Contractual Protection and Indemnity for Purchase of Infringing Goods
One of the little
acknowledged protections of Intellectual Property in Washington and many of the
several states are the conditions placed upon the sales of goods in any commercial
context. Consider that in any state where the Uniform Commercial Code
(“U.C.C.”) has been adopted, there exists an implied warrant of good title that
includes an implied warranty against infringement. Specifically, U.C.C.
§2-312(3) states:
Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.
Thus, to prove that a potential indemnitor breached the statutory warranty, an indemnitee must show that
1. the seller was a merchant regularly dealing in goods of that kind,
2. the goods were subject to a “rightful claim” of infringement of a third party upon delivery,
3. the buyer did not furnish specifications to the seller, and
4. the parties did not form another agreement specifically disclaiming the warranty.
Though three of the four elements are self-evident—either the seller is or is not a merchant, the buyer did or did not furnish specifications, and the parties did or did not form another agreement—one element is not: what constitutes a “rightful claim”? And the volume of case law adjudicating the “rightful” nature of an underlying third-party claim of infringement is relatively scant. The cases that have addressed “rightfulness,” furthermore, have defined it along a continuum.
Whether a third-party claim of infringement is “rightful” is a fact question for a jury to decide. See, e.g., SunCoast Merchandise Corp. v. Myron Corp., 393 N.J. Super. 55 (N.J. App. Div. 2007), cert. denied, 194 N.J. 270, 944 A.2d 30 (N.J. 2008). If an underlying infringement claim was adjudicated and a jury issued a verdict of infringement against the indemnitee, the jury considering the indemnity case may be convinced that the underlying claim of patent infringement was “rightful.” However, an indemnitee will surely stumble in his or her efforts to prove rightfulness of an underlying claim if a jury issued no such verdict, for example, if the parties settled the underlying patent infringement suit. Such a situation also imposes great burdens on a potential indemnitor warding off allegations of rightfulness.
In practice, the warrantee has proven a boon where, for example, a supplier provides a putatively infringing part to be incorporated into the purchaser’s own product. When, once a patent holder asserts infringement, the liability for both the defense and award of infringement is contractually shifted to the party in the best situation to determine the specific applicability of the allegations and the most economical means to address them.
Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.
Thus, to prove that a potential indemnitor breached the statutory warranty, an indemnitee must show that
1. the seller was a merchant regularly dealing in goods of that kind,
2. the goods were subject to a “rightful claim” of infringement of a third party upon delivery,
3. the buyer did not furnish specifications to the seller, and
4. the parties did not form another agreement specifically disclaiming the warranty.
Though three of the four elements are self-evident—either the seller is or is not a merchant, the buyer did or did not furnish specifications, and the parties did or did not form another agreement—one element is not: what constitutes a “rightful claim”? And the volume of case law adjudicating the “rightful” nature of an underlying third-party claim of infringement is relatively scant. The cases that have addressed “rightfulness,” furthermore, have defined it along a continuum.
Whether a third-party claim of infringement is “rightful” is a fact question for a jury to decide. See, e.g., SunCoast Merchandise Corp. v. Myron Corp., 393 N.J. Super. 55 (N.J. App. Div. 2007), cert. denied, 194 N.J. 270, 944 A.2d 30 (N.J. 2008). If an underlying infringement claim was adjudicated and a jury issued a verdict of infringement against the indemnitee, the jury considering the indemnity case may be convinced that the underlying claim of patent infringement was “rightful.” However, an indemnitee will surely stumble in his or her efforts to prove rightfulness of an underlying claim if a jury issued no such verdict, for example, if the parties settled the underlying patent infringement suit. Such a situation also imposes great burdens on a potential indemnitor warding off allegations of rightfulness.
In practice, the warrantee has proven a boon where, for example, a supplier provides a putatively infringing part to be incorporated into the purchaser’s own product. When, once a patent holder asserts infringement, the liability for both the defense and award of infringement is contractually shifted to the party in the best situation to determine the specific applicability of the allegations and the most economical means to address them.