Blue_Puzzle

Understanding Intellectual Property Indemnity

INTELLECTUAL PROPERTY INDEMNIFICATION – A LICENSEE’S PERSPECTIVE

One provision that a customer, or Licensee, should look for in technology agreements is the intellectual property indemnification clause.  This is true whether obtaining a license for software or hardware, or professional services to create a product or process.

What is the purpose of IP Indemnity?  If a company (Licensee) acquires a license for a supplier’s (Licensor’s) intellectual property, like software for example, and a third party claims that the software infringes its copyright or patent, that third party will likely name the company as a defendant in a lawsuit.  This can be true even though the company merely obtained a license to the software and had no involvement in the design or development of it.

If a company is sued merely because it obtained a license to intellectual property, it is reasonable for the company to expect to be reimbursed by the Licensor for the cost of defending the suit and any damages awarded.  This is commonly referred to as intellectual property indemnification (IP Indemnity).

DEFINE AUTHORIZED USERS

A Licensee should look for IP Indemnity to provide protection against claims of infringement for anyone authorized to use the intellectual property, usually defined as Authorized Users.  The Licensee should consider who in the organization needs to use, access or benefit from the intellectual property and that the definition of Authorized User includes all potential users.  Does the Licensee’s organization include affiliated companies?  Does the organization use consultants?  If the IP Indemnity only provides protection to the “employees of Licensee,” the Licensor could refuse to cover claims involving such parties.  The Licensee should always ensure the definition of Authorized Users is: (1) broad enough to cover all potential users and, (2) that all Authorized Users are covered by IP Indemnity.

LOCATION OF AUTHORIZED USERS IS IMPORTANT

The language should provide for IP Indemnity wherever an Authorized User is licensed to use, access or benefit from the intellectual property.  In other words, if a Licensee has Authorized Users in multiple countries, then the IP Indemnity should cover more than just “Authorized Users located in the United States.”  If not, the Licensor may refuse to cover a claim of infringement in the country where the Licensee’s Authorized Users are located.  The Licensee should always request IP Indemnity at least as broad in geographic terms as the license granted.

ENSURE COVERAGE OF ALL TYPES OF IP

A Licensee should also ensure that the language provides protection for any claims of infringement of any type of intellectual property that the Licensee might encounter.  Does the technology contain something that may be patented, copyrighted, trademarked or that the Licensor considers a trade secret?  If the IP Indemnity only protects against a claim “of infringement of any patent” and the Licensee is facing a claim that its use of the intellectual property constitutes copyright infringement or trade secret misappropriation, the Licensee may be stuck paying the bill.  The Licensee should request IP Indemnity for all types of IP.

ENSURE REIMBURSEMENT OF ALL DAMAGES

A Licensee should also ensure that the language protects against all types of damages that occur due to claims of infringement.  Damages should include not just the damages awarded to the intellectual property owner, but the costs paid to the court or to the attorneys to defend such a claim.  If the Licensor’s language provides only for “indemnification from any damages finally awarded” some of the biggest costs, the attorney fees, are left out, leaving the Licensee to pay.

THERE SHOULD NOT BE A DOLLAR CAP

A Licensee should ensure that damages for any intellectual property indemnification claim are uncapped, meaning unlimited in dollar amount.  Frequently, the parties agree to a limitation of the Licensor’s liabilities that sets a cap at the value of the agreement, or some fraction or multiple of that.  This can create a problem for the Licensee if the amount paid for the license is a few thousand dollars, and the Licensee receives a claim of patent infringement.  Considering that the typical cost to defend a claim of infringement on a single patent is approximately five million dollars, the Licensee would find itself paying most of the defense cost.  There should be no cap on damages in the IP indemnity language itself.  If there is a Limitation of Liability clause, that clause should be written to exclude applicability to the IP indemnity clause.

INDEMNITY IS ONLY AS VALUABLE AS THE COMPANY STANDING BEHIND IT

The Licensee should always consider the Licensor’s ability to pay an infringement claim.  What if the Licensor is a small startup with little capital and barely enough cash flows to meet its payroll?  If the Licensor has insurance to cover such claims, then the Licensee has assurances that the Licensor will be financially able to stand behind its IP Indemnity obligation.  If not, the Licensee may find itself footing the bill.  The Licensee should always request insurance.

FINAL NOTE

It is appropriate for a Licensee to expect protection for any intellectual property that it licenses. However, it is unrealistic to expect IP Indemnity for any modifications, or combinations, the Licensee makes to, or with, the licensed intellectual property.  Licensors will usually refuse to cover such modifications or combinations of their intellectual property with that of others.  One caveat, however:  No technology exists, or can be effective, in complete isolation.  Therefore, a Licensee should request that such combinations or modifications still be covered by the IP Indemnity clause if such modifications or combinations: i) are described in the Licensor’s documentation or ii) have been discussed and approved by the Licensor.

About Our Law Firm and Contracting Workshops

Leslie Marell is a business and commercial law attorney with over 25 years of experience in business contracts, purchasing and sales law, technology law & day to day business legal matters. She heads her own Los Angeles firm which specializes in providing legal services to the manufacturing, industrial and high technology industries.

In addition to her legal practice, Leslie has presented contracting and business law seminars and workshops throughout the country since 1990 to thousands of sales, marketing, and purchasing professionals. She has given in-house presentations to companies such as Applied Materials, Eastman Chemical, FMC, Goodrich, Hanes, Hewlett Packard, Hitachi Data Systems, John Deere, Northrop, Texaco, Unum Insurance, University of California, 3M, Unocal, and Verizon. She is a frequent speaker at the Institute of Supply Management International Conference, the Electronics’ Independent Sales Representative’s Association, Manufacturer Agents’ National Association (MANA), and local purchasing and sales trade associations.

Leslie’s workshops are a blend of lecture, dynamic coaching, and audience participation.  She brings her contract knowledge to the corporate classroom in lively and valuable workshops, translating “legal mumbo jumbo” into understandable, useful concepts in an entertaining way.

Leslie’s workshops will enhance your purchasing and sales organizations contracting and negotiating skills and ensure more effective contracts.

 

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