Japan: The Intellectual Property High Court (The "IP High Court") Ruled Against A Buyer Who Alleged A Seller's Violation Of A Certain Intellectual Property ("IP") Warranty And Indemnification Clause And Claimed Damages Allegedly Arising Out Of A Third Party's Patent Infringement Claim. (Case No.: 2023 (Ne) No. 10064)

1. Introduction

IP warranty and indemnification clauses are commonly set forth in a wide range of agreements, especially in sales contracts. In this article, we introduce a recent Japanese judgement rendered by the IP High Court on November 8, 2023, which interprets a certain ambiguous IP warranty and indemnification clause in a sales contract. This judgement would be helpful to interpret the meaning of unclear IP warranty and indemnification clauses in light of Japanese laws and to consider the language of IP warranty and indemnification clauses that should be proposed.

2. Facts

According to the judgement, a statement of the facts is as follows:

(1) On November 30, 2015, the plaintiff and defendant entered into a master sales agreement (the "Sales Agreement") in which the plaintiff, as a buyer, purchases the defendant's products with the name of "Wall Catcher" (the "Defendant's Products") and re-sells the Defendant's Products to plaintiff's business partners. The Sales Agreement contained the following IP warranty and indemnification clause:

(2) A patentee, who became an intervener in this case, argued against the plaintiff and defendant, in around the end of 2016, that the Defendant's Products infringed its patent rights. In response, the defendant denied the alleged infringement and argued that the patent at issue would be invalidated because the applicant of the patent failed to file the application with all of its inventors, which is one of the invalidation reasons under the Patent Act.

(3) Around July 2017, the plaintiff reported to the defendant that one of the plaintiff's business partners had indicated its intention to formally use the Defendant's Products despite a conflict concerning the patent among the plaintiff, the defendant and the patentee.

(4) However, around January 2018, the patentee and the plaintiff's business partner conducted direct negotiations, and both parties reached an amicable settlement to the effect that the patentee would not make any claims against the business partner arising out of alleged past infringements on the condition that the business partner stops purchasing the Defendant's Products from the plaintiff. Accordingly, the plaintiff's business partner notified the plaintiff of its intention that it would not purchase the Defendant's Products from the plaintiff in the future, while itwould compensate the plaintiff for stocks of the Defendant's Products which the plaintiff was currently keeping in its inventory.

(5) The plaintiff filed a lawsuit against the defendant seeking damages including lost profits arising out of the loss of future transactions with plaintiff's business partners, alleging that the Defendant's Products infringed the patent.

(6) The Osaka District Court dismissed the claim, finding that the defendant had not breached the IP warranty and indemnification clause under the Sales Agreement, and the plaintiff appealed to the IP High Court.

3. Judgement

The IP High Court in principle agreed with the Osaka District Court, and dismissed the plaintiff's appeal with the following explanation.

(1) From the language of the IP warranty and indemnification clause, the IP High Court found that the defendant would be liable for compensation for the plaintiff's damages under the clause when the fact of an infringement has been confirmed, such as confirmed by a binding judgement, and the plaintiff incurred damages from the infringement.

(2) However, considering that the clause states, "the defendant shall deal with and settle such infringement at its own cost and responsibility," and that the defendant had technical knowledge about the Defendant's Products, the IP High Court found that the defendant would be liable not only for the compensation described in item (1) above, but also to handle and settle any disputes regarding patent rights at its own costs and responsibility.

(3) Therefore, the IP High Court ruled that the defendant assumed contractual obligations under the clause to cooperate with the plaintiff and to provide it with information sufficient to protect it from damages arising out of any disputes if a third-party patentee alleged patent infringement against the plaintiff.

(4) In this case, the IP High Court found the following facts: (i) the defendant responded to the patentee's allegation regarding a patent infringement arguing that the patent would be invalidated; (ii) the defendant promptly collected evidence to support the defendant's arguments; (iii) as the result of the defendant's explanation and submission of evidence to the plaintiff's business partner, it was convinced and at once decided to use the Defendant's Products; and (iv) the defendant's arguments had reasonable grounds and evidence, and therefore it had a chance of successfully defending itself against the plaintiff from the patentee's allegations. Based on these facts, the IP High Court found that the defendant cooperated with the plaintiff and, upon the plaintiff's requests, provided it with information including technical knowledge concerning the Defendant's Products and the patent, necessary to avoid any situation where it may suffer damages from a dispute. Therefore, the IP High Court held that the defendant had not breached its obligations under the clause above.

4. Remarks

This judgment, on one hand, found that the defendant is obligated to pay compensation when an alleged infringement is confirmed, such as by a binding judgement, considering that the IP warranty and indemnification clause states, "The defendant warrants that the Defendant's Products do not infringe...patent rights...," and, "If there is an infringement". On the other hand, this judgement found that, when a third party alleges infringement of patent rights (i.e., even before an alleged infringement has been confirmed), the defendant is also obligated to cooperate with the plaintiff and provide information necessary to avoid any situation where the plaintiff may suffer damages from such infringement dispute. This interpretation would be helpful to consider obligations under similar IP warranty and indemnification clauses.

On a related note, it may be preferable for buyers to provide an IP warranty and indemnification clause stipulating that a seller will be liable for compensation related to IP disputes "when an IP infringement is alleged," rather than one stipulating, "If there is an infringement," similar to the clause in this case. When we set forth an IP warranty and indemnification clause, we should consider the preferable language of such clause, which may vary depending on the role of the contract at issue and the situation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.