IT services' focus on building IP and platforms may trigger more lawsuits

While lawsuits are common in the US tech industry, analysts believe their nature is changing due to shifts in business models and growing organisational awareness of intellectual property infringement

Recently there has been a spurt in litigation by information-technology (IT) services players as the industry’s business model transitions towards platform and intellectual property-led deals.

Unlike earlier litigation, which were related more to contract breaches and disputes on project-implementation timelines, this time it is about misappropriating trade secrets and infringing intellectual property (IP).

Industry players and analysts say such cases are only going to increase as companies start deploying technologies such as artificial intelligence (AI) and Generative AI (GenAI) for coding and creating tools.

In August this year, Nasdaq-listed Cognizant’s subsidiary TriZetto sued India’s second-largest IT services player, Infosys, in a Texas federal court for alleged misappropriation of trade secrets related to health care software.

According to the lawsuit filed, Infosys allegedly misused TriZetto’s software to create a competing product. Cognizant is seeking monetary compensation and also an injunction against Infosys from further using its proprietary information.

Last year, a United States (US) court had asked Tata Consultancy Services (TCS) to pay up to $210 million for allegedly misappropriating the source code of US-based services firm DXC.

Earlier this year, according to media reports, HCLTech sued French IT firm Atos for copyright infringement. The company is seeking damages of around $132 million.

Peter Bendor-Samuel, chief executive officer (CEO), Everest Group, said this was a function of the maturity of the industry and also the fact that players were taking contracts from one another instead of green fields.

“A complicating factor is that tech services firms have invested in building their own IP, which in many cases is embedded in their services work. For example, Cognizant has TriZetto and DXC a robust set of insurance assets. Hence when clients seek to move vendors there is the potential for IP infringement. The losing vendor then seeks to block the move by taking a litigious position or at least seeks to capture value from its IP assets,” he said.

Phil Fersht, chief analyst and CEO of HFS Research, said one of the reasons for litigation was the intensity of competition and the similarity of delivery platforms.

“Too many times employees are too eager to close deals and end up cutting corners. This has been a weakness of several Indian heritage firms over the years and they need to be far more diligent with these IP issues.”

Salman Waris, partner at TechLegis, said: “Most IT firms have their own internal IPs or library of codes, which they can use across projects. They follow this method to save time and cost apart from improving efficiency in their project bids. However, sometimes, engineers working on the project are not aware of the IP-protection clauses of the contract with the client, leading to inadvertent reuse.”

However, experts say with the advent of AI in coding and the usage of AI tools going up, such litigation will increase.

Fersht said with the proliferation of customised AI platforms, the growth of agentic AI, and the automation of AI, there would be a greater incidence of IP breach, which could end in “serious litigation”.

“The industry is still adjusting to this new reality and this trend is likely to accelerate until this adjustment is complete. This is likely to take a couple of years. Even after that we will still see some litigation but likely somewhat reduced,” said Bendor-Samuel.

According to Waris, litigation will increase especially due to ChatGPT and the use of AI bots.

Trend shift
 

 Cognizant subsidiary TriZetto sued Infosys in August last year for misappropriation of trade secrets 
 

 A US court in Nov 2023 asked TCS to pay up to $210 mn for misappropriation of source code of US-based services firm DXC
 

 Earlier this year, HCLTech sought damages of $132 mn from French IT firm Atos for copyright infringement
 

 Shift in business model, awareness within the industry on IP issues behind the rise, say experts