Trademarks, banks, and res judicata

The Supreme Court recently went into the question of res judicata (i.e., the principle of law which states that an issue already adjudicated by a competent court may not be pursued by the same parties again) in a complex case involving trademarks, assignment and the business of banking. That such a decision should come at a time when the country is going through an upheaval in banking regulation was coincidental, but it does clarify questions as to the assignability of trademarks, and has some interesting pointers on litigation strategies. It holds potential interest to those tracking company bankruptcy (see) proceedings, as well as banking regulation and resolution proceedings (see).

Brief Facts

The facts of the case, Canara Bank v. N.G. Subbaraya Setty and Ors., MANU/SC/0433/2018, were as follows (see also):

NG Subbaraya Setty owed certain dues to a public sector bank, Canara Bank. As part of his repayment strategy, he signed an assignment deed in 2003 assigning to the bank, his trademark “EENADU” (used in respect of incense sticks). After receiving payments for several months, the bank cancelled the assignment deed citing that as per the Banking Regulation Act, 1949, the bank could not be engaged in any business other than banking, and could not be an assignee of a trademark.

This case pertains to two suits. The first one was in 2004, when Setty challenged the deed’s cancellation, and also asked for recovery of the sum of money he had paid to the bank against the assignment thus far. The bank countersued for a declaration that the assignment deed was unenforceable in the eye of law. By a common judgment in 2013, the bank’s suit was dismissed and Setty’s suit was partly allowed, stating that the bank had no right to cancel or rescind the assignment deed. Setty then filed a review petition to recover the sum of money he had originally claimed, which was also allowed in 2015.  The bank challenged this review judgment, but not the original judgement.

The second suit came about in 2008, when Setty sued the bank to recover an additional sum of money that had been paid between 2004 and 2007 against the assignment deed. In 2015, a court held that the earlier common judgment of 2013 (which the bank had not appealed against), was res judicata between the parties. The bank appealed this 2015 judgement, but the suit was dismissed on grounds of res judicata in 2017.  A few days before the 2017 judgment came, the bank sought a review against the original judgment in the first suit.

The court allowed the the bank’s appeal, on grounds that the original judgment in the 2004 suit had effectively validated a transaction which was prohibited under law. Two provisions of law are relevant here: firstly, under Section 45(2) of the Trade Marks Act, unless the assignment deed was registered, it cannot be received in evidence by any Court. Secondly, under Sections 6 and 8 read with Section 46(4) of the Banking Regulation Act, 1949, the bank cannot do any business other than banking business. Further, an assignment deed which allowed the bank to trade in goods and earn royalty from the assignment of a trademark would be void in law, unless such activity was in connection with the realisation of security given to or held by it.

Trademarks as collateral

This case is different from an earlier well-advertised matter involving Vijay Mallya and a trademark bouquet related to the now defunct ‘Kingfisher Airlines’ (consisting of 9 trademarks). In that case (see), Mallya had offered the trademarks as collateral/security to the lenders (various banks) at the time of taking loans from them. In that case, arguably, the trademarks formed a part of security within the meaning of Section 6 of the Banking Regulation Act, 1949. But in the present case, Setty had not pledged his trademark, ‘EENADU’ at the time of seeking credit from the bank, and the trademark could not be said to form a security held by the bank.

The res judicata principle

The Supreme Court, in the present case, summed up the issue of res judicata as follows:

1. The general Rule is that all issues that arise directly and substantially in a former suit between two parties are res judicata in a subsequent suit between them. These would include issues of fact, mixed questions of fact and law, and issues of law.
2. The exceptions to this general rule are as follows:

(i) Where an issue of law decided between two parties in a former suit relates to the court’s jurisdiction, an erroneous decision is not res judicata in a subsequent suit, even where the issue raised is directly and substantially the same.

The court went on to elaborate that an erroneous decision as to the jurisdiction of a court cannot clothe that court with jurisdiction where it has none. So for example, a civil court cannot send a person to jail for an offence committed under the Indian Penal Code. In any event, its judgment would not bind a criminal court in a subsequent proceeding between the same parties, where the Magistrate sentences the same person for the same offence under the Penal Code.

(ii) An issue of law which arises between the same parties in a subsequent suit or proceeding is not res judicata if, by an erroneous decision given on a statutory prohibition in the former suit, the statutory prohibition is not given effect to. This is despite the fact that the issue may be the same as that directly and substantially in issue in the previous suit. This is because in such cases, the parties’ rights are not the only matter for consideration as the public policy contained in the statutory prohibition cannot be ignored.

(iii) A third exception is if the issue of law is different from that in the previous suit. This can happen when the issue in the second suit is based on different facts from the issue in the first suit. Equally, where the law is altered since the earlier decision, the issue in the subsequent suit is not the same as in the previous suit, because the law to be interpreted is different.