C O M M E R C I A L L I T I G AT I O N
Establishing a
Rightful Claim of
Patent Infringement
U.C.C. 2-312(3)
By Daniel J. Herling
and Leyla Mujkic Pasic
A review of the body
Every attorney who has tried a breach of contract case
knows well that the interpretation assigned to a contractual term at issue makes or breaks his or her case. A sale of
a good under the Uniform Commercial Code (U.C.C.)—
of case law in this area,
as well as the facts
that defendants have
had to establish to
fight off an allegation
of “rightfulness.”
often ultimately achieved only after a series of quotes, purchase orders, acknowledgments, invoices, and an exchange of
the parties’ “boilerplate” terms and conditions—may be threatened if contracting
parties have not specifically negotiated a
crucial contractual term and agreed upon
it in writing. Yet commonly even the most
sophisticated contracting parties fail to
foresee all potential threats to their sales
transaction, which exposes their contract
to uncertainty and costly litigation. Such
is the case if contracting parties fail to anticipate the lurking threat of a third-party
patent infringement suit. In a failure to
anticipate, contracting parties may forgo
negotiating and capturing in writing a
mutually acceptable indemnification provision. In the event that such a threat materializes into an actual third-party claim of
patent infringement, a contract’s indemnification provision may well become the most
important contractual term, materially altering the parties’ respective rights. If the
parties have not expressly agreed to a contract’s indemnification provision, for example, if an indemnification provision either
is entirely missing from the contract or is
only addressed in each party’s boilerplate
forms, a buyer and seller may have to litigate for years to determine their respective
rights. If a seller’s boilerplate indemnification provision differs from that of the buyer,
a court will deem neither indemnification
provision part of the contract, based on lack
of mutual assent. Instead, the two different
terms will drop out under U.C.C. §2-207(3),
and a court will deem the contract to “consist of those terms on which the writings
of the parties agree, together with any supplementary terms incorporated under any
other provisions of” the U.C.C.
In the event of a third-party claim of
patent infringement, the U.C.C. does offer
a supplementary term under §2-312, commonly known as the “implied warranty
against infringement,” which permits
indemnification in the event that a poten-
Daniel J. Herling is a partner and Leyla Mujkic Pasic is an associate in the San Francisco office of Keller
and Heckman LLP. Mr. Herling is head of the firm’s Litigation Practice Group and focuses his trial practice on
complex commercial litigation. He is a former chair of the DRI Professional Liability Committee and a member
of the FDCC. Ms. Pasic focuses her trial practice on commercial litigation and product liability. In addition to
her involvement with DRI, Ms. Pasic is active in the San Francisco Bar Association and related organizations.
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© 2011 DRI. All rights reserved.
tial indemnitee successfully establishes
the elements of the provision. 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. See, e.g., 84 Lumber Co. v. MRK Technologies, Ltd., 145 F. Supp. 2d 675, 678–79
(W.D. Pa. 2001). 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.
To date, at least one case looking at
whether the underlying claim of infringement was rightful has been tried by a jury.
See Linear Technology Corporation v. Applied Materials Inc. et al., Santa Clara County
Superior Court Case No. 102CV806004. In
that case, after nine years of litigation and
a six-week trial, the jury held in favor of defendants, the indemnitors, finding that the
plaintiff, the indemnitee, failed to establish
by a preponderance of the evidence that the
defendants breached the statutory warranty
against infringement.
This article will first look at the body of
case law addressing the requirement that
a claim of infringement be “rightful” for
a statutory indemnity provision to apply,
and it will then turn to the facts that the
defendants in Linear v. Applied Materials
et al. had to establish to fight off the allegation of rightfulness made by the plaintiff,
the indemnitee.
The Evolution of the “Rightful
Claim” Analysis
The earliest case examining what constituted a “rightful claim” of infringement
was Cover v. Hydramatic Packing Co., Inc.,
although the Cover court did not actually
define it. 83 F.3d 1390 (Fed. Cir. 1996). In
that case, the specific question involved
preemption—whether 35 U.S.C. §287(a) of
the patent code preempted §2312(c) of the
Pennsylvania Commercial Code. The Federal Circuit held that the two did not conflict “in that Pennsylvania’s commercial law
neither renders compliance with the patent
code a ‘physical impossibility’ nor ‘stands
as an obstacle to the accomplishment and
execution’ of the patent laws.” Id. at 1394.
In dicta, the Federal Circuit suggested that
a rightful claim did not require a finding
of absolute patent liability: “…to adopt Sea
Gull’s [the appellee’s] ‘rightful claim’ argument would not lead to judicious public
policy inasmuch as parties would eschew
settlement and be forced to go to trial to
discern whether a ‘rightful claim’ exists under federal patent law. We cannot lend our
imprimatur to such a policy.” Id. at 1394.
A subsequent case more directly implicated the rightful claim analysis when the
court addressed whether it had to “decide
a substantial question of federal patent law
in order to determine whether the goods”
at issue were “delivered free of a right-
ful claim of infringement.” 84 Lumber
Company v. MRK Technologies, LTD, 145
F. Supp. 2d 675 (W.D. Pa. 2001). In 84 Lumber, the defendants manufactured handheld laser devices used to scan bar codes
on merchandise. Id. at 676. The plaintiff
purchased the equipment from the defendants and was subsequently sued for patent
infringement by a third party, Lemelson
If contracting parties
fail to anticipate the
lurking threat of a… thirdparty claim of patent
infringement, a contract’s
indemnification provision
may well become the most
important contractual term.
Medical, Education & Research Foundation, LP. Id. at 677. The plaintiff settled the
underlying patent infringement lawsuit for
$ 40,000 and then filed a claim against the
defendants, alleging only a breach of the
implied warranty against infringement
under the Pennsylvania statute adopting
without change U.C.C. §2-312(3). Id. The
defendants sought to remove the case to
federal court, asserting federal jurisdiction under 28 U.S.C. §1331, 1338, and 1441.
Id. at 677. They contended that a “rightful
claim” of infringement was “a just or legally
established claim,” or “[a] legally enforceable claim.” Id. Under the defendants’ theory, “a court cannot determine whether or
not they must indemnify 84 Lumber for
the value of its settlement of the Lemelson Suit, without first finding that Lemelson had a rightful, legally enforceable claim
of infringement.” Id. Removal was proper,
according to the defendants, because patent law was a necessary element of the
plaintiff’s breach of contract action. Id.
The plaintiff, on the other hand, contended that the case should have been remanded to state court because “a ‘rightful
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C O M M E R C I A L L I T I G AT I O N
claim’ does not require a determination of
actual liability, and thus, disposition of the
complaint does not require the resolution of
a substantial question of federal patent law.
Any patent issues that may need to be addressed are merely tangential, and may be
competently adjudicated by the Pennsylvania state courts.” Id. Without adopting either definition, the district court stated that
Existing case law requires
that an evaluative inquiry
into the merits of the
underlying infringement claim
be made before deciding
whether the underlying
claim of infringement
against the buyer-­
indemnitee was “rightful.”
“if claims of patent infringement are seen as
marks on a continuum, whatever a ‘rightful claim’ is would fall somewhere between
purely frivolous claims, at one end, and
claims where liability has been proven, at
the other.” Id. at 680. The court then stated
that it did not need to decide what precisely
constituted a rightful claim of patent infringement to decide that it had jurisdiction over the plaintiff’s claims.
The meaning of the phrase “rightful
claim” was next addressed by the California Court of Appeals in the trademark context following an order granting summary
judgment in favor of the defendant. Pacific
Sunwear of California, Inc. v. Olaes Enterprises, Inc., 167 Cal. App. 4th 466 (Cal. Ct.
App. 2009). The lawsuit alleged that the defendant, Olaes Enterprises, breached the
statutory warranty codified in §2312(3) of
the California Uniform Commercial Code.
Id. at 470. Pacific Sunwear sought monetary damages for the alleged breach to compensate it for litigation expenses incurred
defending against a third-party trade-
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mark infringement lawsuit that arose from
Pacific Sunwear’s sale of T-shirts purchased
from Olaes. Id. The trial court granted the
defendant’s motion for summary judgment
on the ground that the third-party claim
did not constitute a “rightful claim” of
infringement under §2312(3), and thus the
defendant did not breach the statutory warranty. Id. The issue on appeal was whether
the trial court properly ruled on a motion
for summary judgment that the §2312(3)
warranty did not apply because the trademark suit filed by the third party was not a
rightful claim of infringement. Id. at 473.
On appeal, the parties offered very different definitions of the phrase “rightful
claim.” Id. The defendant argued that “a
rightful claim is a valid claim, i.e., one that
has proven, or will likely prove, meritorious
in litigation.” Id. The plaintiff argued that
“any claim ‘in the form of litigation’ constitutes a rightful claim regardless of its underlying merits.” Id. Citing 84 Lumber, the
California Court of Appeals stated that “the
correct interpretation of section 2312(3) lies
somewhere in between these positions.” Id.
