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Small Entity Status- Can Foreign Companies Claim It?

The government of India has been aggressively pushing for the development and promotion of entrepreneurship in the country. In the Intellectual Property Domain, various concessions have been made for small and upcoming entities. Organizations claiming a ”small entity” status or a “start-up” status while applying for registration are entitled to some additional benefits pertaining to fees and filing requirements.  Here, we briefly look upon the small entity status as per the Indian patent and design rules. 

Intellectual Property Related Government Initiatives to Encourage Small Entities & Startups

In 2020, the Scheme for Facilitating Start-ups Intellectual Property Protection, was launched as an experimental initiative to encourage start-ups to develop and protect their intellectual property, which was extended for a period of three years (April 1, 2020 – March 31, 2023).

Further, the Patent (Amendment) Rules, 2020[1] were notified on October 19, 2020 to simplify the procedure of submitting priority applications and their translations and filing of working statements under form 27. These changes were introduced in consequence to the Delhi High Court’s order in the case of Shamnd Bashir v UOI[2], that resulted in a stakeholder’s consultation.

On November 4, 2020 the Ministry of commerce and Industry[3], notified Patents (2nd Amendment) Rules, 2020[4], making additional filing and prosecution concessions for start-ups and small entities.  The status of start-ups was discussed critically, extending their life for up to ten years. These amendments are set to make protection of intellectual property affordable to every category and class of business. Finally, the government also notified Design Amendment Rules 2021,[5] which recognized start-ups as applicants. The current Locarno classification system[6] and simplified fee structure were introduced specifically to benefit small entities.

 

Categorization of ‘Entities’

 

1.1 Natural Person

Under the Indian Patent Act, natural person includes an individual human being. In this context, the patent application can be filed in the name of one or a group of individuals. Here, the inventorship and ownership lies solely with the inventor and he is entitled to:

  1. Sell
  2. Transfer
  3. License, or
  4. Commercialize their patent as per their want.

1.2 Small Entity

The Indian Patents Rule, 2003 under Rule 2(fa)[7] define ‘small entity’ as:

  • in case of an enterprise engaged in the manufacture or production of goods, an enterprise where the investment in plant and machinery does not exceed the limit specified for a medium enterprise under clause (a) of sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006); and
  • in case of an enterprise engaged in providing or rendering of services, an enterprise where the investment in equipment is not more than the limit specified for medium enterprises under clause (b) of sub-section (1) of Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).

In calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other things as may be specified by notification under the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be excluded.

1.3 Start up:

A start-up is an entity recognized as a ‘startup’ by the competent authority under the Startup India initiative and fulfills all the criteria for the same.

A foreign entity shall fall under the category of start-up if it fulfills the criteria of turnover and specified period of incorporation/registration, and submission of a valid declaration to that effect as per the provisions of Start-up India initiative. (In calculating the turnover, reference rates of foreign currency of Reserve Bank of India shall prevail.)

As per the Notification of Department of Promotion of Industry and Internal Trade[8], an entity is considered a start-up  

  1. Up to a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
  1. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
  2. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

How to apply for Small Entity Status in India:

 

Any business can apply for the status of small entity under the MSME Development Act, 2006 at udyamregistration.gov.in. Subsequent to a successful registration the business shall be issued a Udyam registration certificate, that can be furnished as proof for availing various government subsidies and benefits. 

A foreign company can also register as an MSME on the same government portal. However, as a preceding step such a company shall register itself as per the provisions of the Companies Act, 2013[9].

Any Indian entity wishing to declare themselves as small entity for the purpose of Patent registration has to furnish the following documents:

  1. Form 28 of the Indian Patent Act:
  2. Proof of Registration Under MSME Act 2006 (Micro, small and medium enterprise development Act, 2006).
  3. Form 1 of the Indian Patent Act (if Fresh Patent Application is being filed).

Any Indian entity wishing to declare themselves as small entity for the purpose of Design registration:

  1. For an Indian entity to claim the status of small entity, it must be registered under the MSME Development Act, 2006.
  2. To file an application as a start-up, the entity should be recognized as startup by a competent authority under the Union government’s Start-up India Initiative.

 

Can a Foreign Company claim Small Entity Status in India?

