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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

As a follow-up to last month’s posts regarding contract provisions impacting intellectual property ownership, in this month’s Contract Corner we review issues regarding intellectual property indemnification, a provision in practically every agreement involving intellectual property or technology.

Background

IP indemnification clauses are the most common indemnification provisions in contracts because typically, both parties need the provision. Users of technology licensed or otherwise received from another party will demand that technology providers take care of any third party IP claims that would prevent (or increase the cost of) use of the technology. On the other side of the transaction, IP owners will want to control any IP litigation against their technology and avoid users settling such claims and giving up valuable IP rights (and it is likely the owner is already facing such IP claims directly).

Although the provisions are common, the language of these provisions can impact the relative risks of IP litigation between the owner and user. In this Part 1 of our two-Part Contract Corner series, we will review issues related to the defense and indemnification aspects of these provisions.

Responsibility to Defend

As described above, an IP indemnity clause typically includes the obligation to defend against third party IP claims. However, the potential costs and risks associated with this obligation can be impacted by the language of the provision. For example, do intellectual property rights include IP rights on a worldwide basis or does the owner limit defense obligations to US patent and copyright rights (where the owner does not operate outside of the United States or provide any trademarks or confidential information)? Second, do defense obligations include the right to select counsel and if users retain their own counsel, who pays for such counsel? Third, is the decision to settle any IP claim solely up to the owner or can users prevent settlements that impact their rights or costs for using the IP?

One specific word highlights the questions raised by the language of the defense obligation. Typically, these provisions will include obligations that the user must notify the owner of any claim and provide assistance to the owner with the IP litigation. In addition to questions of the timing of such notice or the responsibility for the costs of such assistance, if the language reads that the owner will defend “provided that” the user meets such notice and assistance obligations, the owner may get out from its defense (and/or indemnity) obligations if the user fails to meet these requirements.

Indemnification Responsibilities

Like any indemnitee, the user will want indemnification for IP infringement to be as broad as possible, including any losses, costs, damages or expenses whatsoever sustained by virtue of the third-party claim. On the other hand, the owner will want to limit the potential indemnification to the damages (or settlement amounts) that are awarded against the user to avoid issues regarding consequential or other damages. Like any indemnification, the decision of who will bear this business risk will largely be a matter of negotiation (and leverage).

In summary, although IP indemnification provisions are common, the actual language of the provision can impact the allocation of risk for defense and indemnification costs between the IP owner and user. In Part 2 of this two-part series, we will discuss how exceptions, remedies, and liability limitations further impact the allocation of risks from third party IP claims.