Understanding the difference between direct and contributory patent infringement is important when drafting contracts for a tech company.
As counsel to multiple technology companies, I am always baffled when a negotiating counterpart disputes there are multiple types of infringement, followed by a demand my client bears the burden “for any and all patent infringement” related to its product. In reality, if your client signs a contract accepting the onus for “any and all patent infringement”, your client (if its product is successful) will certainly be either defending or paying a third party’s cost for defending a patent infringement lawsuit. Instead, consider only agreeing to liability based on claims your client’s product “directly infringed a patent”. Being responsible only for claims alleging direct patent infringement, your client will not have to concern itself with having to defend claims contributory infringement. Contributory infringement usually rears its ugly head as part of a scatter shot pleading in which a lawyer names every party or person tangentially related to your product or its use. Patent infringement lawsuits are expensive. Limiting your clients exposure to these lawsuits is something to strongly consider when drafting a contract for a tech company client.
A good analysis of contributory infringement, in which the Court held contributory infringement does not exist without first having direct infringement is in the recent case of Limelight Networks, Inc. v. Akamai Technologies, Inc. -S. CT.- 2014 WL 2440536 (2014).
Although businesses should review their standard “form” contracts annually with their attorney, many do not. Most often changes to year’s old contracts occur after a deal has gone bad or an expensive lawsuit has been lost. Hidden “time bombs” await businesses in the form of “the law has changed since we first used this contract” or ” this provision has not been enforced by a court in years”. However, every so often news of a court case, ruling or new statute froths to the top and successful businesses take the necessary steps to adapt their businesses and their contracts accordingly. The recent Florida Supreme Court decision in Tiara Condominium Assoc. v. Marsh & McClennan Companies, Inc. (SC10-1022) should be one of those instances.
In the Tiara Condominium case, the Florida Supreme Court severely limited the “Economic Loss Rule”. This means business that may not have been able to sue for breach of contract, because the actual contract said they could not (clauses limiting certain damages or liability, etc.) have a second chance. Lawsuits seeking damages for tort claims like negligence can now be filed even though a claim for breach of contract, on the same set of facts, is not available.
To businesses that update their contracts regularly, the court’s decision restricting the confusing and often sloppily applied Economic Loss Rule will be welcome. These businesses will have their attorneys review their contracts for the best way to adapt to the court’s ruling. Most likely contract provisions regarding liability and damage limitations, indemnity, insurance and dispute resolution will be modified. Unfortunately, for many businesses the effect of the court’s decision will only be known at a later, much more expensive, date.