Non Infringement Warranty - Updates to UCC Section 2-312
The following are cases addressing different aspects of the non infringement warranty under the Uniform Commercial Code Section 2-312:
Choice of Law as applied to Non Infringement Warranty
84 Lumber Co. v. MRK Tech., Ltd., 145 F. Supp. 2d 675 (W.D. Penn. 2001)
The plaintiff wanted the case heard in state court, since the basis of the claim was breach of contract. The plaintiff argued the patent issue should not preempt the state court from hearing the case because Section 2-312 does not require an actual finding of infringement. Yet, the court reasoned that even though a final determination of infringement is not required, the case still falls under the federal jurisdiction by “arising under patent law.” Section 2-312 provides that there be a “rightful claim of any third person.” The court stated, “we need not decide precisely what constitutes a rightful claim of patent infringement in order to conclude that plaintiff’s claims, as stated in the complaint, cannot be addressed without inquiring into the nature of…use…infringed…”
Fee Shifting Provision in Section 2-312:
RFR Industries, Inc. v. Rex-Hide Ind., Inc., LEXIS 44809 (August 9, 2005)
In this opinion by Judge Kinkeade, the Fifth Circuit recognizes that Section 2-312 “shifts all costs, including attorneys’ fees to the buyer who furnishes a seller with specifications that lead to a claim of patent.” The opinion also confirms that Section 2-312 authorizes recovery of attorney’s fees for the buyer.
Bankruptcy:
In re: Visi-Trak, 266 B.R. 372, (2001)
The debtor was found to have willfully infringed a patent, and the patent owner was awarded judgment for $5,998,627. The debtor then filed for bankruptcy. The debtor was under contract with HPM pre- and post-petition. The patent owner filed an infringement suit against HPM for “using, selling, or offering to sell infringing products, including those of the Debtor.”
The HPM purchase contract with the debtor included the indemnity provision: “…you agree to defend at your own expense all suits against us or our customers for infringement of any United States patent, copyright or trademark by any material…covered by this order and will save us or our customers harmless from all expense of defending any such suit and all payments by final judgment therein assessed on account of such infringement…” Therefore, the issue before the bankruptcy court concerned whether the debtor’s payment of HPM’s legal fees would qualify as an administrative expense since the debtor was required to pay the legal fees that HPM incurred defending the infringement suit. The court found that because the HPM patent infringement suit had not been fully adjudicated, the indemnity duty would not elevate to an administrative expense.
Is there a duty to disclose under the Non Infringement Warranty?
Johnson Electric N. Am., Inc. v. Mabuchi Motor Am. Corp., 98 F. Supp. 2d 480
In this opinion, the court discusses Section § 2-312 by stating, “The duty to indemnify customers does not necessarily create a duty to disclose.” UCC § 2.312 provides that the merchant impliedly warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement. There is no requirement of notice to the customer in the plain language of the UCC provision. Therefore, the court held that there is no duty to disclose under this provision of the UCC.
Confirming the Duty to Indemnify under the Non Infringement Warranty
SEB S.A. v. Sunbeam Corp., 148 Fed. Appx. 774 (11th Cir. 2005)
Sunbeam and Pentalpha Enterprises entered into a product supply agreement, whereby Pentalpha would supply Sunbeam with small household appliances and Sunbeam would then resell them. At some point during Sunbeam’s relationship with Pentalpha, another company filed a patent infringement suit against Sunbeam. Sunbeam then refused to continue doing business with Pentalpha until Sunbeam’s legal fees were reimbursed. The district court noted that Pentalpha conceded its obligation to indemnify Sunbeam, but found there was a material issue as to the amount of fees. The district court held that Pentalpha’s duty to indemnify arose out of § 2-312(3) and was thus independent of Sunbeam’s contracts with Pentalpha. Further, although it was ultimately determined that Sunbeam breached the agreement with Pentalpha first, it did state that under Florida contract law, breaching the indemnity warranty would have constituted material breach of the agreement and could have released Sunbeam from further performance. For an in-depth analysis of Section 2-312, please read our white paper, Warranty Against Infringement, UCC Section 2-312.
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