Startups

Legal And Ethical Issues Faced By The Start-Ups In India – Intellectual Property

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Introduction

Start-ups are small growing companies founded by one or more
entrepreneurs, they are at their initial stage of operation with a
limited amount of capital and limited experience. The government of
India has taken several initiatives to encourage the growth of
start-ups in order to promote entrepreneurship and employment by
providing easier IPR facilitation, a favorable taxation system, and
easier compliance for the setting-up company, etc., even then
Start-ups in India have to deal with various obstacles like
funding, insufficient skill, lack of marketing strategies, etc.
over that start-ups have obligation to operate in compliance with
laws and follow the ethical behavior. Non –compliance with
laws or ethical misconduct may lend the start-ups to serious
troubles like fines, punishments, revocation of licenses,
litigation expenses, etc. which may cause an adverse effect on the
limited capital of the start-ups, following are some most common
legal and ethical issues which start-ups face in India –

Legal Issues

Licencing and permit issues

The start-ups may require various licenses, permissions, or
permits to execute their ideas as due to lack of legal knowledge
the start-up may end up paying penalties and may even end up being
unethical or illegal. The requirement of licenses, permits, and
permits may vary from business to business, so before starting a
business the person should be aware of the local laws, rules, and
regulations. The other issue with respect to licenses is that
sometimes it is not much quick and easy to get licenses from the
government authorities and it requires a lot of time and money to
obtain licenses. Some of the licenses required by the companies are
registration certificates, GST registration, FSSAI license,
import and export code, Udyog Aadhar registration, etc.

Dealing with goods or services which requires license like
alcohol/ alcoholic beverages, electricity, guns, drugs and
medicines, prohibited crops like marijuana or opium, tobacco, food
products, human organs, etc. without obtaining proper licenses from
the concerned governing bodies may attract criminal charges which
may lend the businessmen in jail or suffer heavy fines and
penalties.

GST
registration
 – In the current scenario most
start-ups are looking at their future as an e-commerce business for
such e-commerce businesses GST registration is mandatory, the
businesses whose turnover is equal to or more than 40 Lakhs, should
get themselves registered, the process of registration is called
GST registration, there are certain kinds of business who should
get GST registration failure to which is considered as an offense.
Following start-ups/businesses should mandatorily get GST
registration – Casual taxable persons, Non-resident taxable
persons, e-commerce aggregators, those who are paying through
reverse charge mechanism, etc.

Permissions – for the smooth functioning of a business
should operate in such a manner that it should use its resources in
productivity rather than in paying fines and penalties thus it is
mandatory that a business should get necessary permissions and
permits from the concerned bodies before starting their operations.
A Start-up should obtain Fire permits and safety registration. The
benefit of obtaining registrations is not limited to protection
from legal hindrances but it also benefits in availing various
government schemes like MSME registration which can help the
start-ups to get subsidies in loans, taxation, and other schemes. A
start-up should get registration under the start-up India
registration scheme.

Advertisement and marketing

Advertisement and marketing are very important for any start-up
or any other forms of business but advertising false claims,
obscene, scandalous, or seditious advertisements may give rise to
serious criminal penalties and it may blow away the goodwill and
reputation of a firm and for start-ups, such mistakes may be like
stepping over a small growing seedling. Some examples of prohibited
advertisements are – “Tobacco Prohibition Act”
prohibits all kind of direct or indirect advertising of tobacco and
tobacco products in all media, The food safety, and standards act,
2006 prohibits advertising of infant formula in order to encourage
breastfeeding of infants, physicians under Indian Medical Council
regulations, 2002, legal services under bar council of India Rules,
pre-natal sex determination services under The Prenatal Diagnostic
Techniques act, 1994, Alcohol or alcoholic beverages under Cable
Television Network Rules, 1994, Guns and other firearms under Arms
Act, 1959, medical services and medical devices, religion-related,
comparative advertising (which compares one’s product with the
competitor), deceptive or misleading advertising.

Example

World Health Organization has also prohibited the sale and
marketing of infant formula like Nestle faced a lot of criticism
worldwide for being accused of violating ethical marketing codes
and manipulating customers with misleading nutritional claims about
its baby milk formulas by comparing it with mother’s milk.

Recently Tanishq faced a lot of criticism for violation of
ethical marketing norms for hurting the religious sentiments of the
people.

Myntra was forced to change the appearance of its “M”
logo after an FIR was launched against it that its mark was obscene
because it resembles a woman.

Infrastructure related Zonal Laws

Allocation of property for the purpose of the office, warehouse,
service center, manufacturing units, etc. is another major
challenge for start-ups in India. The start-ups should be aware of
local laws regarding the commercial use of agricultural land/
school/ hospital property.

In India land comes under the domain of state government and the
laws related to land vary from state to state. The start-up must be
aware of the zonal laws, zonal laws are the regulations that deal
with the use of land in a particular area. For example – The
local municipal authority in an area can pass a law forbidding the
use of any property or land for industrial or commercial purposes,
as it is a residential area. The zonal authority divides a locality
into eight parts which include residential, commercial, industrial,
public, and semi-public, public utilities, open
areas/parks/playgrounds, transport and communication, agricultural
use. The zoning authorities may decide to prescribe the height,
location, and map of the building where the commercial work is
carried out. The purpose of the zonal laws is to separate
residential areas from commercial areas.

In case a person plans to operate a business from his residence
he/she may be required to take necessary permissions from the local
municipal authority, town planning authority, landlord (if the
property is being used by the tenant).

When a residential property is being used for a commercial
purpose the property tax also changes when a property is used for
commercial purposes then the tax rate will be higher in comparison
to the residential property.

Data Protection and Privacy Issues

In the era of digitalization everyone is using any kind of
internet device be it a smartphone or pc over that the covid-19
pandemic was like icing on the cakes for the field of
digitalization and many businesses, offices courts shifted their
work to the online mode which brings huge opportunities for the
start-ups. In the digital world privacy is a myth, Consider a real
example suppose that if you download and log in to Healthkart to
check some supplements you enter your phone number, address, name
and check the terms and conditions popup even without reading it,
what happens to your details like your phone number, address? And
next time when you open YouTube or Google Chrome you will get to
see ads based on what you searched on Healthkart. The Startups and
other e-commerce businesses record and use personal details
including the search history. The conclusion of this example is
that the start-ups should not access the private details of the
users without their permission or they should not ask for the
permissions which are not needed by their website or application.
The start-ups should give importance to the privacy of the users.
It could be done by drafting a privacy policy in a short, simple,
and summarized manner and also in regional language so that before
signing in to any application the user may easily read and
understand the privacy policy, terms and conditions. The start-ups
should also enter into an agreement with their users that they will
not share or use the personal details of the users which in turn
will help the start-up itself in gaining goodwill and trust of the
people. In the privacy policy agreement, the start-up should
disclose what personal information is collected by the site, how
the information will be shared or sold to the third party.

Protection of Intellectual property rights

Intellectual property rights are like the heart and soul of any
start-up. Many start-ups face a common fear that their idea or plan
could be stolen by someone so it is important for a start-up to
protect their intellectual property rights on a priority basis. And
the other issue is that the start-up should also check that what
they are planning to do or what they are planning to sell is
already been protected. So that they may not face problems like
trademark infringement or other IP violations after they invest a
big sum of funds in their business.

The requirement of intellectual property rights protection may
be different from one start-up to another. Start-ups should seek to
protect the following intellectual property rights –

  1. Patents – In case a start-up is dealing with any
    technical thing or a technical process of performing a thing then
    it should go for product patent or process patent. The patent right
    is a negative right that will allow the patent owner to make
    exclusive commercial use of his invention and prohibits others from
    using it. Once a patent gets registered the owner can make its
    exclusive use for the period of 20 years and in case he ignores the
    patent registration then anyone else can copy his idea and which
    will subsequently cause a negative effect on the business of the
    inventor by affecting their profit and goodwill.

  2. Copyright – The start-up can get copyright of its
    software application, magazines, articles, research work, or idea
    presented on paper or other literary or artistic work. It will
    forbid others from using his creation for the period of lifetime of
    the creator and 60 years after his death.

  3. Trademark/ Servicemark – The start-ups should be careful
    while deciding their trademarks that their trademarks or tradename
    should be easy to pronounce, it should be attractive, distinctive,
    international implications of the marks should also be considered,
    they should look for the mark they are deciding to choose on the IP
    India website or simply by making a google search. The start-up
    should seek registration for a trademark or service mark either for
    used or proposed to be used. A trademark or service mark is an
    identity of a business or a service provider. It helps the
    customers to identify your goods or service in the market.

  4. Trade Secrets and Confidentiality Agreements – Trade
    secrets are the most important IP right held by an entrepreneur, a
    secret will not be secret anymore if it leaks and gets into the
    knowledge of many people. In order to protect trade secrets, the
    start-ups should enter into a confidentiality agreement /
    Non-disclosure agreement with their partners and employees.

Contract Management

An agreement enforceable by law is known as a contract. A
start-up must be careful while drafting a contract as well as while
signing it. A start-up goes through several contracts with
suppliers, employees, and others. For purpose of reference, it
would be ideal for a start-up to go through the sample contracts
available online of pre-existing companies which may help them to
draft a good contract.

