Don’t come to me, if the product I sell you infringes IP

Disclaimers can take many forms...

Disclaimers can take many forms…

The title of this post is almost poetic.  Recently, IP Draughts was asked for advice on the sale of products by an overseas company to purchasers in the UK.  The products were to be sold to retail businesses, who would resell to consumers.

The question that was raised was whether the contract terms between the client and the retailer could include a provision by which the client excluded liability if the retailer were sued by a third party for IP infringement.

Any such provision would face some legal obstacles.

Section 12 of the (UK) Sale of Goods Act 1979 (SGA) implies into contracts for the sale of goods, in summary:

  1. A condition that the seller has the right to sell the goods; and
  2. A warranty that the buyer will enjoy “quiet possession” of the goods.

In Microbeads v Vinhurst Road Markings [1975] 1 All ER 529 (CA), Lord Denning MR discussed that either or both of the above implied terms could be breached if the buyer were sued for patent infringement by a third party.  In that case, on the facts, a breach of the first of these terms could not be established, but a breach of the quiet possession warranty was established.  The latter is an ongoing warranty that continues while the buyer remains in possession of the goods.

carnationLord Denning also discussed the earlier Court of Appeal case of Niblett v Confectioners Materials [1921] 3 KB 387 (CA), in which a similar point was discussed in relation to trade mark infringement.  In the latter case the products in question were tins of condensed milk marked with the name Nissly, to which Nestle (pronounced ness-lay) not surprisingly objected.

These are the only two cases of prominence that IP Draughts is aware of, in this field.  The SGA and its predecessors date back to the nineteenth century.  In 1975, in the Microbeads case, Lord Denning described the infringement issue in relation to section 12 as a “new and interesting point”.

If one accepts that the law is this area was settled by the Microbeads case, the next question is whether a seller can avoid liability for IP infringement by the buyer through the use of suitable contract terms.  Unfortunately for sellers, there is another legal obstacle.  Section 6(1)(a) of the Unfair Contract Terms Act 1977 (UCTA) states that liability for breach of section 12 of the SGA “cannot be excluded or restricted by reference to any contract term.”

internationalSo, the short answer seems to be that a seller is liable if the buyer is sued by a third party for IP infringement.  No doubt there are special cases where this might not be so.  For example, sections 12(3) and (5) of SGA limit the implied terms of title where “there appears from the contract or is to be inferred from its circumstances an intention that the seller should transfer only such title as he or a third person may have”.  And section 26 of UCTA disapplies certain of UCTA’s prohibitions in the case of “international supply contracts”.

Moreover, if the buyer provides a detailed design and specification for the product, and the seller simply follows the buyer’s instructions, common sense might suggest (although IP Draughts hasn’t yet worked out whether the law follows common sense on this point) that the buyer should not able to rely on section 12.  Or perhaps section 12(3) then applies.

Has any reader encountered this legal issue under English or other laws?  If so, what conclusions did you reach?

6 Comments

Filed under General Commercial, Intellectual Property

6 responses to “Don’t come to me, if the product I sell you infringes IP

  1. Reblogged this on IP Draughts and commented:

    Another golden oldie. If you think of software licensing as the sale of an intangible product, giving an indemnity against IP infringement makes more sense and is aligned with the law on sale of goods.

  2. Is software ‘goods’ – maybe not software ‘as such’ (although maybe that is changing since UsedSoft/Oracle?); but for sure lots of products embedding important software components would qualify as ‘goods (eg Playstations, Blu-Ray players, mobile phones, …).

    I was under the impression that your post was about the manufacturer/IP owner indemnifying the customer/reseller against IP claims? And not the inverse? It would indeed be common for the IP owner to indemnify the licensee, but that is not always so. Most obviously in open source license terms (and any goods embedding open source software), which usually waive any warranty or indemnification for IP infingement. Would this eg render the GPL unenforceable in the UK? Inversely, it is indeed less common for the licensee to indemnify the licensor, but it is not very unusual either; especially in the OEM/embedded reseller space, it is common for the reseller to indemnify the licensor eg for combination claims (ie when the combination of the licensor software with the licensee product constuitutes the patent infringement).

    • Interesting point about GPL. I looked at GPLv3, which includes the following text:

      THERE IS NO WARRANTY FOR THE PROGRAM, TO THE EXTENT PERMITTED BY APPLICABLE LAW. EXCEPT WHEN OTHERWISE STATED IN WRITING THE COPYRIGHT HOLDERS AND/OR OTHER PARTIES PROVIDE THE PROGRAM “AS IS” WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE PROGRAM IS WITH YOU. SHOULD THE PROGRAM PROVE DEFECTIVE, YOU ASSUME THE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION.

      No mention here (or am I missing the relevant clause?) of a specific dislaimer of liability for infringement of third party IP, but it is probably caught up in the general wording.

      Surely if one is licensing under GPL it is more likely to be a software licence as such and not the sale of a product?

      As to whether the SGA would “render the GPL unenforceable in the UK” it might make one small aspect of the above disclaimer of warranties unenforceable. But anyway the above wording has not been drafted with English law in mind – as can be seen from the reference to merchantability.

    • Also interesting to look at the US Uniform Commercial Code, given that putting the disclaimer in block capitals in the GPL is probably based on an attempt to comply with the UCC’s requirement for prominent text.

      The relevant section of the UCC on title is as follows:
      § 2-312. Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement.

      (1) Subject to subsection (3), there is in a contract for sale a warranty by the seller that:

      (a) the title conveyed shall be good and its transfer rightful and shall not unreasonably expose the buyer to litigation because of any colorable claim to or interest in the goods; and

      (b) the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.

      (2) Unless 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 but a buyer that furnishes specifications to the seller must hold the seller harmless against any such claim that arises out of compliance with the specifications.

      (3) 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 does not claim title, that the seller is purporting to sell only the right or title as the seller or a third person may have, or that the seller is selling subject to any claims of infringement or the like.

      It doesn’t look to me like the disclaimer in the GPL licence complies with paragraph (3) above, so perhaps the GPL licence is also “unenforceable” under US laws!

  3. Your question raises several issues!

    First, are software licences “goods” for the purposes of the Sale of Goods Act? Probably not.

    Second, we have B2C unfair contracts legislation, mostly based on EU law, but we also have an older set of laws in UCTA 1977, that applies also to B2B contracts. These could be viewed as a relic of the pre-Thatcherite days of industrial policy, depending on your political views. The closest in German law, I understand, may be that you cannot exclude liability for gross negligence or wilful misconduct, among other things.

    Third, my experience is that software licences often include some form of IP indemnification, in the sense of the licensor indemnifying the licensee against third party IP claims made against the licensee. Much less common, in my experience, are terms in which the licensee indemnifies the licensor against third party IP claims made against the licensor, or agrees not to sue the licensor in respect of third party claims made against the licensee. Is your experience different?

  4. I am not an English lawyer, but are you saying that exclusion (or limitation?) of IP indemnification is not enforceable under UK law? Exclusions or serious limitations of IP indemnification are very common in any software license – in most continental systems, unfair contract terms-regulations apply only in B2C transactions, not between two commercial parties?

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