Testing Without Transferring: Protecting Startup IP in Pilot and Proof-of-Concept Agreements

Introduction : A startup does not usually make a sale in one meeting with a large business. Customers would like to verify that the product works for their data and operations while companies would like to get income after that. This is where a pilot is introduced. This instrument fills the void between both parties but at the same time represents the biggest risk for them as well since the customer has wide access to the product, its processes and often specialists; so on the other side, the startup operates with no written agreement and very limited powers; as a result, two typical scenarios emerge: either a pilot becomes an indefinite unpaid trial, or it gradually turns into bespoke development undertaken at the startup’s cost. The needs of the customer are also fair and reasonable as it wants to have enough time and support as well as clear success criteria, clarity of data handling and some price certainty, if it decides to proceed with buying. In this regard, the article will examine how to use pilot agreements under Indian legislation so that testing can be done while protecting the startup’s IP, confidential information, and commercial interests.

Legal Provisions

Pilot agreements are not subject to any law in India and are only assessed under the general principles of contract and intellectual property laws. In India, a pilot is enforceable if it adheres to the provisions of Section 10 of the Indian Contract Act, 1872 and consideration under Section 2(d) does not have to be in monetary form, thus allowing for the promise to be supported by information or feedback. Section 27 makes void, to that extent, any agreement restraining a lawful trade, profession, or business. Sections 37 and 62 govern performance and the substitution of a new contract for an old one, which matters when a pilot converts into a commercial deal. Sections 73 and 74 govern damages and pre-agreed sums.

The Copyright Act, 1957 treats a computer programme as a literary work. The author is the first owner, subject to exceptions such as employment under a contract of service; the commissioned-work exception in section 17(b) covers photographs, paintings, portraits, engravings, and films, not software. Copyright passes by assignment only in writing signed by the assignor, which must identify the work, the rights, and the duration and territory; if duration is omitted it is deemed five years, and if territory is omitted, India. A licence must likewise be written and signed, and section 19 applies to it through section 30A.

India has no standalone trade-secrets statute. Protection comes from contract and from the equitable action for breach of confidence, measured against the international benchmark of information that is secret, commercially valuable because it is secret, and subject to reasonable protective steps. Where personal data is involved, the Digital Personal Data Protection Act, 2023 requires processing to comply with the Act and provides for contractual arrangements with data processors in specified circumstances; the 2025 Rules have staggered commencement. Rules 1, 2 and 17 to 21 came into force on publication, Rule 4 came into force one year after publication, and Rules 3, 5 to 16, 22 and 23 came into force eighteen months after publication. Startups should therefore identify the specific provisions applicable at the relevant stage rather than treating 13 May 2027 as a single commencement date for the entire framework.

Legal Analysis

A. Defining the scope and purpose of the pilot

The concept of a pilot can be explained best when understood as a combination of a time-based limited, non-exclusive license for product use as well as professional services such as support and onboarding, influence and validation methods that have been agreed upon by both parties. It is also stated that such transactions cannot be considered sale transactions since ownership rights are not being transferred here.

The license must also specify that no transfer takes place, indicating that the license is restricted and cannot be assigned to other people, places, or purposes. Establishing limits has a prominent role in preventing “unintentional development.” The concept of a problem definition, a specific dataset, and criteria for success as well as procedures for changes helps to turn an endless trial into a trial with a limited structure. All actions mentioned in Section 37 are binding for all parties, and therefore it is essential to provide a clear description of the obligations of the startup, which would allow avoiding integrating extra functionalities. Requesting features that do not exist, or integrations that the startup would not otherwise build, belong in a separate, differently priced statement of work.

B. Duration, fees and preventing indefinite trials

A predetermined term, automatic end, and renewal only through written approval at a defined price prevent ongoing access without permission. An unpaid trial period is enforceable because consideration does not need to be cash-based, if the start-up can prove what it is getting in return i.e., comments, right to refer to the product, or permission to access data. Even a small price indicates the seriousness of the process and offsetting it against a first-year payment gives the user an incentive to proceed. Advanced fees and a defined amount for further development allow both parties to foresee changes in the process. The clause stating the fee amount for exceeding the limit or early termination through the contract, allows only for reasonable damages amounting to up to the stated sum thus, the amount has to be commercially justifiable and not assumed to be recoverable merely because it is stated in the contract.

C. Protecting background IP and limiting customer rights

Since the pre-existing background IP, which includes all the code, models, documentation, and any knowledge of the startup, should belong to the startup and should only be licensed for the pilot period, it has to be specified upfront. The source code should not be transferred unless there is an explicit agreement. It must be noted that the concept of silence works both ways. Namely, if the customer has ordered a custom-made software, but there is nothing in the contract about complete ownership of the results of this work, the developer (or its employer) will be considered the owner again due to section 17(c); of course, the customer can claim that he has an implied license to use what he has paid for, but this matter will be settled depending on the circumstances. WIPO recognises that legitimate analysis or reverse engineering may not, by itself qualify as theft; therefore, an agreement limiting reverse engineering must be mutually agreed in accordance with the applicable legislation.

