This posting contains notes and comments for the corresponding section of the Pactix Pretty Good Contract Clauses compendium, and should be read in conjunction with that section.

Heads-up: Implied warranties of noninfringement

Under § 2-312 of the Uniform Commercial Code, "[u]nless otherwise agreed, a seller that 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"; moreover, "[a] warranty under this section may be disclaimed or modified only by specific language or by circumstances that give the buyer reason to know that ... the seller is selling subject to any claims of infringement or the like."

That's why many contract drafters expressly disclaim the UCC implied warranty of noninfringement, and instead create their own, along with associated exclusive remedies.

Copyright and trade-secret warranties

Copyright and trade-secret noninfringement warranties are comparatively practical for a provider to manage. Generally speaking, demonstrably doing one’s own work, without improperly "borrowing" from others — that is, proving independent creation — should defeat claims of copyright infringement or trade-secret misappropriation.

(Proof of independent creation is great to have; it's worth taking some trouble to document that your people did their own work. But such proof isn't necessarily required to prevail against a claim of infringement or misappropriation, because legally the burden of proof is normally on the claimant, not the defendant.)

Patent warranties

Warranting that a product doesn't infringe any patents can be a decidedly non-trivial affair. You can't comply with such a warranty merely by making sure your people do their own work. That's because you can infringe a patent without even knowing it exists; in fact, you can infringe a patent that didn't exist when your people did their work (for example, if the patent application was still pending at that time, and the patent was issued afterwards).

If you're asked to give a warranty of no patent infringement, you'll definitely want to consult patent counsel, and perhaps to commission a patent search and opinion. That will usually involve non-trivial calendar time and monetary expenses, which of course might have to be factored into the pricing and scheduling for the contract.

Carve-out for compliance with specifications

The Pactix noninfringement warranty language doesn't cover infringement arising from compliance with specifications furnished or approved by (or on behalf of) the acquiring party. Suppose a buyer says to a seller, "I want you to sell me a product that has X and Y and Z." Now suppose that, because the product has X, Y, and Z, it infringes someone else's patent. Under the Pactix language, if the patent owner sues the buyer for infringement for using the product, that suit isn't covered by the seller's warranty. (The patent owner might be able to sue the seller separately for having sold the infringing product, which is another matter.)

This carve-out is adapted from the hold-harmless language of UCC § 2-312(2), which says that “a buyer that furnishes specifications to the seller must hold the seller harmless against any such claim [of infringement] that arises out of compliance with the specifications.”

Remedy notes

Who decides?

Suppose that Seller sells a product to Buyer. Years later, a third party writes a letter to Buyer, claiming that Seller's product infringes his (the third party's) patent. Can Buyer immediately stop using the product and demand a full refund from Seller, just because the infringement claim has been made?

Under the remedy language of some contracts, that's exactly what Buyer can do. In effect, under those contracts, Seller is warranting, not just that there's no infringement, but that no one else will even claim that there's infringement.

That shouldn't happen under the Pactix remedy language, under which Seller, not Buyer, gets to decide whether Buyer should stop using the product (unless a court enjoins Buyer's use). Seller also gets to decide whether:

• to provide Buyer with a replacement product that doesn't infringe
• to make a deal with the third-party claimant to allow Buyer to keep using the infringing product
• to refund what Buyer paid for the product, reduced pro rata by the time elapsed in the noninfringement warranty period (typically three years).

Here's why the Pactix language is drafted this way.

First, Seller is normally in the best position to assess the potential merits of the infringement claim. Moreover, Seller usually has the most "skin in the game" in respect of the infringement claim about its product.

Furthermore, allowing Buyer to make the remedy decision unilaterally would give it the ability to demand a refund for “strategic” reasons. For example, suppose Buyer had been using Seller's product for years but now wanted to switch to a newer product made by Seller's competitor. It wouldn't be fair for Buyer to be able to demand a refund, just because of the sudden appearance of an infringement claim.

Pro-rata refund

For the same reason, if Seller decides to refund Buyer's money, the refund is only a pro rata one: If Buyer had been using the product for, say, 2/3 of the noninfringement warranty period before being forced to stop using it, it’s not unreasonable for Seller to be able to keep 2/3 of the money.

Non-infringing substitute

One of the Pactix infringement remedies is for Seller to provide a noninfringing substitute. Under the patent law of many jurisdictions, infringement can exist under the doctrine of equivalents; consequently, the Pactix language intentionally does not use the phrase “an equivalent non-infringing substitute.”