Agreement with co-founders – The start-ups should make a
proper deal with the co-founders/ partners in a written form so as
to avoid any kind of dispute in the future. Like what will be the
distribution of profits, what will be the capital investment,
roles, and responsibilities of the co-founders, what will be the
salaries? decision making, percentage of ownership of each founder,
how will the sale of business be decided, what will be the dispute
resolution mechanism, what are the goals of the business, etc.

Confidentiality agreements – Confidentiality agreements
are also known as Non-disclosure agreements (NDAs) they impose a
duty on the parties that they will not disclose any secret
information or idea of the firm to any outsider. The NDA agreement
should also state what will be the consequences in case of a breach
of NDA. The start-ups should get into a confidentiality agreement
with their employees, co-founders, or whoever holds the
confidential information or idea of the start-up in order to
protect their ideas.

Contract with service providers – While making any
contract with any service provider or supplier the contract must be
drafted carefully and it should include all the major and minor
details which should include timings, quantity, quality, cost, etc
and it should also mention the jurisdiction in case of conflict.
While drafting such contracts the Co-founders should keep in mind
that they should keep their liabilities limited and the contract
must also state what will be the dispute resolution mechanism in
case any dispute arises.

Employment Contracts – A start-up should get signed an
offer letter with its employee while hiring because hiring someone
without any proper agreement may lead to disputes with respect to
working hours, salary, etc. The employment contract must contain
all necessary directions and information with respect to work, like
– what will be the office timings, what will be the salary,
what is the job position, who will be the super wiser, terms and
conditions for termination of employment.

The start-ups should avoid going through traditional and lengthy
methods of drafting contracts, rather their contracts should be
simple, summarized, precise manner and the use of legal maxims and
tough legal words should be avoided so that they would be easy to
understand by a layman or any person not belonging from a legal
background.

Tortious Liabilities

Tortious liabilities may arise when someone does an act
prohibited by law or omits to do any act which he is obelized to do
by law. A start-up may have to face tortious liability if it is not
careful about its acts. The relevant tortious liabilities which may
arise is Strict Liability – The rule of strict liability was
evolved from the famous Rayland v Fletcher case wherein Ryland
builds employed laborers on his land to make a reservoir where they
found an unused mine shaft and they forgot to seal the mineshaft
which later on caused flooding in the adjoining mines and caused
the heavy loss. The court held Rayland liable for strict liability.
The Startups should take care that they should be careful in
handling and management of raw materials, noise, fire, vibrations,
smell, etc. For Example- A start-up is involved in making and
delivering lunchboxes in the nearby offices and homes and on one
unfortunate day the gas cylinder catches fire and burns down the
roofs of adjoining houses then the theory of strict liability will
arise in this case and the start-up may have to face heavy penalty
or even loss of life and property.

The problem is determining the business structure

Many start-ups face problem in determining what is an ideal
business structure for their start-up as the business structure may
vary from business to business and one business structure could be
good for one may be bad for the other in terms of risk, a number of
people involved, sharing of profits, liability, taxation, annual
meetings, and registration, etc. The business structure of a
start-up may be in the form of partnership, sole proprietorship,
private limited business or LLP, etc. Following are some most
common business structures in India.

Sole proprietorship – This structure is ideal for
those who like to have total control over their business and the
best thing about this structure is that the proprietor enjoys all
the profits alone. This structure is very popular because of its
easier taxation structure as the tax amount is decided on the basis
of the revenue earned by the proprietor. In India, unlike other
business structures, a sole proprietorship business structure is
not taxed as a separate legal entity. Rather, the proprietors file
their tax as parts of their individual tax returns. The tax rate
for a sole proprietor business earning less than or equal to 2,
50,000 is zero. The proprietor has to pay 5% tax when its income is
more than 2, 50,000. In case the income is five lakh and below 10
lakhs then the taxation rate is 20% and when the income exceeds 10,
00, 000 then it’s 30%. Apart from advantages there are some
disadvantages too as the liability of a sole proprietor is
unlimited which means in case the proprietor is unable to pay the
debts of the business then his personal assets could be sold to
meet the needs as in sole proprietorship business the assets are
not classified as private assets or personal assets. And one more
disadvantage of this structure is that the capacity to raise
capital is very limited.

Limited Liability Company – This business structure
is most suitable when the business is unstable or risky. The best
thing about this structure is that the liability is limited means
that the personal assets and business assets are considered
separate and the personal assets could not be used up for the
recovery of the debts. In this structure, the company is considered
a separate legal entity. In Limited Liability Company, the expenses
involved in forming it are comparatively higher than sole
proprietorship business.

