Thursday, August 13, 2009

An Infringing Building Offers No Indemnity

A recent case suggests the need for caution in dealing with building plans. A builder acquired a set of plans from a plan developer in order to construct a single family residence. The house was built, but the builder was sued by a third party who owned the copyright in the building plans and design. It turns out that the plan developer who sold the plans to the builder had wrongfully copied the plans from a third-party copyright owner. The copyright owner was a competing plan developer operating in the same market area who had previously developed the plans.

In attempting to defend itself, the builder brought indemnification claims against the seller of the counterfeit plans. He argued that the seller committed fraud and misrepresentation in selling plans that the seller knew were wrongfully copied. The court dismissed the indemnification claims because there is no right of indemnity for copyright infringement.

The court pointed out that there is no indemnity right included in the Copyright Act, and that the Copyright Act preempts conflicting state law. As such, state indemnity law does not apply. In any event, it is federal common law, not state common law, that applies in a copyright proceeding. Federal common law is very limited and does not include the right of indemnity for violation of federal law.

Outside of the building context, this case raises anew the obvious problem faced by the buyer of goods that turn out to be counterfeit. How can the innocent buyer of counterfeit goods protect itself from liability when the seller fails to disclose that the sold goods were wrongfully copied?

Without the right to bring an indemnity claim, the buyer's options are limited. If the transaction is regulated under Article II of the Uniform Commercial Code, then the buyer may be able to bring a breach of title warranty claim against the seller. Or, the buyer may have a claim under a state's unfair trade practices law or similar consumer protection laws. One potential problem with the consumer protection laws is that they do not necessarily apply in the context of a commercial transaction involving business parties. Another approach is to include covenants of good title and non-infringement on the part of the seller in the contract of sale.

Be careful out there. The copyright law is not just for poets anymore. It applies in many commercial contexts involving useful articles.

No comments: