IP Indemnities - Your Exposure May Be Greater Than You Think

Koninklijke Philips Electronics NV v Aventi Limited and Koninklijke Philips Electronics NV v Princo Digital Disc GmbH and another - Ch. D (Pumfrey J) 16/9/2003

Section 51 of the Supreme Court Act 1981 confers the jurisdiction to order costs against a non-party to litigation. In this case, Philips commenced patent infringement proceedings against Aventi Ltd. Princo - a non party to, but a funder of, this litigation - was held liable for Philip’s costs.

Philips sued Aventi in the UK in respect of unlicensed compact discs made by Princo amongst others. Aventi was Princo’s main customer in the UK. Princo was already subject to proceedings in Germany in relation to the German equivalent of Philip’s UK patent. However Princo was not party to the litigation in the UK.

Princo agreed to indemnify Aventi against any damages award should it be held to infringe and to pay the costs of Aventi’s defence and Aventi relied upon that funding. When the costs of Aventi’s defence exceeded those that Princo believed it had agreed to pay, Princo refused to continue the funding. Aventi went into liquidation six weeks after the withdrawal of the funding. Aventi’s defence collapsed. Philips also successfully brought another patent infringement action directly against Princo and its director.

1. Was Princo a commercially disinterested funder (in which case the order would not be made) or would its interests be advanced by a successful outcome in the litigation?
2. A pre-condition for making such an order was a finding that without the funding from Princo the litigation would not proceed.
3. If the causation pre-condition was satisfied then did justice require that an order be made?

Princo was held liable for the costs of the action. Princo clearly had a commercial interest in the outcome of the proceedings in the UK. It was in its interests for the UK as well as the German patent to be held invalid. The causation pre-condition for making such an order was satisfied because Aventi would not have defended the action but for Princo’s funding.

It is quite common for suppliers to offer indemnities against IP infringement and such indemnities often extend to cover the legal costs of defending infringement actions. Suppliers often seek to cap their liability under these indemnities. However, this case illustrates there is a real risk that the exposure under such indemnities may be increased to an unpredictable extent in the event that the IP rights holder obtains a costs order under section 51.

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.