Yttro Corp. v. X-Ray Marketing Assn., Inc., 559 A.2d 3 (1989)

Facts

  • In July 1985, Yttro Corporation (Yttro) and X-Ray Marketing Association, Inc. (XMA) entered a contract for Yttro’s sale and XMA’s purchase of 1,000 x-ray filters that were covered by a patent.
  • Yttro delivered 262 filters to XMA.
  • In February 1987, XMA learned that Yttro neither owned nor had a license to the patent covering the filters.
  • After learning of Yttro’s lack of patent rights, XMA returned the filters it had already accepted and refused to take delivery of the remaining 738 filters.
  • In March 1988, Yttro entered into a licensing agreement with the patent holder. The license was effective retroactively to February 1985.
  • Yttro sued XMA to enforce the July 1985 contract.
  • XMA defended on the theory that Yttro’s patent violation (lack of rights to sell patented goods) entitled XMA to rescind.
  • The New Jersey Superior Court (trial level) applied the New Jersey UCC and granted summary judgment for XMA.
  • Yttro appealed to the Superior Court of New Jersey, Appellate Division.

Issues

  1. Under New Jersey’s UCC warranty against infringement (UCC § 2-312(3)), does a seller’s lack of patent ownership or a license at the time of contracting and delivery automatically entitle the buyer to rescind when the seller later obtains a retroactive license covering the period of sale?
  2. Was summary judgment for the buyer proper on this record, given the retroactive license and the need to determine whether any third-party infringement claim was “rightful”?

Decision

  • The Appellate Division reversed the summary judgment entered for XMA and remanded for further proceedings.
  • The court concluded that XMA was not entitled to judgment as a matter of law on its UCC § 2-312(3) infringement-warranty theory in light of Yttro’s later-obtained retroactive patent license and unresolved questions about whether any infringement claim would be “rightful.”

Legal Principles

  • UCC § 2-312(3) imposes an implied warranty that goods will be delivered free of a third party’s “rightful” claim of patent (or other intellectual property) infringement, unless the parties agree otherwise.
  • The warranty addresses legally enforceable infringement claims, not mere uncertainty about the seller’s patent status.
  • A retroactive patent license may affect whether a third party would have a “rightful” infringement claim arising from the seller’s manufacture or sale of the goods during the relevant period.
  • Summary judgment should not be granted when material legal and factual questions remain about the existence of a “rightful” infringement claim and the effect of a retroactive license on the alleged breach and the buyer’s remedies.

Conclusion

In Yttro Corp. v. X-Ray Marketing Assn., Inc., the Appellate Division held that the buyer was not entitled to summary judgment rescinding a contract for patented goods solely because the seller lacked patent rights at the time of delivery, where the seller later obtained a retroactive license and unresolved questions remained about whether any third-party infringement claim was “rightful” under UCC § 2-312(3).