Wednesday, December 12, 2007

UCC 2-312--"Rightful Claim" of Breach of Warranty Against Patent Infringement May Be Asserted At Outset of Lawsuit

What is a “rightful claim” of patent infringement, allowing the buyer to sue seller for breach of the UCC 2-312 statutory warranty against claim of infringement?
The 2-312 statutory warranty against infringement may be triggered when the purchaser is sued, even if the purchaser denies the infringement claim. Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546 (US D. Ct., N. Dist. CA; Judge Marilyn Hall Patel). Phoenix sued the buyer (Sony) for use of an infringing product (software products for an interactive voice response system). Buyer answered Phoenix’s complaint by denying liability and infringement. Buyer also filed a third-party complaint against the seller of the software (Intervoice), asserting that seller breached the statutory 2-312 breach of warranty against infringement. The seller moved to dismiss under Rule 12(b)(6), arguing that the statutory warranty only covered “rightful claims” of infringement, and that since the buyer had denied any infringement, no “rightful claim” had been asserted. Since the complaint against infringement cast a “substantial shadow” over the title to the product, the Court allowed the purchaser’s lawsuit to proceed. The Court held that the “rightful claim” standard of UCC 2-312 was satisfied because the buyer alleged that plaintiff’s lawsuit “gave rise to a colorable claim of patent infringement,” even though buyer was “denying the ultimate merits of the claim.”
The Court also held that the buyer need not wait until the ultimate infringement is adjudicated before asserting the breach of warranty under 2-312. Citing the UCC comments, the Court held that “the buyer’s remedy arises immediately upon receipt of notice of infringement.”
This was an unusual case because the seller and the plaintiff agreed that seller had not infringed the plaintiff’s patents. Seller presented a stipulation with plaintiff that the seller’s software (in the unmodified state in which buyer purchased it) was not infringing, and that the buyer’s modifications caused the infringement. However, the court found that these facts were disputed by buyer and could not be resolved in the context of a motion to dismiss—which only covers the pleadings.
Does UCC 2-312 impose a duty to defend or merely to indemnify? Presumably, a court would not ultimately find that the UCC 2-312 warranty had been breached (giving rise to damages) merely by the filing of plaintiff’s lawsuit, and if the buyer or seller ultimately proves no infringement, there would be no breach of the statutory warranty. (However, this was not discussed in the opinion and I have not checked into this point in other cases.)
How to avoid the lawsuit entirely? UCC 2-312 allows the parties to exclude the warranty at the time of sale with specific language. UCC 2-312(2), (3).
Note: The opinion (Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546) cites 2-312(3), which is the form of UCC adopted in California. This corresponds to the official UCC 2-312(2).

No comments: