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Patents (Amendment) Rules, 2014 – Certain issues with the definition of small entities

By Prashant Reddy & Adarsh Ramanujan

Introduction

On February 28, 2014 the Indian Patent Office (IPO) notified the Patents (Amendment) Rules, 2014 (“Rules”). These Rules are based on the earlier draft Patents (Amendment) Rules, 2013 which were published on May 6, 2013. The amended rules have come into effect from February 28, 2014.

When the draft rules had proposed a substantial fee hike across the board, the IPO received negative feedback, warning about the adverse impact such fee hike would have on small and medium entities. It appears that acting in response to this criticism, the IPO has now created a new class of entities, called “small entities”, for the purposes of fee-discrimination. Earlier, the IPO recognized only two categories of applicants: “natural persons” and “other than natural persons”.  After the notification of these Rules, there will be three categories of applicants: “natural persons” and “other than natural persons” which will now be divided into “small entity” and “others except small entity”. A "small entity" would now enjoy a lower fee than “others except small entity" and the reduced fee is indicated item-by-item in the schedule.

Definition of “small entities”

(i) For Indian citizens and companies:

The Patent (Amendment) Rules, 2014 define small entity in the terms of Micro, Small and Medium Enterprises Development Act, 2006 (MSMEDA). The main criterion to define “small entity” is the size of the investment made by the enterprise (whether micro, small or medium) in plant and machinery (in case of manufacturing) or equipment (in case of services), minus the cost of pollution control, research and development, industrial safety devices and such other things as may be specified by notification under the MSMEDA. The value of investment as specified in Section 7(a)(1) & Section 7(b)(1) of the MSMEDA is detailed below:

For enterprises engaged in manufacture and production of goods:

  • A micro-enterprise, where the investment in plant and machinery or investment in equipment does not exceed INR 25 lakh;
  • A small-enterprise, where the investment in plant and machinery or investment in equipment is more than INR 25 lakh but does not exceed INR 5  crore;
  • A medium enterprise, where the investment in plant and machinery is more than INR 5  crore but does not exceed INR 10  crore.

All three categories of enterprises qualify as “small entities” for the purposes of the Patent (Amendment) Rules, 2014.

For enterprises engaged in providing or rendering services:

  • A micro-enterprise, where the investment in equipment does not exceed INR 10  lakh;
  • A small-enterprise, where the investment in equipment is more INR 10  lakh but does not exceed INR 2 crore;
  • A medium enterprise, where the investment in equipment is more than INR 2 crore but does not exceed INR 5 crore.

All three categories of enterprises qualify as “small entities” for the purposes of the Patent (Amendment) Rules, 2014.

The secondary criterion to qualify as a micro, small and medium enterprise under the MSMDE Act is the nature of goods being manufactured. As per “Explanation 1” to the new Clause 2(fa) of the Rules, the “small entity” will have to be involved 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 or engaged in providing or rendering of any service or services in such an industry. While the First Schedule is quite extensive and covers 37 specific industries plus miscellaneous industries, there is, however, the possibility that some industries may have been missed in this list. The IPO may need to appreciate that the Industries (Development and Regulation) Act, 1951 was passed with the limited object of "development and regulation of certain industries" and the list in the first schedule to this law cannot be taken as exhaustive, especially keeping in mind the purpose behind prescribing a reduced fee for "small entities" under patent law. Failing to recognize this may have wider ramifications on the international front.

The Rules are surprisingly silent on the nature of evidence needed to be submitted by “small entities” demonstrating that they meet the qualifying criteria. Instead, this requirement is mentioned in the new corresponding Form 28 which small entities are required to file in order to benefit from the lower filing fee. In particular, Form 28 requires the Indian entities availing “small entity” status to submit evidence of registration under the Micro, Small and Medium Enterprises Development Act, 2006. This evidence of registration is basically a memorandum which has to be submitted to the District Industries Centre within whose jurisdiction the enterprise is located. It is relevant to note that most states provide for online registration facilities.

(ii) For foreigners:

The criteria for foreign applicants in terms of monetary investment in “plant and machinery” or “equipment” will be the same as applicable to Indian entities, i.e., as defined above. However, the documentary evidence that needs to be furnished along with Form 28 by the foreign applicant in respect of such claim has not been expressly defined by the Patent Office. The Form 28 notified by the Patent Office merely states “any other document (in case of foreign entities)” which is vague. Foreign applicants are, therefore, advised to check on this grey area including on the requirements of the law of their country and the government authorities responsible for issuing such documentary evidence to them.

Can Universities & Research Institutions classify themselves as “small entities”?

Universities & research institutions are increasingly becoming large patent filers in today’s world. Going by a simple reading of the definition of the term 'enterprise' in Explanation 1 to the newly inserted clause 2(fa), it would appear that universities and research institutes may be covered under the rules since they provide research services to the industries in the First Schedule to the Industries (Development and Regulation) Act, 1951. Nonetheless, universities & research institutions providing research services in industries not listed in the said schedule risk losing out on the reduced fee. A grey area would be universities doing basic research, not as sponsored research for industries. Further, it is not clear whether any of the District Industries Centre have been registering Universities as MSMEs and hence, they may face difficulties in providing the requisite evidence to the IPO. The IPO would do well to clarify the position of universities and research institutes vis-à-vis small entities both in India and abroad.

One issue going forward is the valuation of the plant and machinery since a laboratory conducting the scientific research is not a legal entity which is separate from the University and if the entire value of the university’s plant and machinery is taken into account, it will most likely, always cross INR 5 crores (which is the upper limit for the definition of small entity).

When small entities change their status during prosecution

Another problematic area going forward is about entities that may change status during the course of the prosecution, such as where the application is assigned to a large entity. The newly inserted Rule 7(3A) suggests that the difference in fee will have to be submitted along with the request for transfer. Logically, for subsequent activities requiring fee, the payment would be made based on the status of the new applicant. However, the Rules do not seem to cover situations where a "small entity" loses its status as a "small entity" after the filing of the application. Since the schedule to the Rules prescribe fee on an item-by-item basis, the fee requirement will have to be decided at each stage when such fee is being paid. However, the Rules do not seem to provide for detailed evidentiary requirements in such cases and it is not clear how the IPO will deal with such realistic scenarios.

[ The authors are Principal Associates, IPR Practice, Lakshmikumaran & Sridharan, New Delhi ]

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