Thomas Hemnes, M.S.
The practices associated with intellectual property indemnity can be traced in part to Article 2 of the Uniform Commercial Code. At the dawn of the computer age, practitioners searched for legal models that they could use for transactions in intangible rights and products such as computer software. Although computer software did not fit easily into the “sale of goods” paradigm, analogies to the familiar rules governing sales of goods were inevitable. Lurking in the lower reaches of Article 2 of the UCC, one finds an implied warranty of non-infringement in Section 2-312(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. In the context of a sale of goods at the time Article 2 was drafted, a non-infringement warranty made good economic sense. The only form of intellectual property likely to be of concern to the purchaser of goods was patent protection. In the mid-twentieth century, when Article 2 of the UCC was adopted, patents were the disfavored stepchildren of the federal courts. A high percentage of patents were held to be invalid, and the damages accorded to those found to be valid were often limited to a modest royalty. Furthermore, patent rights are—as a rule—exhausted upon the first sale of a product and far fewer patents were being issued. Additionally, products were less complex, typically falling into only a single engineering domain, with correspondingly fewer points of intersection with issued patents. For all these reasons, the risk that the ultimate purchaser of a product would be sued for patent infringement was very remote, and even if the purchaser were sued, the damages would be only a tiny fraction of the purchase price—the average and median for all products was between five and seven percent.