Intellectual property lawsuits pose risk to Indian IT firms' growth

Domestic companies may have to distinctly separate product and services businesses

Rising number of lawsuits against Indian IT services companies over allegations of stealing trade secrets are seen as key risks to their growth in the coming years. 

Experts are of the opinion that as domestic IT firms eye bigger product and platform play through development of their own IPs (intellectual properties), they have to draw watertight compartments between product and services business to stay clear from such litigations. The workforce also has to be sensitised on IP-related matters in a project for any inadvertent exposure, they added.

“Domestic IT companies are likely to face such lawsuits unless they draw watertight compartments between product and services businesses. Also, engineers on the project have to be sensitised towards the IP protection clauses in an outsourcing contract for staying away from these complications,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

According to industry experts, most IT firms have their own internal IPs or library of codes in which they normally store source codes that can be reused in subsequent projects. This approach enables them not to write the source code from the beginning in case there are similarities in a new project. Software services firm follow this method in their bids to save time and cost apart from improving efficiency. However, sometimes, engineers working on the project are not aware about the IP-protection clauses of the contract with the client, leading to inadvertent reuse.

“An outsourcing contract has tight lines on who has the ownership over the IPs. But, technical people on a project might not be aware of the nuances,” Jain said. Big Indian IT firms have faced lawsuits over alleged IP misuse in recent years. While Tata Consultancy Services (TCS) have faced such allegations from Epic Systems and more recently from Computer Sciences Corp (CSC), Infosys faced a lawsuit from Qudos Bank in Australia on this matter. However, both the IT services giants have vehemently denied such allegations and are actively defending their stand in courts.

In their annual reports, both firms have also flagged up possible litigation arising out of IP-related matters as one of the key risks to their growth prospects. 

“Given the scale and geographic spread of the company’s operations, litigation risks can arise from commercial disputes, perceived violation of intellectual property rights and employment related matters. Our rising profile and scale also makes us a target to litigations without any legal merit,” TCS said in its FY19 annual report. 

Similarly, Infosys has mentioned possible reputational risk and financial liabilities arising from privacy breach as one of the risk factors that can affect its operations.

“IP misuse cases are very normal globally. With weaker IP framework in India, our services industry should make their staffers more aware about the intricacies,” said a legal expert in Bengaluru-based law firm. The person, however, said it was difficult to prove IP-misuse cases given the complex fine prints of a contract.