On a plain interpretation of the requirements under the Patent rules and Design rules, it is clear that a foreign enterprise can claim the status of a small entity or a start-up, provided it is registered and incorporated in India and is engaged in the manufacture of goods and services as specified in the first schedule of the 2006 Act.[10]

Under the MSME Development Act, 2006 an enterprise is defined as:

enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;[11]

With an objective to incentivize the incorporation of OPC (One Person Companies), the Ministry of Corporate Affairs amended the Companies (Incorporation) Rules. The move empowers OPCs to grow without any restrictions on paid up capital and turnover, thereby facilitating their conversion into any other type of company at any time. Additionally, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allowing Non-Resident Indians (NRIs) to incorporate OPCs in India has paved the way for foreign entities to enter Indian markets[12] [13].

 

Application Process for Small Entity Status in India? (Foreign Company):

Patent Rules

A foreign applicant seeking the status of ‘small entity’ for the purpose of filing patent in India, has to submit duly filled Form 28[14], along with the requisite documents of proof.

As per the requirements of Form 28, a foreign applicant has to attach evidentiary documents that verify their status as ‘small entity’ for the want of Rule 2 (fa) of the Patent Rules, 2003. For this purpose, the said documents can include a certified copy of financial statement from a Chartered Accountant, that proves that the investment in plant and machinery and the annual turnover of the entity on the date of filing the application does not exceed the limitations specifications under the MSME Development Act, 2006.

Design Rules

For the purpose of recognitions as a start-up the foreign entity should satisfy the following criteria:

  1. The entity must be a private limited company, limited liability partnership, or partnership firm.
  2. Its turnover at any point during the course of its business (from inception) should not exceed INR 100 crores (approximately USD 13.7 million as on date)
  3. The entity would be considered a start-up only for a period of 10 years from the date of incorporation.
  4. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Start-up”

For a foreign entity to claim the benefit of being a start-up, an affidavit (which under Indian practices would need to be notarized, although this has not been explicitly mentioned in the Amendment Rules) along with supporting documents must be submitted at the time of filing the application[15], to be submitted with Form 24[16] of the Designs Rules.

References:

[1] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1668081

[2] writ petition No. WPC- 5590

https://www.scconline.com/blog/post/2020/10/28/patents-amendment-rules-2020-patentee-would-get-flexibility-to-file-a-single-form-27-in-respect-of-a-single-or-multiple-related-patents/

[3] https://ipindia.gov.in/writereaddata/Portal/Images/pdf/Patents__2nd_Amendment__Rules__2020.pdf

[4] https://ipindia.gov.in/writereaddata/Portal/Images/pdf/Patents__2nd_Amendment__Rules__2020.pdf

[5] https://www.foxmandal.in/wp-content/uploads/2021/08/Indian-Designs-Amendment-Rules-2021.pdf

[6] https://www.wipo.int/classifications/locarno/locpub/en/fr/

[7] https://ipindia.gov.in/writereaddata/Portal/IPORule/1_70_1_The_Patents_Rules_2003_-_Updated_till_1st_Dec_2017-_with_all_Forms.pdf

[8] https://dpncindia.com/blog/wp-content/uploads/2019/02/DIPP-Notification-dated-19-Feb-2019.pdf

[9] https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&sectionId=185&sectionno=2&orderno=2

[10] https://www.startupindia.gov.in/content/sih/en/bloglist/blogs/How-a-foreign-national-from-China-can-start-and-register-company-in-India.html

[11] https://www.indiacode.nic.in/show-data?actid=AC_CEN_46_77_00002_200627_1517807324919&sectionId=9884&sectionno=2&orderno=2

[12] http://164.100.117.97/WriteReadData/userfiles/Notification%201.pdf

[13] http://164.100.117.97/WriteReadData/userfiles/Notification%202.pdf

[14] https://ipindia.gov.in/writereaddata/Portal/IPOFormUpload/1_40_1/form-28.pdf

[15] https://www.foxmandal.in/wp-content/uploads/2021/08/Indian-Designs-Amendment-Rules-2021.pdf

[16] https://www.ipindia.gov.in/writereaddata/Portal/IPOFormUpload/1_109_1/Form_24.pdf

Image Credits: Photo by Startup Stock Photos from Pexels

 

On a plain interpretation of the requirements under the Patent rules and Design rules, it is clear that a foreign enterprise can claim the status of a small entity or a start-up, provided it incorporates itself under the relevant schemes and statutes and is able to furnish documents for proof to the same effect

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Why filing of Provisional Patent Application keeps you ahead in the Patenting race?

With an additional focus to build an Innovation based entrepreneurial eco system, innovation is happening at the drop of a hat. However, the floodgate of invention around the race does not seem to be limited to an ingenious mind but also requires a go-getter attitude. As we know, Patent protection works on a “first to file” basis and not on “first to invent” which means it is granted to the one who files the Patent application first, subject to fulfilling other patentability criteria.

