Earlier this year, the University of California sued Amazon, Walmart, Target and other major retailers for alleged infringement of four university patents related to “filament” LED light bulbs.
While the case is currently on hold pending a U.S. International Trade Commission probe, a decision could have lasting implications for retailers and suppliers in the U.S., as well as pose an important question: Who’s responsible for intellectual property in the supply chain? Is it the retailer or the manufacturer?
Patent holders have the right to exclude others from making, using and selling a product. Typically, plaintiffs in infringement cases target the manufacturer, in order to cut off supply at the source. If no one makes the infringed product, it can’t be shipped, sold or used. Interestingly, the University of California has taken a different approach: suing the retailer instead of the supplier.
This choice might be more of a practical matter than a strategic one. It’s possible that the decision was made because the university couldn’t pursue litigation abroad, where the light bulbs were likely manufactured. If the University of California only has patent protection in the U.S., it can only sue companies there. While it could pursue litigation against manufacturers, there’s the practical matter of locating them in China and bringing them to court in the U.S. Therefore, it was a more practical move to sue the sellers.
That said, this unique move could inspire more patent holders to sue sellers, versus manufacturers, in the coming years.
However, just because retailers might be taking the heat right now, it doesn’t mean suppliers will start to avoid repercussions. Contracts between buyers and suppliers already detail elements such as liability, insurance, warranties and IP, so manufacturers will likely continue paying for any patent infringements.
Suppliers and other members of the supply-chain ecosystem should carefully read the patent indemnity clauses in their contracts with retailers. This set of conditions outlines who is responsible for infringement should it occur, and what responsibility the supplier has should the buyer be accused of infringement. Depending on how this section is written, manufacturers could be left footing the bill for the infringement trial, damages and lost goods.
To understand the role that suppliers, shippers and other stakeholders play in infringement proceedings, they need to make sure they understand the ins and outs of the patent indemnity clause, as it will likely get stricter after the University of California case. By addressing the issue of IP during contract negotiations in a product manufacturer-customer relationship, both parties can minimize uncertainty and avoid the potential for conflicts, lawsuits and monetary damages.
Beyond changes to contractual processes involving retailers and their suppliers, the University of California case might also prompt retailers to push for greater visibility into supply-chain operations. They’ll seek insight into things like where and how they get their goods, and put more effort behind enforcing IP protections at the different stages of the supply chain.
Many retailers already do this, motivated by calls for increased visibility for moral and ethical reasons. Now, however, there will be extra scrutiny to ensure that IP rights are being respected. A report by the Stanford Initiative for the Study of Supply Chain Responsibility found that companies can use the same thinking they have applied to protect against social and environmental risk in supply chains to help protect against IP risk as well. Should retailers apply these practices, manufacturers that sell knockoffs will no longer be able to get away with it.
Changes could be hitting the supply chain soon enough, and manufacturers, shippers and other stakeholders should be diligent when it comes to respecting IP rights. While the exact question of where IP responsibility falls has yet to be determined, stakeholders should begin to consider the implications of this case, and how they can implement best practices to ensure the manufacture, delivery and service of legitimate goods.
Eric Giler is CEO of Ciprun Global.
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