IP Court Found LED Chip Supplier Liable to Indemnify, Ruling Duty To Indemnify Is Not Conditioned Upon Judicial Finding Of Patent Infringement

Tong Fang Semiconductor (HK) Co., Ltd. (“Tong Fang”) sued Unity Opto Technology, Ltd. (“Unity”) in Taiwan, alleging overdue payment (US$ 1, 102, 195.57) for the LED chips Tong Fang supplied to Unity. In response, Unity argued that the LED chips provided by Tong Fang infringed third party’s U.S. patents[1], which rendered Unity subject to potential patent infringement liability in the United States[2]. Unity therefore stated that according to the “Intellectual Property Guarantee Letter” (“Letter”) provided by Tong Fang, Tong Fang should be responsible for costs Unity incurred due to the infringement lawsuit. Since Unity paid US$ 1,122,073.35 for the U.S. lawsuit, Unity is entitled to offset the legal fees it paid (i.e., US$ 1,122,073.35) against the payment it allegedly owed to Tong Fang (i.e., US$ 1, 102, 195.57). Thus, Unity argued that Tong Fang is not entitled to the overdue payment.

Since the two parties did not dispute the amount of the overdue payment, the key issue is whether Unity is entitled to hold Tong Fang responsible for the legal fee Unity incurred arising out of the LED chips Tong Fang supplied.

The relevant clauses prepared by Tong Fang in the Letter are as follows:

“We (i.e., Tong Fang) warrant that all Chip products manufactured and/or sold to Unity do not infringe or misappropriate any Intellectual Property Rights, including without limitation,  patent, copyright, trade secret, industrial design, know-how, trademark of any third parties in design, construction, manufacture or use of the Products.

We will defend, indemnify and hold harmless Unity, its agents, directors, officers, employees, affiliates and customers, from and against any asserted claims, suits, injunctions, demands, actions, expenses, losses or damages（including, without limitation, shipping costs, repackaging fees, recalls, handling fees, losses of product distribution, custom tariff, tax, fines, field return expenses and/or attorney fees）arising from or related to we do not comply with the warranty and representation hereinabove in any manner .

We will, at our own cost and expense, select necessary manner to let Unity, its affiliates and/or customers continue to use the Products legally and legitimately…”

Tong Fang argued that the Letter is not applicable because there is no final court’s decision on issue of infringement. In other words, the applicability of Tong Fang’s obligation to indemnify should be conditioned upon a final court’s decision that finds infringement. The IP Court judge disagreed, holding that:

1.     The terms used in the Letter, such as asserted claims, demands, actions, etc., all refer to matters that are not necessarily involving a final court decision. Thus, the literal interpretation of the cited clause suggests that a final determination of infringement by the court is not the premise of Tong Fang’s duty to indemnify.

2.     Besides, Unity required this Letter from Tong Fang because Unity had to manage the legal risk and damages accompanied with the LED chips Tong Fang supplied. Since patent litigation is notorious for its high cost and lengthy procedure, before a court enters its final decision on infringement, there would be considerable costs and expenses incurred. It would be against the purpose of the Letter to construe Tong Fang’s duty to indemnify be premised on a final judicial finding of infringement.

3.     Further, it would be unfair to adopt Tong Fang’s proposed interpretation. Since Tong Fang is the supplier of the accused LED Chip, Tong Fang, compared with Unity, is in a better position to defend patent infringement lawsuit. However, under Tong Fang’s theory, not only will Unity be unable to ask Tong Fang to help defend the infringement lawsuit at the outset of the litigation, Tong Fang may still refuse to compensate Unity when, in the end, Unity obtains a final judicial finding of non-infringement for Tong Fang’s chips.

In view of the above, the IP Court found Tong Fang should indemnify Unity for the costs Unity incurred due to the patent infringement lawsuit. Since the costs Tong Fang should indemnify is higher than the payment it demanded from Unity, after offsetting Unity’s alleged costs from Tong Fang’s demanded payment, there is no need for Unity to pay Tong Fang. As such, the IP Court rejected Tong Fang’s claim accordingly.

TIP: While indemnity clause is helpful in managing and balancing the legal risk between the seller and buyer, it is critical to make sure the circumstance intended to be covered by the indemnity clause should be as clear and definite as possible.

Source:

智慧財產法院民事判決108年度民專上字第30號

https://bit.ly/3d5wKBO

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[1] The patents are: US 6,657,236; US 6,885,036; US 6,614,056; US 7,312,474; US 7,976,187; US 8,766,298; US 8,596,819; US 8,628,214; US D653,366; D660,990

[2] The title of the case is: Cree, Inc. v. Feit Electric Company, Inc. et al.