Partnership firm – This business structure is
suitable when more than one people are involved in the business and
it is one of the simplest forms of business structure it is
governed by The Partnership Act and the Indian Contract Act. The
taxation structure in the partnership firm is quite similar to the
proprietorship firm. The main characteristic feature of a
partnership firm is that in this form of business more than one
person is involved and the agreement between them is governed by
the partnership deed. The main disadvantage of this structure is
that the profit is shared among several partners and there are
several issues like conflicts in ideas of different partners.

Further, these business structures are classified on the basis
of the incorporation, type of liability, ownership, place where the
company is functioning, etc.

Ethical Issues

The purpose of a start-up is to earn profit but while earning
profit ethics should not be ignored. The start-ups should comply
with the laws and regulations and at the same time, it should not
forget their duty towards the community, people, customers, and the
company.

  1. Duties towards the customers – The
    start-ups should not indulge in any kind of activity which may be
    detrimental to the interest of the customers, the start-ups should
    accept the feedback from the customers and should take care of the
    after-sale services and assist the customers. A start-up can grow
    only with the help of satisfied and happy customers.

  2. Duties towards the employees – The
    employees for a start-up are as important as wheels for a car, be
    it a small or big employee everyone’s contribution is necessary
    for the proper growth and functioning of a start-up. The start-up
    should be legally as well as ethically give regard to the rights of
    the employees. They should be given proper treatment, timely
    payment of salary and allowances, the Start-ups should have a
    proper system for hearing the grievances of its employees and it
    should try to keep its employees motivated in order to maintain
    healthy growth of the start-up.

  3. Duties towards the environment –
    The Startups should be careful that they obtain all the legal
    certificates, permissions, and permits from the government bodies
    and they should not involve in any activity which may have a
    negative impact on the environment.

  4. Duty towards the Start-up – The
    employees in a start-up should prioritize the interest of the
    start-up rather than their personal interest. All the employees
    should work together for the growth of the start-up.

  5. Duties towards the community – The
    Startups should be careful that they should not in any manner cause
    harm to the sentiments of the people and they must follow a proper
    pathway for the betterment of the society by keeping provisions of
    investing in social causes like education, food, environment, etc.
    Start-ups should be careful about the religious sentiments of the
    people, especially while advertising.

  6. Issues with respect to Labour
    laws
     – It would be wise for a start-up or any
    other company to be well-versed with the labor laws and the local
    laws because when we are hiring some person to work for us then we
    have several legal as well as ethical responsibilities towards that
    person as there are several statutes which protect the rights of
    the laborers with respect to the working hours, sexual harassment
    at the workplace, payment of wages, payment of bonus, etc. However,
    the new start-up, India initiative which was launched by prime
    minister Narendra Modi in 2015 exempts the start-ups from labor
    inspection.

  7. Use of deceptive or inappropriate
    marks
     – Since the launch of the Make in India
    initiative by the Narendra Modi Government in September 2014.
    People have connected their patriotic sentiments with the make in
    India campaign and many businesses and start-ups could be seen
    using the make in India logo on their products in order to market
    their products in the name of the country and befooling people.
    Back in 2016, a Noida-based start-up named Ringing Bells announced
    the launch of a smartphone named Freedom 251 at exceptionally low
    cost which gained attention all over the country. It came up with
    an advertisement on the front page of several local newspapers
    which consisted of India’s tricolor flag and later on the
    company ended up merely as a scam.

    The improper use of such marks or emblems is prohibited from use
    under the Emblems and Names (Prevention of Improper Use) Act, 1950
    which prohibits any person from using or continuing to use, for the
    purpose of any trade, business, calling, or profession, or in the
    title of any patent, or in any trademark or design, any name or
    emblem specified in the Schedule or any colorable imitation thereof
    without the previous permission of the Central Government or such
    officer of Government as may be authorized in this behalf by the
    Central Government. The start-ups should keep in mind that they
    should not use any mark or emblem or logo which is prohibited by
    law from use.

    The start-ups should not try to befool the customers by using the
    certification marks without obtaining the certificates from the
    competent authorities. If any individual for any reason
    misrepresents any certification mark as registered in regard to any
    products or services; then he/she by law is punishable with
    imprisonment for a term which may extend to three years or with
    fine, or both.

Dealing with counterfeit goods

The start-ups should avoid the sale or promotion of food,
beverages, health supplements, medicine, auto parts, clothes,
beauty products, pirated software. The US Trade Representative
(USTR) offices ‘Notorious Market’ report has marked
Snapdeal and Amazon for the sale of counterfeit products. The sale
and promotion of such goods are detrimental to the start-up’s
reputation, the manufacturer as well as the consumers.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

Read more at www.mondaq.com

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