LPEs are first sold into India. The defendants presented another argument that the Copyright Act, 1957 only applied to the import of infringing goods but not the export of copyright protected goods.  However, this argument also did not hold.

The Delhi High Court found that the Copyright Act, 1957 grants to the copyright owner the right to exploit copyrights by way of assignment or licensing, which could be exclusive or non-exclusive.  The copyright owner also had the right to limit the assignment or license by time or territory.   As a result the copyright owner could exhaust his or her rights in some territories while retaining rights in others.  Hence, the plaintiffs in this case were prevented from selling and exporting the LPEs to territories where the plaintiffs’ rights of distribution and sale still subsist.

Legal Notes

Can Service Marks be registered in India?

In India, the Trade Marks Act, 1999 for the first time introduced service marks so as to bring the Indian trademark law in line with TRIPS, which contemplates registration of service marks for services in addition to trademarks for goods. India has been following the international classification of goods and services under the Nice Agreement and the same is incorporated in the Fourth Schedule to the erstwhile Trade and Merchandise Marks Rules, 1959 and now Trade Marks Rules, 2002. The Fourth Schedule has recently been amended vide a notification dated May 20, 2010 to include three additional classes of services to the pre-existing ones, thereby raising the total number of classes to 45. The Amendment also modifies the existing class 42 and adds the following additional classes to the list of existing class of services: (a) Scientific and technological services and research and design relating thereto; (b) industrial analysis and research services; design and development of computer hardware and software; (c) Services for providing food and drink; temporary accommodation; Medical services, veterinary services, hygienic and beauty care for human beings or animals; agriculture, horticulture and forestry services and (d) Legal services; security services for the protection of property and individuals; personal and social services rendered by others to meet the needs of individuals.

 

Poorvi Chothani, Esq. is the founder and managing partner of LawQuest, a law firm in Mumbai, India. She is admitted to the New York State Bar with an LL.M from the University of Pennsylvania, USA, and is registered as a Solicitor in England and Wales. Poorvi has been practicing law in India since 1984 and is admitted to the Bar Council of Maharashtra and Goa. She can be reached at  poorvi@lawquestinternational.com.

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