A Patent application has to be filed along with certain Specifications (details/working of the invention). These specifications are of two types i.e. Provisional and Complete. Therefore, the application can be filed along with the Provisional or Complete Specification. If filed with Provisional, the Complete specification needs to be filed within 12 months.

 

Provisional Specification is very basic in nature and does not require details about the invention, unlike Complete Specification. Perhaps the difference between the two specifications is clear from the preambles of the specifications itself i.e.:

Preamble of the Provisional Application: “The following specification describes the invention”.

Preamble of the Complete Specification: “The following specification describes the invention and the manner in which it is to be performed.”

 

Even though, the Provisional Specification does not require claims, detailed descriptions, drawings etc., however, due care needs to be taken to ensure that the specification is broad enough so the objectives of the invention is covered as Complete Specification cannot be broader than what was disclosed in the Provisional.

 

Many times, during the office action as well as during the infringement or revocation attack, it is the provisional specification, which is first scrutinized to check if the invention was covered clearly. Therefore, even though it is provisional, taking professional guidance while drafting would be advisable to avoid possible mishaps in the future.

 

In order to stay ahead in the competition of technological advancement, R&D companies and other IP sophisticated companies around the globe, work on new inventions and file applications with the bare minimum information to get a priority date for their inventions. This is done before deep diving into specifics such as looking at the prior art or doing the feasibility test for the product/process etc.

 

Ideally, if an inventor comes up with an invention, she should not wait for the invention to be fully developed or for the feasibility test to be done. Needless to mention, millions of researchers around the globe are working on similar subjects and one never knows who might be coming up with similar invention in some part of the world and perhaps may be moving faster to file the patent application to claim priority.

 

Post filing of a Patent Application along with the Provisional Specification, an inventor has 12 months’ time to complete the research and file the Complete Specification. Since this option has been provided under the Patent law, availing it to claim the priority date would be a wise thing to do rather than wait for the research to complete where one would be running the risk of losing everything if someone else files before them. 

 

Ideally these 12 months period are given so one can carry out the patentability/ prior art search, which help the inventors tremendously in working around similar inventions.  Further, the Companies/inventors could also use the (provisional) Patent Application number to discuss the invention with potential investors, partners, licensee, etc. with due caution. 

 

In a situation where the inventor is unable to file the Complete Specification within the due date due to unavoidable circumstances, there is an option to file a request to post-date the application for a maximum period of six months subject to non-disclosure of the invention in the public domain.  

 

Considering these obvious advantages, filing a Patent Application along with a Provisional Specification could and would prevent a genuine effort from being a day late and a dollar short.

 

 

 

Image Credits: Photo by Med Badr Chemmaoui on Unsplash

Post filing of a Patent Application along with the Provisional Specification, an inventor has 12 months’ time to complete the research and file the Complete Specification. Since this option has been provided under the Patent law, availing it to claim the priority date would be a wise thing to do rather than wait for the research to complete where one would be running the risk of losing everything if someone else files before them. 

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A Brief Analysis of the Patents (Amendment) Rules, 2019

The Government of India, Ministry of Commerce and Industry (Department for Promotion of Industry and Internal Trade) vide its notification dated September 17, 2019, has published the Patents (Amendment) Rules, 2019[i] (hereinafter the “Rules”) amending the Patents Rules, 2003 (hereinafter the “Principal Rules”). The amendment came into force from the date of notification.

 

The Government of India, Ministry of Commerce and Industry (Department for Promotion of Industry and Internal Trade) vide its notification dated September 17, 2019, has published the Patents (Amendment) Rules, 2019[i] (hereinafter the “Rules”) amending the Patents Rules, 2003 (hereinafter the “Principal Rules”). The amendment came into force from the date of notification.

 

The highlights of the amendments are as follows:

 

  1. Rule 6: Leaving and serving documents

 

The amended Rules substitute Rule 6 (1-A) with the following:

“Notwithstanding anything contained in sub-rule (1), a patent agent shall file, leave, make or give all documents only by electronic transmission duly authenticated:

Provided that any document, if asked to be submitted in original, shall be submitted within a period of fifteen days, failing which such documents shall be deemed not to have been filed.”

 

Analysis: This amendment is brought to reduce the burden of submission of scanned copies of original documents subsequent to the filing of the same online. The amendment clarifies that the original copies are required to be submitted only when requested by the Indian Patent Office, within 15 days from the date of request.

 

  1. Rule 7: Fees

 

The amended Rules substitute the second proviso of Rule 7(1) with the following:

“Provided further that in the case of a small entity, or startup, every document, for which a fee has been specified, shall be accompanied by Form-28.”

 

Analysis: Again, this amendment is merely clarificatory in nature with respect to the filing of Form 28 along with documents that specify fee. In the principal rule, the provision existed only for small entities and the word ‘startup’ was not expressly mentioned. However, it was already in practice i.e. the patent office required Form 28 to be submitted with documents requiring fee even for startups.

 

  1. Rule 24-C: Expedited examination of applications

 

The amended Rules substitute Rule 24C(1)(b) with the following:  

“(b) that the applicant is a startup; or

(c) that the applicant is a small entity; or

(d) that if the applicant is a natural person or in the case of joint applicants, all the applicants are natural persons, then the applicant or at least one of the applicants is a female; or

(e) that the applicant is a department of the Government; or

(f) that the applicant is an institution established by a Central, Provincial or State Act, which is owned or controlled by the Government; or

(g) that the applicant is a Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013); or

(h) that the applicant is an institution wholly or substantially financed by the Government;

Explanation:- For the purpose of this clause, the term ‘substantially financed’ shall have the same meaning as in the Explanation to sub-section (1) of section 14 of the Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971(56 of 1971); or

(i) that the application pertains to a sector which is notified by the Central Government on the basis of a request from the head of a department of the Central Government.:

 Provided that public comments are invited before any such notification; or

(j) that the applicant is eligible under an arrangement for processing a patent application pursuant to an agreement between Indian Patent Office and a foreign Patent Office.

Explanation: – The patentability of patent applications filed under clause (j) above will be in accordance with the relevant provisions of the Act.”

 

Analysis: The Principal Rules had provision for expedited examinations only in case of startups and international applications where India was a competent searching/examining authority, however, that has been amended to include additional categories of applicant such as small entity, natural person(s) having at least one female applicant, institution or department of Government or controlled by Government. Also, Government companies, institutions wholly or substantially financed by the Government, sectors notified by the Government and applicants eligible under an agreement with a foreign patent office can also file for expedited examination. This amendment will motivate other categories of applicants to have fast track examination of patent applications for early grant of patent.

 

Further, in order to accommodate the said categories, the corresponding Form 18A has been amended.

 

  1. First Schedule: Transmittal Fee & Certified copy fee towards filing an International Patent Cooperation Treaty (PCT) application

 

The amended Rules add:

  1. If the PCT application is filed online, the applicant is not required to pay any fee towards the Transmittal fee. Earlier applicants were required to pay fees ranging from 3200 to 16000. The fees for physical filing remain unchanged.
  2. If a request is filed for preparation of a certified copy of priority document and sharing the same via e-transmission through WIPO DAS, the applicant is not required to pay any fee for the same. Earlier applicants had to pay fees ranging from 1000 to 5000. The fees for physical filing remain unchanged.

 

The amendment in the Rules, especially the expansion of the expedited examination system, would augment the government’s patent prosecution highway (PPH) program that intends to harmonize the patent examination standards and encourage the filing of patent applications in India. In September 2018, after the Second JPO- DIPP Review Meeting in August 2018, the Japan Patent Office (JPO) and the Department of Industrial Policy and Promotion (DIPP) had agreed in principle, to start a bilateral PPH program on a pilot basis in certain identified fields of inventions in the first quarter of fiscal year 2019.[ii] The amendment seems to be a result of the agreement and the intention of improving the overall IP environment of the country. Additionally, the waiver of the transmittal and certified copy fees would also increase the filing of PCT applications and facilitate the ease of doing business in India.

The amendment in the Rules, especially the expansion of the expedited examination system, would augment the government’s patent prosecution highway (PPH) program that intends to harmonize the patent examination standards and encourage the filing of patent applications in India. In September 2018, after the Second JPO- DIPP Review Meeting in August 2018, the Japan Patent Office (JPO) and the Department of Industrial Policy and Promotion (DIPP) had agreed in principle, to start a bilateral PPH program on a pilot basis in certain identified fields of inventions in the first quarter of fiscal year 2019

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Quality Drafting: Key to the Success of Patents

Increased IP awareness and the consequent surge in the rate of patent filings have failed to deliver on the effectiveness quotient of IP enforcement in the market. This has necessitated thorough scrutiny by the Indian Patent Office (IPO) to deter applicants from getting a grant on inventions that might not be able to stand a trail in the Court of Law if its discussed. Therefore, drafting a patent application (specification) plays a crucial role in the success of an invention. From acceptance to infringement actions, the content and quality of the draft determine the fate of the invention. An inventor may know his invention well but might not be able to explain it in a manner compliant to the requirement of the patent office. In such a scenario, professional assistance from an experienced patent practitioner is sought and it is expected of them to understand the technical complexity of the invention at hand and have the desired foreseeability to help the invention survive the various tests.

