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As litigation brought by so-called “patent trolls” continues to grow, corporate consumers could increasingly find themselves the target of unexpected litigation. Generally speaking, a patent troll is a company that owns patent rights but does not make, use or sell a product covered by the patent in question. Patent trolls use their intellectual property to make money through licensing or litigation and will often sue multiple entities along the supply chain. They often will not hesitate to sue manufacturers and purchasers alike. For corporate consumers that have purchased infringing products to resell or incorporate into their own products, ensuing litigation can be a daunting proposition. Often, the only protection such customers have is the possibility of indemnification from the manufacturer. Yet, absent language in the sales papers, indemnification cannot be guaranteed. If the buyer fails to think ahead, it may find itself pulled into a lawsuit and left wondering who actually bears responsibility. Most of the time, patent owners litigate against their actual competitors in the marketplace, the manufacturers of infringing products. Patent holders rarely wish to sue potential customers who, absent the infringer, would most likely purchase their requirements from the holders themselves. Lawsuits brought by patent trolls, however, are an exception. Because patent trolls have no existing or prospective business relationship with the customer, they have no incentive not to sue. In many situations, even patent trolls will find it difficult to sue end users and customers. Why should they sue every purchaser of a computer, for instance, when one suit against the manufacturer will do? However, what if only one component of the computer is alleged to infringe and that component is supplied by a small company to much larger computer manufacturers? The patent holder may find it desirable to sue both the computer and the component manufacturers so that it can maximize its chance of collecting damages and apply pressure on all of the parties to settle. Issues with indemnification When faced with such a suit, the corporate customer’s initial reaction often is that the manufacturer will simply indemnify it. The manufacturer is the one that developed the product, and the manufacturer is presumed to be the one that would have done a freedom-to-operate analysis. However, in practice, indemnification is not always easy to obtain. A number of factors may contribute to a manufacturer’s unwillingness to assist on its own, including whether the manufacturer is of a sufficient size and has sufficient resources in relation to its customer to be able to assist; whether it followed particular specifications for the product provided by the customer; whether the customer is a large enough purchaser for the manufacturer to feel obligated to assist; and whether the number of customers is so numerous that it is virtually impossible for the manufacturer to police whether each one made material changes that could affect a determination of infringement. Though the customer may feel entitled to indemnification, absent explicit language in the sales papers, the manufacturer’s obligation to indemnify is often far from clear. As a result, companies that believe they are nothing more than innocent purchasers may find themselves pulled into lawsuits and left with many questions about their ultimate liability. One thing is clear. Under the law itself, anyone who “without authorization makes, uses, offers to sell, or sells any patented invention . . . infringes the patent.” 35 U.S.C. 271. This provision covers both the manufacturer as well as any buyer that uses or resells the manufacturer’s product. What remedies, then, does a buyer have against a manufacturer if it is dragged into a lawsuit resulting from the use or resale of the manufacturer’s product? Section 2-312 of the Uniform Commercial Code offers an answer, though in practice its impact is narrow in scope. Subparagraph (3) of that section reads: “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.” There are very few cases applying � 2-312(3), and the resulting legal landscape is murky at best. On its face, � 2-312(3) affords a purchaser of goods an implied warranty against infringement when purchasing such goods from a dealer. The nature of an implied warranty, however, can lead to one of the greatest impediments in enforcing � 2-312(3). In many instances, such warranties may simply be disclaimed by language in the sales forms themselves. For instance, in Landis & Staefa v. Flair Int’l Corp., 60 F. Supp. 2d 14 (E.D.N.Y. 1999), the court held that language on the reverse side of order acknowledgements and invoices, disclaiming all implied warranties, was sufficient to disclaim the warranty of no infringement. Landis & Staefa had purchased motorized heating valves from Flair International Corp. for resale. Honeywell Ltd. accused Landis of infringing a U.K. patent. Landis settled the claim and sought indemnification from Flair. The court rejected Landis’ claims based simply on the standard disclaimers in the sales forms. The risk that such general disclaimer language will have an impact on the enforceability of � 2-312(3) creates a significant impediment to most business relationships in which sales are consummated with nothing more than price quotes, purchase orders and invoices. Yet, even when dealing with more complex business arrangements, the applicability of � 2-312(3) itself is questionable. Relevance of specifications One situation in which � 2-312(3) would not apply on its face is when the