A frequent point of contention between parties negotiating the allocation of risk related to intellectual property rights in connection with the acquisition of intellectual property is the interplay between the warranty and indemnification sections. Below we break down what to look for in these sections and how minor changes in the language can significantly change the rights a party is granting or receiving.
Intellectual Property Warranties
An intellectual property warranty generally provides that the intellectual property rights being licensed or assigned constitute all intellectual property rights owned or controlled by a party prior to the effective date of the transaction, and that those rights are all the rights necessary for the conduct of the business (as it is currently conducted) after the effective date of the transaction. A warranty may also go on to say such intellectual property does not infringe third-party intellectual property rights. The following versions of this clause demonstrate how this clause can be worded to strengthen or weaken the warranty.
Warranty Provider Favorable
Party A represents and warrants to Party B that to Party A’s knowledge as of the effective date, the intellectual property being transferred or licensed constitutes all the intellectual property owned by Party A with respect to which and to the extent to which, and subject to the conditions under which, Party A has the right to grant or cause to be granted licenses to Party B that are necessary for the conduct of the business of the company as it is conducted as of the closing date (Party A IP), and the Party A IP does not at the time of the transaction violate or infringe any third-party intellectual property rights in the United States.
Note: The warranty above is limited by (1) knowledge, (2) ownership, and (3) the extent to which Party A has the right to grant the rights.
Warranty Receiver Favorable
Party A represents and warrants to Party B that the Party A IP constitutes all the intellectual property rights necessary for the conduct of the business of the company as it is conducted as of the effective date, and in the usual, regular, and ordinary course of business, and that the company has all intellectual property rights to operate its businesses in the ordinary course of business after the effective date, and the Party A IP will not infringe upon or violate any US or foreign patent or copyright, misappropriate any trade secret, or violate any third party's intellectual property right.
Intellectual Property Indemnifications
An intellectual property indemnification generally provides that the assignor of the intellectual property rights being licensed or assigned will indemnify the assignee if the intellectual property infringes a third party’s intellectual property rights. The following versions of this clause demonstrate how this clause can be worded to strengthen or weaken the indemnification obligations.
Party A shall, for [a certain period of time] following the effective date, indemnify, defend, and hold harmless Party B from and against (a) any and all claims, suits, actions, proceedings, or allegations brought against Party B by a third party that any of the Party A IP is invalid; or (b) any and all Losses arising out of any inaccuracy of the representation or breach of the warranty, in each case set forth in the intellectual property warranty.
Note: The indemnification above is limited by (1) time, (2) ownership (because it refers back to the definition of Party A IP (which is limited), and (3) the warranty language.
Party A shall indemnify, defend and hold harmless Party B, its Affiliates, and their respective officers, directors, and employees (collectively, the Party B Indemnified Parties) from and against (a) any and all claims, suits, actions, proceedings, or allegations brought against the Party B Indemnified Parties by a third party that any of the Party A IP is invalid or infringes, misappropriates, or otherwise violates the intellectual property rights of a third party; or (b) any and all Losses arising out of any inaccuracy of the representation or breach of the intellectual property warranty.
Watch out for the explanation that an indemnification gives a party equivalent rights to a noninfringement or intellectual property sufficiency representation and warranty. These provisions can only be considered “equivalent” if they actually cover the same things (e.g., if a party is only indemnifying for intellectual property infringement, and the definition of intellectual property does not cover all applicable intellectual property, the other party would still need the intellectual property sufficiency representation and warranty).
This post is part of our recurring Contract Corner series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.