Impact of drafting the patent specifications having broader scope:

The broader you cover the invention, the broader is your scope of the invention protected. Drafting the patent specifications broadly, covering related future developments, would restrict competitors to a possible extent from claiming similar invention with slight modifications. Therefore, in drafting the specification, the patent expert should avoid using phrases such as “the invention is…” instead they could use phrases like “in an embodiment of the invention.” This will ensure that patent claims receive the broadest interpretation possible.[i] Moreover, broadly drafted patent specification still provides the chance to the applicant to narrow down the specification at the worst case and proceed further to put the application in order of grant. However, care must be taken to limit the breadth so as not to go beyond the invention. Too broad description, without precise details and proper drafting in view of the existing prior arts, might lead to rejection of claims or increased susceptibility to complex patent prosecution.

 

Impact of having various embodiments in patent specifications:

While drafting patent specifications, various embodiments should be provided in order to ensure better clarity in terms of the scope of the patent application. Multiple embodiments should disclose all the possible methods of performing the invention and different combinations of structural components that are involved to achieve the objective of the invention including alternatives. The embodiments disclosed could effectively restrict competitors from claiming a scope similar to the applicant’s invention with slight modification. Additionally, varying embodiments assist in identifying the means that one could employ to avoid infringement and those means must be incorporated to protect the invention from future actions. However, the best patent claims will protect the “invention” itself so that no physical embodiments of the invention can be made, used or sold by anyone without infringing the claims.

 

Impact of having an effective background section in patent specification:

The background section should disclose the existing state of the art to which the invention relates to and the areas of improvement as well as the limitations of such existing art. It must also state the need for the present invention and provide a solution to the problem associated with the state of the art. Care must be taken so as not to limit the scope of the invention to a particular state of the art and if possible, its application to other fields should be hinted.

 

Impact of using appropriate terminologies in patent specifications:

Drafting of patent application in a precise and clear manner, using appropriate terminologies, enable applicants to claim the scope of the invention to the maximum possible extent. Terminologies utilized in the patent specifications have a substantial importance in protecting the scope at the time of patent prosecutions/enforcement. Say, for instance, using the terminology specifically like “selfie” in an invention related to image capturing would limit the scope of the invention to selfies only. Whereas using a broad term such as “image” would protect the invention not only for “selfies” but also for other images. However, the best practice is to use only the appropriate terminologies that are applicable/relevant to the invention. Further, the terminology used in claims should have proper enablement/support in the patent specification. Similarly, inconsistencies must be avoided as it may limit the extent of protection and could render the claim objectionable. Finally, negative limitations and disclaimers should generally be avoided because they do not provide the elegant and artful claim language that offers the best protection for inventions.

 

Impact of claiming the invention in various perspectives and categories:

Claiming the invention in all possible perspectives and categories enables the inventor to protect the scope of the invention entirely. For instance, claiming the invention only in transmission perspective provides a chance to the competitor to exploit the rights of the applicant’s invention in reception perspective with minor changes. Similarly, claiming the invention in all possible categories under a single inventive concept would enable the inventor to completely protect the invention. Else claiming only in one particular category provides a chance to competitors to exploit the rights.

 

Conclusion:

The best practice is to draft patent specifications with utmost care to extract maximum benefits. Patent Practioners need to identify how best to protect their clients’ invention and achieve their clients’ business objectives. It is essential that novelty, utility, and non-obviousness of the invention are adequately represented in the application. Apart from the above-mentioned observations, certain key points such as precision and brevity of claims, lack of repetition, noting essential features and elements of the invention, and going from broadest claim to the narrowest would help in proper drafting.

 

References 

[i] https://www.wipo.int/edocs/pubdocs/en/patents/867/wipo_pub_867.pdf

 

 

Image Credits:  Daniel McCullough on Unsplash

The best practice is to draft patent specifications with utmost care to extract maximum benefits. Patent Practitioners need to identify how best to protect their clients’ inventions and achieve their clients’ business objectives. It is essential that the novelty, utility, and non-obviousness of the invention are adequately represented in the application.

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