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Tech & Sourcing @ Morgan Lewis

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

In Part 1 of this two-part series, we discussed issues related to the defense and indemnification aspects of intellectual property indemnification. In this second part, we will review the exceptions, remedies, and liability limitation related to this common provision.

Exceptions

As described in Part 1, both technology providers and users will want providers to be responsible for claims that the technology infringes the intellectual property rights of a third party. However, providers will want to limit such obligations where actions by users or other third parties cause infringement. Providers will frequently attempt to carve out of IP indemnification clauses infringement claims based upon

  • use of the technology in combination with other hardware, software, or data;
  • unauthorized use;
  • modifications to the technology; or
  • failure to incorporate the latest updates or upgrades.

Any carve-outs should be carefully considered by users as language such as “unauthorized” and “modifications” could apply in instances where users expect coverage. For example, the “combination” exception could essentially render any IP indemnity useless as something as simple as use of a computer or connecting to the internet could technically trigger this exclusion. Users should make sure such language provides the proper balance (e.g., “combinations not specified by the provider or reasonably anticipated by the parties”).

Remedies

The indemnification obligation can create a dilemma for a technology provider. Since the user is being indemnified, it has no incentive to change or stop using the infringing technology, subjecting the provider to unlimited liability. To limit this risk and mitigate potential damages, the provider needs the ability to provide (and to have the user accept) the following remedies:

  • Modification or replacement. If there is an IP infringement, providers can modify or replace technology to make it not infringing. In this scenario, users should seek assurances that any modified or replacement product maintains equivalent functionality and performance.
  • Procurement of the license rights. Alternatively, providers obtain license rights to allow users to continue using the infringing item. Users should ensure that there are no costs or restrictions associated with this remedy.
  • Termination. If the IP owner is unable to modify, replace, or obtain the license rights, then the last alternative is for termination of use of the technology to limit mounting damages. Users will want to limit this remedy and obtain refund of license fees and/or other consideration if this remedy is implemented.

Liability Limitations

In addition to reviewing the language of the IP indemnification provision, the impact of the overall limitation of liability provisions should be reviewed. It is common for agreements involving intellectual property or technology to contain provisions that include an overall aggregate cap for an IP owner’s liability. An IP user should always attempt to include a carve-out to the limitation of liability section for the IP indemnification to make the owner fully responsible for IP claims. Although this is a common exception, providers still need to review the risk of such unlimited liability, including the rising costs for defending against “patent trolls.”

We hope this two-part series has provided guidance to both IP providers and users on issues raised by the common IP indemnification provision. Look for other posts in our continuing Contract Corner feature for guidance on other typical “form” provisions.