The California Court of Appeals examined both the official commentary to U.C.C.
§2-312(3), adopted in California without
change, as well as the public policy rationales underlying California Uniform Commercial Code §2312, before holding that
the implied warranty against infringement covers a broad scope of infringement
claims and is not limited to claims that
ultimately will prove successful in litigation. Id. at 481. Specifically, the Pacific Sunwear court held that “the warranty against
rightful claims applies to all claims of
infringement that have any significant and
adverse effect on the buyer’s ability to make
use of the purchased goods, excepting only
frivolous claims that are completely devoid
of merit.” Id. The Pacific Sunwear court
went on to write,
the existence of litigation is neither necessary nor, in itself, sufficient to establish that a claim is ‘rightful.’ A claim
of infringement may be rightful under
section 2312(3) whether or not it is ultimately pursued in litigation. For example, a claim may be deemed rightful if
the buyer, prior to any litigation, voluntarily ceases to use purchased goods due
to a third party claim of infringement.
And, contrary to PacSun’s [Pacific Sun-
wear’s] suggestion, the mere filing of litigation will not necessarily establish
that a claim is ‘rightful.’ As the courts
are well aware, a third party may file a
complaint and pursue litigation despite
the absence of any merit to the underlying contention.
Id. at 482.
The Pacific Sunwear court also noted
that if it accepted Pacific Sunwear’s argument that the “warranty is triggered by the
filing of litigation, without any evaluative
inquiry into the merits of the underlying
claim itself, we would effectively be reading
the term ‘rightful’ out of the statute.” Id. at
482 n. 10. Even though it rejected Pacific
Sunwear’s contention that filing the underlying suit triggered the statutory warranty,
the appellate court concluded that the trial
court had erred in granting the defendant’s
motion for summary judgment. Specifically, the appellate court noted that the
existence of the underlying litigation created “a triable issue of material fact,” on the
claim’s rightfulness. Id. at 483.
Pacific Sunwear, thus, requires an evaluative inquiry into the merits of the underlying infringement claim in indemnification
cases. It requires determining whether the
underlying infringement claim was “frivolous,” meaning, completely devoid of merit,
and whether it had “any significant and
adverse effect, through the prospect of litigation or otherwise, on the buyer’s ability to make use of the purchased good.”
Id. Because Pacific Sunwear was a trademark infringement case, however, it did not
address whether comparing the patents at
issue with the accused products was necessary to establish the rightful nature of the
underlying claim.
Shortly after the Pacific Sunwear opinion, the Northern District of California
examined a different though related issue:
how far must a patent infringement case
proceed for an indemnitee to establish a
rightful claim of patent infringement under
the statutory warranty. Phoenix Solutions,
Inc. v. Sony Electronics, Inc., 637 F. Supp. 2d
683 (N.D. Cal. 2009). The specific question
in Phoenix Solutions was whether “claim
construction is required to assess a ‘rightful claim’ of patent infringement to sustain a breach of warranty claim.” Id. at 695.
In that case, the plaintiff, Phoenix
Solutions, sued Sony, alleging patent
infringement. Id. at 686. Sony then filed
a third-party complaint against Intervoice, Inc., alleging breach of the statutory warranty. Id. at 688. Phoenix Solutions
and Sony settled their patent infringement action. Id. at 689. Both Intervoice
and Sony moved for summary judgment
on Sony’s implied warranty claim, disagreeing on whether Phoenix Solutions’
infringement claims against Sony were
“rightful” under §2312(3) of the California
Commercial Code. Id. at 689. Sony argued
that “Phoenix’s infringement claims barred
Sony from manufacturing, importing or
using its IVR system and required Sony to
pay compensatory damages,” and thus, that
the allegations cast doubt on Sony’s rightful use of the IVR systems. Id. at 695. Sony
also pointed to the fact that it had to pay
for its defense against Phoenix Solutions.
Id. Intervoice argued that Sony’s noninfringement defenses to Phoenix Solutions’
claims demonstrated that Phoenix Solutions’ claims were not rightful and, in the
alternative, that claim construction was
required to assess a “rightful claim” of patent infringement to sustain a breach of
warranty claim. Id. at 695, 696.