buyer actually provides specifications for the product to the manufacturer. If the production of goods pursuant to those specifications infringes a patent, the UCC places responsibility on the buyer. Yet, questions often arise as to whether compliance with the specifications led to the activity accused of infringement. For instance, in Jack Frost Laboratories Inc. v. Physicians & Nurses Mfg. Corp., No. 92 Civ. 9264, 1995 WL 293328 (S.D.N.Y. May 12, 1995), Physicians & Nurses Manufacturing Corp. (P&N) manufactured and sold a microwavable gel pack to Pfizer Inc. for use in a promotion. Pfizer’s agent had requested “500,000 custom made 11″ by 5.5″ one pound blue filled reusable hot/cold gel packs with a two side print.” P&N provided the gel packs to Pfizer and was subsequently sued for infringement. P&N argued that Pfizer and its agent should indemnify it pursuant to � 2-312(3) since it was simply following Pfizer’s specifications. The court disagreed, finding that the patent claim related to the composition of the film used on the outside of the gel packs, not the color or size of the packs. The court further rejected P&N’s argument that requiring the gel packs to be microwavable inherently caused P&N to use a material that infringed the plaintiff’s patent. The court reasoned that P&N was in the best position to know of the plaintiff’s patents, and in the absence of any direct specification as to the material, the court was unwilling to assign liability to Pfizer. A related question occurs when the buyer takes the product and either changes it or incorporates it into a larger product before resale. If the alteration or incorporation places the product under the scope of the patent, or even if it arguably moves it further in that direction, one could argue that the buyer bears responsibility. Conversely, if the changes have nothing to do with the patent, it seems as if responsibility should still lie with the manufacturer. One can imagine, however, a wide-ranging gray area in which the parties debate whether particular changes were relevant to the issue of infringement. Another fundamental question raised by � 2-312(3) is whether it applies in the context of a patent claiming a particular process as opposed to a product or device. In Motorola Inc. v. Varo Inc., 656 F. Supp. 716 (N.D. Texas 1986), Motorola Inc. filed suit against Varo Inc. for infringing a patent covering a method for making semiconductor devices using a certain photosensitive material. Varo purchased such materials from various third-party defendants. Varo accused the third-party defendants of breaching the implied warranty of noninfringement. The court ruled in favor of the defendants, holding that � 2-312(3) only guarantees the goods to be delivered free of all claims of infringement. The court found that it does not cover the buyer’s subsequent use of the goods. From the buyer’s perspective, this result seems somewhat unfair. The buyer’s interest is simply to purchase a product that it can use or resell as it sees fit. Why should the buyer’s rights depend upon the type of patent that is being asserted? Nevertheless, cases such as Motorola appear to draw this distinction, which can lead to what appear to be quite arbitrary results. One final issue that has arisen in the case law is whether � 2-312(3) applies to a buyer that purchases a product fully aware of the patent at issue and the possibility of infringement. The 9th U.S. Circuit Court of Appeals recently dealt with this issue. In Pyramid Plastics LLC v. Roundhouse Products Inc., 130 Fed. Appx. 162 (9th Cir. 2005), Rembrandt Photo Services sued both Pyramid Plastics LLC, the seller, and Roundhouse Products Inc., Pyramid’s customer, for infringement. Both companies brought indemnification claims against each other, with Pyramid arguing that it was just following Roundhouse’s specifications for the goods and Roundhouse arguing that as the manufacturer, Pyramid had to indemnify it. The court found that both parties had equal knowledge of Rembrandt’s patent and claim of infringement. Therefore, it would be inequitable to force either party to indemnify the other. Allocating risk by contract The absence of significant case law involving claims for indemnification in the patent context and the variety of ways in which such claims may arise lead to a great bit of uncertainty on who bears the risk of infringement. As with many situations involving uncertainty under the law, parties may be well advised to mitigate their risks by specifically contracting for indemnification. All companies prepared to make a significant purchase from a vendor should at least contemplate whether there is room to negotiate specific contractual language providing for indemnification. Moreover, drafting specific indemnification provisions into their sales agreements also permits parties to tailor the language to the specific situation. For instance, if a reseller knows it is going to make certain changes to an item before selling the item, it can specifically negotiate language into the indemnification agreement that will account for those changes. Failure to negotiate any form of explicit indemnification clause leaves companies subject to a great deal of uncertainty under the law. With entities such as patent trolls targeting manufacturers and customers alike, this inherent uncertainty becomes far less tolerable. It is wise to think all of the details through in advance. Mark S. Freeman is a partner in the intellectual property litigation practice group at Choate, Hall & Stewart in Boston. He can be reached at [email protected].

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