D. Ownership of improvements, customisation, and feedback

There are three categories that require separate treatment. License-back should be used for feedback such as bug reports and feature suggestions where the customer might hold its materials independently, but the startup can benefit from the information without paying or giving any credit while ensuring that any confidential information received from the customer is protected. The startup must have ownership of the general improvements made to the core product. However, the startup will most probably keep ownership of the codebase while allowing the customer to use their customised solution.

A startup can assign the bespoke part of a bespoke project to a customer who pays for the work and desires ownership through a signed assignment under section 19 and by cutting out the core product. Joint ownership should be avoided as the owning party’s ability to use and license the project will be unclear, as there will be no regime of usage in place. However, since the author is the owner of the work in question, a customer’s recommendation will not entitle it to any rights in the startup’s product, but it would be helpful to keep records of contributions made to prevent disputes.

E. Confidentiality and trade-secret protection

In the absence of a trade-secret statute, the confidentiality clause is the primary protection, and equity is the fallback. Brady shows that information delivered for a limited purpose in negotiations that never matured stays protected, regardless of whether a contract was ever signed. An illustration of the limitations is Fairfest, an NDA running within six months, where the claimant had to pinpoint the information which they relied on, while the relief was limited to certain categories for a predetermined period. American Express shows that data ascertainable by a competitor independently, as well as general know-how, may enjoy no protection whatsoever. A model clause should thus categorise confidential information into-source code, model architecture, roadmap, pricing, and benchmark results-limiting access to designated users and allowing for an indefinite duration of protection over source code and trade secrets, provided they are confidential. As far as a reasonable degree of protection within the test goes, the startup's own marking and access controls will be assessed. A concise processing clause that identifies fiduciary and processor, authorised purpose, security measures, and deletion of pilot data must be included in the personal data. It is crucial to ensure that any public disclosure or publication of an invention has not been made before a patent application is filed.

F. Exclusivity and restraint of trade

Customers often ask for exclusivity or a right of first refusal. Section 27 does not treat every such term alike. In Gujarat Bottling the Supreme Court held that a negative stipulation working only during a commercial agreement, and meant to advance trade, is not a restraint of trade. Niranjan Golikari likewise enforced a restraint during the term of employment and treated confidentiality obligations differently from restraints on trade. In Percept D’Markthe Court applied the same line to an exclusive-negotiation period and a right of first refusal valid while the contract lasted, but prima facie void once enforced after expiry. The Court treated the post-term position as settled, citing Krishan Murgai among others, though its finding was expressly prima facie, given at the interim stage.

For pilots, a covenant not to offer the same pilot to named competitors during the pilot period, or an exclusive-negotiation window within it, is defensible. An obligation that survives expiry and stops the startup dealing with other customers, or a post-termination non-compete, is likely to be void under section 27. If the customer needs comfort after the pilot, a short, priced exclusivity inside the commercial agreement, or agreed pricing and priority terms, is the better tool.

G. Termination and transition to a commercial agreement

The contract must clarify what occurs when it expires or terminates early. Access ends automatically, and each party must return or destroy the other's confidential information. The customer data must be returned or deleted within a specified period in exchange for a certificate, and previous payment obligations must remain valid. Termination at one's wish ensures that one side will not be stuck with a contract, while the parties should also address breach cases, e.g., the misuse of intellectual property and confidential info. Survival clauses should only apply to confidentiality, ownership of intellectual property, payment and liability, as generally, while avoiding post termination restraints that fall foul of section 27. 

Conversion should be designed in from the start. A pilot that meets the agreed success criteria triggers a negotiation window on stated heads of terms, with the pilot fee credited to the first-year fee. The clause should set a process and timetable, not promise a deal. If the parties intend the eventual commercial agreement to replace or alter the pilot arrangement, it should expressly state which pilot terms are superseded or preserved; where applicable, the arrangement can be structured consistently with section 62 on novation, rescission and alteration of contracts. Confidentiality and IP provisions for pilot-period information should survive as expressly agreed.

Case Laws

John Richard Brady v Chemical Process Equipments Pvt Ltd, the plaintiffs gave a manufacturer drawings and knowledge, under a confidentiality undertaking, so it could quote for components of their fodder production unit; the supply deal failed and the manufacturer launched a similar machine. The Delhi High Court granted an interim injunction, holding that equity restrains breach of confidence whether a contract was concluded.

Fairfest Media Ltd v ITE Group Plc, a travel-show organiser shared financial and marketing information under a mutual NDA while discussing a joint venture or takeover, and the recipient later co-organised a competing show. The Calcutta High Court recognised protection through equity and breach of confidence, required the claimant to identify the information, and granted only a limited, time-bound restraint.

American Express Bank Ltd v Priya Puri, a bank sought to restrain its former wealth-management head from using customer data. The Delhi High Court vacated the interim injunction, holding that customer details a competitor could ascertain independently were not trade secrets.

Engineering Analysis Centre of Excellence Pvt Ltd v Commissioner of Income Tax, Indian distributors and end users paid foreign software suppliers under end-user licences, and the question was whether the payments were royalty for copyright. The Supreme Court held that a licence conferring only a right to use a copy, without any right to do the acts reserved by section 14, is not a licence of copyright under section 30; the review petitions challenging the judgment were subsequently dismissed. It is a tax decision, but it supports the use-versus-ownership distinction on which a pilot licence rests.

Gujarat Bottling Co Ltd v Coca Cola Co, a bottler undertook not to deal in competing beverages during its franchise agreement. The Supreme Court held that the stipulation, confined to the term and meant to promote trade, was not hit by section 27.

Percept D’Mark (India) Pvt Ltd v Zaheer Khan, a sports management agency claimed a right of first refusal over a cricketer’s endorsements after their three-year agreement ended. The Supreme Court held the clause valid within the term but prima facie void when enforced after expiry. First-refusal rights should therefore be confined to the agreed contractual term.

Niranjan Shankar Golikari v Century Spinning and Manufacturing Co Ltd, an employee with access to technical know-how agreed not to work for a competitor during his employment and to keep the information secret. The Supreme Court enforced both undertakings during the term.

Practical Implications

According to the analysis, startups should pay attention to the following essentials: defined scope, process of amendments, fixed term, limited license and indication that no IP is passed to third parties, prohibition on reverse engineering, confidentiality clauses based on categories, and any fee even if it is small for conversion. In terms of customers, they could get clear access and support, engagement criteria, promise to delete data, and define the way to the commercial terms according to a similar structure. Technology companies and IP owners should treat feedback, improvements, and background IP as separate clauses to avoid joint ownership while commercial contracting departments must keep clauses about survival, exclusivity, and outline the conversion as a process.

Conclusion

A pilot has the ideal use case of being a limited license and assessment process rather than a free one. Startup companies may permit effective testing while retaining the control of the product through licensing rather than assignment, defining scope and success measures, establishing term and fee, providing confidentiality of information in the absence of trade secrets legislation, and limiting exclusivity to the pilot period under section 27. The list of unresolved points includes whether a party that finances custom development without a signed assignment is entitled to something more than an implied license, how courts will prosecute negotiation period terms in reality, as well as how the data protection scheme will determine pilot data conditions pursuant to its phase-in provisions.

Author: Suhani Babu in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

Endnotes

1. Indian Contract Act 1872, ss 2(d), 10.

2. Indian Contract Act 1872, s 27.

3. Indian Contract Act 1872, ss 37, 62.

4. Indian Contract Act 1872, ss 73–74.

5. Copyright Act 1957, ss 2(o), 2(ffc), 14(b).

6. Copyright Act 1957, s 17(b)–(c).

7. Copyright Act 1957, ss 18–19.

8. Copyright Act 1957, ss 30, 30A.

9. John Richard Brady v Chemical Process Equipments Pvt Ltd, AIR 1987 Delhi 372 (Delhi HC, 6 July 1987).

10. Fairfest Media Ltd v ITE Group Plc, 2015 SCC OnLine Cal 23 (Calcutta HC, 8 January 2015).

11. WIPO, ‘Frequently Asked Questions: Trade Secrets,’ World Intellectual Property Organisation.

12. Digital Personal Data Protection Act 2023, ss 2(i), 2(k), 8(2), 8(7)

13. Ministry of Electronics and Information Technology, Digital Personal Data Protection Rules, 2025, notified 13 November 2025, G.S.R. 846(E).

14. Copyright Act 1957, s 19(1).

15. Engineering Analysis Centre of Excellence Pvt Ltd v Commissioner of Income Tax, (2022) 3 SCC 321 (SC, 2 March 2021), 2021 INSC 137.

16. American Express Bank Ltd v Priya Puri, (2006) III LLJ 540 (Del) (Delhi HC, 24 May 2006).

17. Patents Act 1970, s 25(1)(b), (d).

18. Gujarat Bottling Co Ltd v Coca Cola Co, (1995) 5 SCC 545 (SC). The Supreme Court recognised the distinction between a stipulation operating during the contractual relationship and a restraint extending beyond it.

19. Niranjan Shankar Golikari v Century Spinning and Manufacturing Co Ltd, AIR 1967 SC 1098 (SC).

20. Percept D’Mark (India) Pvt Ltd v Zaheer Khan, (2006) 4 SCC 227 (SC, 22 March 2006).

21. Superintendence Co of India (P) Ltd v Krishan Murgai, (1981) 2 SCC 246 (SC).