Considering court precedents concerning patent warranty clauses and indemnification clauses in basic sales agreements ~ Intellectual Property High Court H27.12.24 (Judgment Ta No. 1425, p. 146)

Kenji Kuroda

Partner, Kuroda Law Offices

Patent warranty clauses and indemnification clauses are often stipulated in basic sales agreements. In this case, one of the points of contention was a breach of obligations like the patent warranty clause in a basic sales agreement. In this paper, we will focus on this point.

  1. Summary of the case

According to the judgment, the following patent warranty clause was stipulated in a basic agreement (“Basic Agreement”) concluded between the appellee (plaintiff in the first instance) and the appellant (defendant in the first instance) for the sale and purchase of goods. The appellee is the seller and the appellant is the buyer.

Article 18 (1): “The appellee warrants that the goods to be delivered to the appellant, as well as their manufacturing method and method of use, does not infringe the industrial property rights, copyrights, or other rights of a third party (collectively, “IPR”).”

Article 18 (2): “If a dispute with a third party arises due to infringement of IPR for the goods, the appellee shall resolve it at its own expense and liability, or cooperate with the appellant and not cause any inconvenience to the appellant. In the unlikely event that the appellant suffers damage, the appellee shall compensate for the damage.”

However, regarding the ADSL modem chipset and DSLAM chipset (“Chipsets”) delivered by the appellee to the appellant, a so-called infringement warning (license offer) was issued by third-party patentees, and as a result, the appellant paid a license fee (JPY 200M) to the patentees. Then, the appellant claimed damage compensation from the appellee due a breach of Paragraphs 1 and 2 of Article 18 of the Basic Agreement, stating that “(1) the Chipsets delivered by the appellee and their method of use infringe each of the patent rights, and (2) the appellant was forced to pay the patentees JPY 200M in license fees and suffered the same amount in damage since the appellee could not resolve disputes concerning each of the patent rights (“Disputes”) with the patentees” (for the details of the case, please refer to the text of the judgment below).

  • Court decision
  • Feasibility of breach of Article 18.1 of the Basic Agreement

“In its explanation to the court in the original trial, not only did the appellant state that it did not intend to prove that the Chipsets were part of the technical scope of each of the patented inventions after analyzing the Chipsets themselves, but that it would not try to claim or prove the specific configuration of the Chipsets using specific technical backing.”

“We cannot recognize that the Chipsets or products have the configuration described in the product composition list attached to the original judgment, nor that they satisfy each of the constituent requirements described in the product composition list attached to the original judgment.”

“We cannot recognize that the Chipsets infringe each of the patent rights. Accordingly, there is no need to consider the allegations of a breach of Article 18.1 of the Basic Agreement and other points, nor is there a reason to.”

  • Feasibility of breach of Article 18.2 of the Basic Agreement
  • Obligations pursuant to Article 18.2 of the Basic Agreement

“Since there are no other specific provisions in the Basic Agreement regarding the means or methods of resolving disputes with third parties due to infringement of IPR, while premised on the fact that the appellee warrants to the appellant that the delivered goods do not infringe the IPR of a third party pursuant to Paragraph 1 of the same Article, it is reasonable to interpret Paragraph 2 of the same Article as stipulating the comprehensive obligations that the appellee should take in the event that infringing IPR held by a third party becomes a problem.”

“We cannot recognize that the specific obligations that the appellee should bear immediately would arise from the wording of the same paragraph alone, and as mentioned above, the same paragraph stipulates the comprehensive obligations that the appellee should take, so it is reasonable to interpret the content of the specific obligations that the appellee bears as being stipulated by the nature and content of the allegations of infringement by the third party, and specific circumstances such as discussions with the appellant.”

  • Appellee’s specific obligations under Article 18.2 of the Basic Agreement

“In view of the fact that the appellant had received a license offer for each of the patent rights from Wi-LAN (N.B.: the patentee) […], that from the beginning, when it requested that the appellee cooperate, the appellant was seeking an answer as to whether or not the Chipsets infringed any of the patent rights […], and that it had been confirmed between the appellee, the appellant and Ikanos (N.B.: the supplier of the Chipsets) that the license fee and the basis for its calculation required consideration, and Ikanos had responded that it would provide the necessary information […], it is reasonable to recognize that the appellee had the specific obligation to (1) conduct a technical analysis of each patent, and present its views, along with supporting materials, on the validity of each patent and whether or not the Chipsets infringe any of the patent rights, in order to determine whether or not it is necessary for the appellant to conclude a license agreement with Wi-LAN, or (2) collect and provide the materials necessary to calculate a reasonable license fee in preparation for the appellant to conclude a license agreement with Wi-LAN.”

  • Appellee’s breach of obligations
  • Obligation to provide the results of technical analysis

“The results of the technical analysis reported by Ikanos cannot be said to be sufficient, and in addition, since we cannot recognize that the appellee or Ikanos presented their views on the validity of each patent and whether or not the Chipsets infringe any of the patent rights, along with supporting materials, from the evidence, the appellee must be said to have neglected its obligation to provide them.”

  • Obligation to provide information on calculating license fee

“We cannot recognize that the appellee or Ikanos provided the appellant with information on calculating the license fee.”

“The appellee could be said to have neglected its obligation to provide the materials necessary to calculate a reasonable license fee in preparation for the appellant to conclude a license agreement with Wi-LAN.”

  • Observations
  • Breach of Article 18.1 (Patent Warranty Clause) of the Basic Agreement

This clause is a so-called patent warranty clause, and the patent warranty clause is a frequently used clause in basic transaction agreements and sales agreements. If the object delivered by the seller to the buyer infringes the patent rights of a third party, the buyer may claim damages against the seller for breaching the patent warranty clause.

The point here is that, as it became apparent in this case, when the buyer claims a breach of the patent warranty clause, the buyer must prove that there was a breach of the patent warranty under the law of legal procedure. In other words, the buyer must assert and prove that “the object infringes the patent rights of a third party” (equaling a breach of the patent warranty). Proving this is expected to be extremely difficult for buyers who are neither patentees nor manufacturers and who are likely to have no knowledge of the technology.

In fact, in this case as well, the appellant, who is the buyer, did not prove the claims with specific technical backing for the specific configuration of the Chipsets, so it was determined that it could not be recognized that the Chipsets infringed any of the patent rights.

Considering this, it is clear that a buyer cannot relax just because a patent warranty clause was stipulated, and one could say that provisions that specifically make the patent warranty clause work are necessary.

  • Breach of Article 18.2 of the Basic Agreement

This clause is a so-called indemnification clause, and the indemnification clause is also a frequently used clause in basic transaction agreements. Provisions like this clause stipulating the parties to “cooperate” and “not inconvenience” each other are often found in domestic contracts, while it is normal for one party (the seller) to defend and indemnify everything in international contracts. If there is a provision stipulating “cooperation”, the interpretation that a specific obligation cannot be unequivocally derived is also inevitable. If one wants to ask for specific obligations, one needs to specify that point in the contract. In particular, methods that determine the content of the obligations according to the circumstances after the agreement is concluded, as in this judgment, are not appropriate in view of risk management at the time of concluding the agreement.

Regarding the indemnification clause, making one party (the seller) bear an obligation to thoroughly defend itself is one happy solution from the buyer’s point of view, and one could say that it is necessary to list the specific obligations, at the very least.

(References)

Intellectual Property High Court H27.12.24 (Supreme Court website)