In May 2006 PacSun filed an action in superior court, alleging that Olaes breached the statutory warranty that the hot sauce monkey shirts were “free of the rightful claim of any third person by way of infringement or the like,” as contained in section 2312, subdivision (3) of the California Uniform Commercial Code (§ 2312(3)). Both parties filed cross-motions for summary judgment. The trial court denied PacSun’s summary judgment motion, but with respect to Olaes’ motion, the court ruled that “SNCL’s underlying claims of infringement were not ‘rightful claims’ under § 2312(3) and thus Olaes did not breach the warranty provided for under that section” and relied upon the fact that SNCL did not carry its burden to succeed on the motion for preliminary injunction in the underlying trademark suit.

On appeal, PacSun argued that the trial court erred in ruling, as a matter of law, that SNCL’s trademark infringement claim was not a rightful claim because “at the very least,” there is a disputed factual issue as to whether the claim is “rightful,” which precludes summary judgment. The issue before the Court of Appeal for the Fourth Appellate District of California was whether the trial court properly ruled on a motion for summary judgment that the § 2312(3) warranty did not apply because the trademark suit filed by SNCL was not a rightful claim of infringement. Olaes suggested that a rightful claim is a valid claim, meaning one that has proven, or will likely prove, meritorious in litigation. By contrast, PacSun argued that any claim “in the form of litigation” constitutes a rightful claim regardless of its underlying merits.

Citing 84 Lumber Co. v. MRK Technologies, Ltd. 145 F.Supp.2d 675 (W.D.Pa. 2001), the Court of Appeals noted that other courts have found that the phrase "rightful claim" under the UCC as being somewhere between these interpretation. However, there were no California cases that discussed § 2312(3) and the definition of a rightful claim. As such, the Court of Appeals applied the general rules of statutory interpretation.

First, looking to the text of the statute itself, the phrase “rightful claim” is not defined in the California Uniform Commercial Code, and due to the multitude of definitions of “rightful” in common usage that leave the term ambiguous, the court then turned to extrinsic aids. The court looked to the official commentary to the Uniform Commercial Code, as an especially helpful aid under California caselaw as done in AmerUS Life Ins. Co. v. Bank of America, N.A., 143 Cal.App.4th 631, 638 (2006); Wilson v. Brawn of California, Inc. 132 Cal.App.4th 549, 555 (2005); Cohen v. Disner 36 Cal.App.4th 855, 862 (1995). This demonstrated that, contrary to Olaes’ position, the term “rightful claim” as used in the statute is intended to broadly encompass any nonfrivolous claim of infringement that significantly interferes with the buyer’s use of a purchased good. The court of appeals found that the comments, by stating that the seller warrants that there will be “no claim of infringement,” and by asserting that the buyer’s remedy arises immediately upon notice of infringement, strongly suggests that any significant claim of infringement – whether or not ultimately meritorious- triggers the § 2312(3) warranty. The court also noted public policy arguments that supported interpreting the warrant to encompass all nonfrivolous claims of infringement. For example, the seller’s incentive to reduce or eliminate prospective claims of infringement is undermined if the § 2312(3) warranty applies only to meritorious claims, leaving the risk of closely contested, but ultimately unsuccessful, infringement claims to be borne by unsuspecting purchasers, who are less familiar with the product that the seller.

Lastly, the Court of Appeals noted that this interpretation was consistent with another court's decision on the same basic warranty provision: Sun Coast Merchandise Corp. v. Myron Corp. 393 N.J.Super. 55; 922 A.2d 782, 796–797 (App.Div. 2007), which held that a rightful claim is a claim that "cast[s] a ‘substantial shadow’ on the buyer's [*31] ability to make use of the goods in question." However, the Court of Appeals modified this standard to clarify that to cast a substantial shadow, the claim must be non-frivolous since whether a claim is frivolous is more consistent with terminology used in California law. As such, the Court of Appeals settled on the following standard:

A rightful claim under section 2312(3) is a nonfrivolous claim of infringement that has any significant and adverse effect, through the prospect of litigation or otherwise, on the buyer's ability to make use of the purchased goods.

Olaes then contended that even if the court of appeals disagreed with the trial court’s interpretation of rightful claim, it could still affirm the summary judgment ruling on the alternate ground not ruled on by the trial court: that Olaes’ breach of the warranty was not the proximate cause of PacSun’s damages. Olaes argued that the warranty breach cannot be considered the proximate cause of the damages because PacSun knew of the purported defect in the hot sauce monkey shirt before it ordered them. The court of appeals, however, did not find that the evidence presented on Olaes’ summary judgment met the threshold for a ruling in Olaes’ favor.

The trial court’s interpretation of “rightful claim” was erroneous; a rightful claim under § 2312(3) is not synonymous with a claim that ultimately will prove successful in litigation. Under this standard, the trial court could not properly conclude on the evidence before it, as a matter of law, that the third party infringement claim against PacSun was not a rightful claim. The court of appeals reversed the judgment of the trial court.

The State of Texas entered a plea for jurisdiction on the grounds that there was insufficient evidence of a taking under Article 1 such that sovereign immunity prevented Mr. Holland's action. The trial court and the court of appeals both denied the plea on the grounds that there was insufficient evidence that the use of the patent was under a contract, and thus found that there was an issue as to whether the use was a takings under Article 1, Section 17. The Supreme Court of Texas reversed, finding that there was no takings claim since the patent use was colorably under the contract between the State and Mr. Holland's companies.

As an initial point, the Supreme Court noted that, while sovereign immunity generally protects the State from suit, sovereign immunity does not protect the State from a takings claim under Article 1, Section 17. In order to show that a takings took place, however, there needs to be evidence that "a governmental actor acted intentionally to take or damage property for a public use." However, where the government acts under colorable contractual authority, there is no takings since the government "lacks the necessary intent to take under its eminent-domain powers and thus retains its immunity from suit." Instead, the only parties liable are the contractors doing the work on behalf of the State. As such, a remedy is only provided against the contractors as opposed to the State.

In view of the above, the State of Texas did not form the necessary intent to take U.S. patent no. 6,027,653. Specifically, there was uncontroverted evidence that Mr. Holland personally provided, during the contract, the process to the filtration process that eventually was patented. As such, regardless of whether there was a true contractual relationship between Mr. Holland, personally, and the State of Texas, there was no requisite intent to exercise eminent domain for U.S. patent no. 6,027,653 and instead any use was under color of the contract between the State and Mr. Holland's companies. Therefore, while Mr. Holland's companies could be liable for infringement, there was no liability under Article 1, Section 17 of the Texas Constitution.