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The Application of the Principle of Good Faith in Cases of Breach of Settlement Agreements in Patent Infringement Disputes—Supreme Court Civil Judgment 2025 Tai-Shang-Zi No. 275
I. Facts of the Case
1. VIAVI Solutions Inc. ("VIAVI") is the patentee of Taiwan Invention Patent No. I576617, titled "Optical Filter and Sensor System," and China Invention Patent No. ZZ000000000000.2, titled "Filter and Sensor System" ("Patents"). VIAVI filed lawsuits against Platinum Optics Technology Inc. ("Platinum ") in both Taiwan and China, alleging that Platinum had infringed the Patents. Subsequently, in April 2020, the parties entered into a settlement agreement ("Agreement"), stipulating that VIAVI shall not, in any country, assert claims of infringement against products manufactured and sold by Platinum prior to the effective date of the Agreement, based on patents obtained in various countries pursuant to U.S. Provisional Patent Application No. 61/672,164 or patents that are substantially identical thereto. However, shortly after the conclusion of the Agreement, in August 2020, VIAVI, based on a patent granted in the United States, again asserted that the optical filter products manufactured and sold by Platinum infringed its patent rights, and filed a patent infringement lawsuit against Platinum in the United States. As a result, Platinum filed a lawsuit, claiming that VIAVI had clearly engaged in abuse of the right of action, constituting unfair competition and violating the provisions of Article 3 of the Agreement, and therefore should pay punitive damages in accordance with the Agreement. VIAVI subsequently moved to withdraw the aforementioned U.S. infringement lawsuit, and the motion was granted by the California Court.
2. The original judgment of the Intellectual Property and Commercial Court (2023 Min-Chuan-Shang No. 24) ruled that the Agreement did not prohibit VIAVI from initiating infringement litigation against Platinum for products manufactured and sold by Platinum after the effective date of the Agreement. Since VIAVI explicitly asserted in the U.S. infringement litigation that it was seeking damages for infringing acts committed by Platinum after May 1, 2020, there was no violation of the terms of the Agreement. Although VIAVI used the comparison report of filter 11246 as evidence to adduce evidence of Platinum's infringement, the purpose was to demonstrate that the infringing products manufactured and sold by Platinum after May 1, 2020, were similar to filter 11246. Therefore, it was permissible to directly use the comparison results between filter 11246 and the disputed patent as proof of Platinum's infringement. In essence, VIAVI was using old evidence to prove the facts of new infringing acts, which is a method of adducing evidence regarding the existence of infringing acts. It cannot be hastily concluded that VIAVI, in the U.S. infringement litigation, was asserting infringement against old products manufactured and sold before the effective date of the Agreement, nor can it be determined that VIAVI violated the Agreement. Accordingly, Platinum's appeal is overruled.
3. Platinum filed an appeal against the original judgment. The Supreme Court, in its 2025 Civil Judgment No. 275, held that the original judgment was flawed due to insufficient reasoning and failure to conduct a thorough investigation and review. Accordingly, the Supreme Court set aside the original judgment and remanded the case to the appellate court for further proceedings.
II. Main Issues of the Case
Main Issues in the Original Trial
After the execution of the Agreement, VIAVI used the optical filter (i.e., Filter No. 11246) purchased from Platinum prior to the effective date of the Agreement for the purpose of initiating litigation in China as evidence of infringement, and subsequently filed an infringement lawsuit in the United States. The main issue is whether such conduct constitutes a violation of Article 3 of the Agreement, thereby obligating VIAVI to pay punitive damages in the amount of USD 300,000 and interest.
Main Issues in the Third Instance
Whether the original judgment contains a violation of law due to insufficient reasoning as stipulated in Item 6, Paragraph 1, Article 469 of the Code of Civil Procedure[1]; and whether VIAVI’s initiation of the infringement lawsuit in the United States can be deemed not to violate the principle of good faith and therefore does not constitute a breach of contract.
III. Supreme Court’s Holdings
1. Platinum repeatedly asserted during the original trials that VIAVI, in the U.S. infringement litigation, only identified the No. 11246 filter, which had been analyzed through reverse engineering in June 2019 as alleged in the prior China litigation, as the accused infringing product. Regarding the allegation that Platinum constituted “inducement of infringement,” VIAVI did not limit the period of the alleged infringing acts, but rather included acts of infringement prior to May 1, 2020, thereby violating the stipulations of Article 3 of the Agreement, and submitted expert opinions and supplemental expert opinions as evidence. This is crucial to determining whether VIAVI, in the U.S. infringement litigation, accused Platinum of patent infringement for products manufactured and sold before the Agreement took effect, and whether there was a breach of the Agreement. Such arguments constitute important means of attack. However, the court of second instance disregarded the above evidence favorable to Platinum, failed to address or explain its reasoning for accepting or rejecting such evidence in the grounds of the judgment, and hastily rendered a decision unfavorable to Platinum, which is arguably a hasty conclusion and constitutes a violation of the requirement to provide reasons in the judgment.
2. According to the exercise of rights and performance of obligations, such acts shall be conducted in accordance with the principle of good faith, as expressly provided in Paragraph 2, Article 148 of the Civil Code. If one party to a contract, without just cause, improperly impairs the other party’s reasonable expectations regarding the transaction, and circumvents its own prior conduct that led the other party to justifiably rely on the faithful performance of its obligations, such conduct constitutes a violation of the principle of good faith. VIAVI, just over three months after the conclusion of the Agreement, immediately filed a U.S. infringement lawsuit against Platinum on the grounds that it had manufactured and sold products infringing its patent rights. From the time of filing until the California Court, granted its motion to withdraw the lawsuit with prejudice, VIAVI only submitted the product information for the No. 11246 filter previously presented in the China litigation, and did not provide any other relevant new evidence. If VIAVI clearly knew that there was no new evidence of patent infringement by Platinum, yet willfully initiated the U.S. infringement litigation against Platinum, causing Platinum to incur unnecessary labor and expenses in responding to the lawsuit, and thereby damaging Platinum’s reasonable reliance and expectation of faithful performance of the Agreement by VIAVI, can it be said that such conduct does not violate the principle of good faith and does not constitute a breach of contract? This is a matter that warrants further consideration.
IV. Lessons Learned from This Case
1. Performance of Contracts Must Adhere to the Principle of Good Faith
The principle of good faith is regarded as the paramount provision of the Civil Code. In addition to serving as the basis for contract interpretation and supplementing legal loopholes, it also empowers judges, when applying the law to individual cases, to intervene in the rights and obligations between private parties to meet the requirements of fairness and justice, to restrict the abuse of rights, and thereby to adjust, supplement, and limit the exercise of rights and the performance of obligations.
The Supreme Court has repeatedly emphasized the importance of the principle of good faith in individual cases, such as determining the invalidity of contracts between parties (see Supreme Court Civil Judgment 2002 Tai-Shang-Zi No. 754[2]), finding that the exercise of the right to terminate a contract by a party violated the principle of good faith (see Supreme Court Civil Judgment 2006 Tai-Shang-Zi No. 342[3]), and holding that the method of contract performance by a party contravened the principle of good faith (see Supreme Court Civil Judgment 2005 Tai-Shang-Zi No. 2001[4]).
The Supreme Court, in its 2025 Tai-Shang-Zi No. 275 Civil Judgment, reiterated that the performance of a settlement agreement must comply with the principle of good faith. Even though VIAVI argued that it relied on evidence obtained prior to the execution of the Agreement to allege that Platinum’s conduct after the Agreement infringed its U.S. patent and thus did not violate the Agreement, the court, after reviewing the relevant evidence, found that from the time of filing the lawsuit until the California Court approved its withdrawal with prejudice, VIAVI did not present any new evidence to support its claim. Therefore, the Supreme Court held that VIAVI had violated the principle of good faith, constituting a breach of contract.
Accordingly, when exercising rights and performing obligations under a contract, parties should pay attention to and base their actions on the principle of good faith, considering the interests of all parties fairly and reasonably, so as to avoid adverse consequences such as the contract being declared invalid or a breach of contract being found by the court due to harm to others’ interests or violation of public interest.
2. Enforcing Patent Rights Requires the Specific Claim Period and Submission of Concrete Evidence of Infringement
In this case, VIAVI, in the U.S. infringement litigation, only identified the No. 11246 filter, which had been analyzed by reverse engineering in the prior China litigation, as the accused infringing product, and alleged that Platinum constituted “inducement of infringement.” However, VIAVI failed to specify the period of the alleged infringing acts. On this basis, the Supreme Court determined that this was a key argument in assessing whether VIAVI had violated the Agreement, specifically regarding the assertion of patent infringement against products manufactured and sold by Platinum prior to the effective date of the agreement. It is thus evident that, when exercising patent rights, the claim period should be specified and concrete evidence of infringement should be provided, so as to avoid the risk that the facts (including the patent(s) asserted, the period of infringement, the nature of the infringing acts, etc.) and evidence (including the infringing products, infringement analysis, etc.) relied upon in exercising rights are absent or unclear, which may lead the court to find an abuse of rights.
[1] Item 6, Paragraph 1, Article 469 of the Code of Civil Procedure provides that "A judgment shall be deemed to be in contravention of the laws and regulations in the following situations: ……(6) Where the judgment does not provide reasons or provides contradictory reasons."
[2] Supreme Court Civil Judgment 2002 Tai-Shang-Zi No. 754 ruled that the exercise of rights must not contravene public interest or be primarily intended to harm others; the exercise of rights and the performance of obligations shall be conducted in accordance with the principles of honesty and good faith, as expressly stipulated in Article 148 of the Civil Code. The so-called principle of good faith refers to the adjustment of all legal relationships, based on their specific circumstances, in accordance with the ideals of justice and equity, so as to achieve appropriateness and propriety. As stated above, since the appellant does not have any claim against the appellee, the appellant should not have been registered as the mortgagee. Furthermore, by taking advantage of the characteristics of non-contentious proceedings, the appellant petitioned the court for a ruling to auction the mortgaged property without a definite substantive legal relationship, and subsequently utilized the continued compulsory enforcement procedures against the disputed real property of the appellee, thereby compelling the appellee to settle and agree to pay NT$5,250,000. The appellant, having acquired such a claim without any underlying cause for payment, is clearly not exercising the claim obtained through the settlement agreement in good faith, and is instead acting with the sole purpose of unjust enrichment at the expense of the appellee’s interests. The means and results lack reasonable correlation, and this constitutes an abuse of the right to petition for compulsory enforcement based on the ruling in the non-contentious proceedings, which is contrary to the principle of good faith. Although the disputed settlement agreement between the two parties was legally established, its content violates the prohibition against abuse of rights as stipulated in Article 148 of the Civil Code, and should therefore be deemed invalid and not protected by law.
[3] Supreme Court Civil Judgment 2006 Tai-Shang-Zi No. 342 ruled that the so-called "principle of good faith" refers to, within the context of specific rights and obligations, the concept and method based on fairness and justice, whereby, according to objective standards, the interests of both parties are weighed to avoid sacrificing the other party for one's own benefit, so as to determine and realize the content of one's rights. If the appellee did, in fact, terminate the distributorship agency contract between the two parties at the time when the appellant was about to successfully conclude negotiations for the sale of machinery with Powerchip Technology Corporation and TSMC, and subsequently entered into separate transactions with those two companies, whether such conduct is in violation of the "principle of good faith" remains questionable. The original trial failed to thoroughly consider whether the timing of the appellee's termination of the contract between the two parties was appropriate and whether it violated the principle of good faith. It merely relied on the provision in the parties' license agreement that the appellee could terminate the cooperative relationship at any time, and on the appellee's assertion that the termination of the appellant's distributorship rights and the application to establish a branch office in Taiwan were based on operational adjustments due to considerations such as cost, market development, and business management. On this basis, the original trial found that the appellee did not use improper means to prevent the appellant from fulfilling the conditions for commission payment, and that the termination of the contract did not violate the principle of good faith, which is particularly lacking in appropriateness.
[4] Supreme Court Civil Judgment 2005 Tai-Shang-Zi No. 2001 ruled that the so-called principle of good faith refers to the requirement that all legal relationships should be adjusted according to the specific circumstances of each case, based on the concepts of justice and equity, in order to achieve appropriateness and propriety. Once a contract entered into by the parties is lawfully established, it should indeed be binding, and the right holder may exercise their rights in accordance with the contract. However, if the right holder fails to exercise their rights within a certain period and there are external facts sufficient to cause the obligor to reasonably believe that the right holder no longer intends to exercise such rights, it may be deemed that any subsequent exercise of rights by the right holder would violate the principle of good faith. In the present case, after the appellant entered into the disputed settlement agreement and received a check for NT$100,000 delivered by the appellee, the appellant refused to accept the remaining payments from the appellee, denied the existence of the settlement agreement, and, in violation of Article 5 of the settlement agreement, initiated a separate incidental civil action seeking damages from the appellee. These actions were sufficient to cause the appellee to reasonably believe that the appellant did not intend to assert the rights arising from the settlement agreement. Therefore, when the appellant, five years after the appellee was finally acquitted by the criminal court, again sought performance from the appellee based on the disputed settlement agreement, such conduct was clearly contrary to the principle of good faith and should not be permitted.