The district court first rejected Intervoice’s argument that noninfringement
defenses generally demonstrate that a
claim is not rightful, stating instead that a
party’s defenses have no bearing on rightfulness since the Federal Rules of Civil
Procedure liberally permit pleading in the
alternative. Id. In an effort to address Intervoice’s second contention, the district court
considered Pacific Sunwear, first noting
that because it “was a trademark infringement case, it did not address whether a
comparison of patents at issue with the
accused products was necessary.” Id. at
697. The district court then extended the
Pacific Sunwear reasoning to patent cases,
noting that merely filing litigation does not
establish that a claim is rightful, and evaluating the merits of the underlying claim
was necessary. Id. However, the court ruled
that claim construction was not required
for Sony’s breach of warranty claim to survive summary judgment: “the court finds
that Sony has met its burden of asserting
a rightful claim, for the present purposes
of surviving summary judgment, because
Phoenix’s infringement claims had a significant and adverse effect on Sony’s abil-
ity to make use of” the product at issue. Id.
The court noted that the case had advanced
beyond the “mere filing of an action,” and
the infringement-­related settlement terms,
submitted to the court under seal, indicated that “an evaluative inquiry was made
into the merits of the underlying claim
itself.” Id.
Thus, in a buyer-­indemnitee’s breach of
statutory warranty case against a seller-­
indemnitor, existing case law requires
that an evaluative inquiry into the merits
of the underlying infringement claim be
made before deciding whether the underlying claim of infringement against the
buyer-­indemnitee was “rightful.” As a natural consequence of that rule, not every
underlying claim of infringement will be
found to be rightful. Instead, only nonfrivolous claims having any significant and
adverse effect, through the prospect of litigation or otherwise, on the buyer’s ability to use the purchased goods will meet
the “rightfulness” requirement of the statutory warranty.
Applying the Above Principles,
at Least One Jury Has Held That
Plaintiff Failed to Establish the
“Rightfulness” of the Underlying
Claim of Infringement
At least one case demonstrates the complexity parties face proving or disproving
the applicability of a statutory warranty
and its attendant indemnity provision. In
Linear Technology v. Applied Materials, et
al., No. 102CV806004, the plaintiff, Linear
Technology, sued three manufacturers of
semiconductor equipment, Applied Materials, Novellus Systems, Inc., and Tokyo Electron Limited, in the Santa Clara County
Superior Court in 2001, alleging six causes
of action against them, including breach of
contract and breach of the statutory warranty. Linear’s claims, allegedly, stemmed
from its purchase of the defendants’ semiconductor equipment. Specifically, Linear contended that purchasing and using
the defendants’ semiconductor equipment
exposed it to an earlier patent infringement lawsuit initiated by a third party,
Texas Instruments. Linear contended that
the underlying patent infringement lawsuit, which was never tried before a jury,
resulted in a settlement agreement with
terms unfavorable to Linear.
Before the trial commenced, Linear settled its dispute with Applied Materials,
leaving Tokyo Electron and Novellus as the
remaining defendants in the Santa Clara
action. Before the jury began to deliberate, the court determined that Linear had
contracted separately with Tokyo Electron
and Novellus to purchase their equipment.
However, the court decided that the parties’
Only nonfrivolous claims
having any significant
and adverse effect… on
the buyer’s ability to use
the purchased goods will
meet the “rightfulness”
requirement of the
statutory warranty.
different indemnification provisions, contained only in their respective boilerplate
terms and conditions, did not become part
of the contract. Instead, the court instructed
the jury that the statutory warranty against
rightful claims of infringement became a
provision of Linear’s separate contract with
each, Tokyo Electron and Novellus.
During the course of the trial, Linear
sought to establish that it was entitled to
indemnification under the statutory warranty because it had been sued by Texas
Instruments for using the Tokyo Electron
and Novellus equipment. Consequently,
much of the trial focused on whether or
not Texas Instruments’ underlying patent
infringement claims against Linear were
“rightful.” Resolving the issue of “rightfulness” would ultimately decide whether the
defendants breached the statutory warranty against infringement and whether
Linear was entitled to indemnification.
In an effort to show that Texas Instruments’ patent infringement claims against
the defendants’ equipment were rightful,
Linear sought to prove by a preponderance
Patent, continued on page 78
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Patent, from page 63
of the evidence that Texas Instruments’
infringement claims had a significant and
adverse affect on Linear’s ability to use the
machines, were not “frivolous,” and were
not a result of the defendants’ compliance with Linear’s specifications. Linear
argued that since the mere prospect of litigation establishes the first prong of the test,
the fact that it was actually sued by Texas
Instruments for patent infringement indicated that Linear’s ability to use the purchased equipment was significantly and
adversely affected.
Next, Linear attempted to establish
that Texas Instruments’ patent infringement claims were not “frivolous.” Relying on Pacific Sunwear, Linear argued
that it did not have to show that Texas
Instruments would have ultimately won
its patent infringement case, but that Texas
Instruments’ claims were not “totally and
completely without merit.” Among other
things, Linear attempted to prove the
“rightfulness” of the underlying patent
infringement claims by offering into evidence Texas Instruments’ claim charts,
the fact that Texas Instruments’ aggressively litigated its claims against Linear
for almost two years, and the fact that Linear settled the underlying patent infringement claims on unfavorable terms because
of the risk of an adverse result. Perhaps
most strongly, Linear relied on the jury
verdict in Texas Instruments’ separate lawsuit against nonparty Hyundai determining that the use of similar semiconductor
equipment by Hyundai had infringed the
same Texas Instruments patents. Linear
argued that the Hyundai verdict corroborated the rightful nature of Texas Instruments’ claims against Linear.
To defend against Linear’s allegations of
the “rightfulness” of the underlying patent
infringement claims, Tokyo Electron and
Novellus had to present substantial evi-
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dence to support their contention that any
claim that the operation of their equipment by Linear infringed Texas Instruments’ patents was “frivolous,” therefore,
that the claim was not “rightful.” To do so,
the defendants examined the substance
of the underlying patents, which specified that the infringing tools had to operate “asynchronously.” The defendants’
offered detailed, factual and expert testimony explaining why the equipment
could not have operated in the manner
described in Texas Instruments’ patents.
Specifically, the defendants showed that
because their tools operated “synchronously,” Texas Instruments underlying
infringement claims were factually devoid
of merit, that is, “frivolous.” The defendants also presented evidence showing that
no court, including the Hyundai court, had
ever addressed whether Texas Instruments’
infringement claim against Linear actually had any merit. Finally, the defendants
showed that Linear never stopped using the
defendants’ equipment during the patent
litigation, nor that it replaced that equipment, so the underlying litigation had no
adverse effect on Linear’s ability to use
Tokyo Electron’s and Novellus’ equipment.
Because Texas Instruments’ infringement
claims were factually and legally devoid of
merit, and because they did not adversely
affect Linear’s ability to use the equipment,
the defendants argued, Texas Instruments’
claims were not rightful.
After the parties presented all the evidence, the judge instructed the jurors on
the elements of the statutory warranty
breach and provided them with a legal
definition of a “rightful claim.” Specifically, the court instructed the jurors that
to recover damages from either defendant
for breach of the statutory warranty, Linear
had to prove that (1) the goods supplied by
the defendants were not delivered free of a
rightful claim of infringement, and (2) Lin-
ear was harmed by that failure. The court
defined a “rightful claim” as “one that has
any significant and adverse effect on the
buyer’s ability to make use of the purchased
goods and is not frivolous.” It defined a
“frivolous claim” as “one that is factually
or legally devoid of merit.” The court also
specified that “the filing of a lawsuit alone
cannot establish that a claim of infringement is rightful,” but that a plaintiff, in this
case, Linear, did not need to show that “the
claim of infringement ultimately would
have been successful in order to establish
that the claim is rightful.”
Before deliberating, the jurors received
two identical special verdict forms, one for
Tokyo Electron and one for Novellus. The
first question on each form asked whether
the respective defendant had breached “the
statutory warranty incorporated into its
contract with Linear.” After considering all
of the evidence presented by the parties, the
jurors unanimously answered, “No.”
Conclusion
As the Linear case demonstrates, determining whether an underlying claim
of patent infringement is “rightful” is a
fact question that a jury must decide in
a dispute over indemnification involving U.C.C. §2-312. Though the law does
not require that underlying patent litigation ultimately result in a verdict against
the buyer-­indemnitee, it does require an
evaluative inquiry into the merits of the
underlying patent infringement claim. To
prevail on a statutory warranty claim, a
buyer-­i ndemnitee must demonstrate to
the jury that the underlying claim of patent infringement was not “frivolous” and
that it had a significant effect on the buyer’s ability to use the purchased goods.
Where the buyer-­indemnitee fails to present such evidence, he or she will also fail in
its breach of statutory warranty claim.