Tech & Sourcing @ Morgan Lewis

Contract Corner

In a prior series of posts, we discussed issues relating to intellectual property indemnification, including some exceptions, remedies, and allocation of liability. Given that these provisions often involve taxing negotiations and that many technologies have become intertwined, below we explore some nuanced—and frequently sticky—issues regarding third-party products and how they can be resolved.

Combination Exception

As we previously noted, the indemnifying party commonly takes the position that it should not be responsible for infringement arising from combinations with other products or services. But what if the indemnifying party delivers or provides access to third-party products (e.g., software) as part of the overall design or relationship? Or what if certain “third party” products are produced or distributed by one of the indemnifying party’s affiliates? Or what if the indemnifying party provides documentation or instructions that specifically recommend third-party products as compatible with the underlying technology? Or what if specific third-party products are necessary for the operation of the underlying technology? Under these circumstances, the indemnifying party’s core argument—that it has no control over third-party products or services—requires careful consideration.

When one or more of these scenarios applies or is reasonably likely to apply, parties may agree on corresponding carve outs of the combination exception (e.g., “[combination with] third-party products not provided by or on behalf of [indemnifying party] and not expressly authorized in writing by [indemnifying party]” or “[combination with] third-party products not provided by [indemnifying party]”).

Indemnified parties may also try to clarify that the combination exception does not apply unless the alleged infringement would not have occurred but for such combination. But if the exceptions to the infringement indemnification only apply “to the extent” they result in infringement (i.e., proportional responsibility), then the indemnifying party may argue that the “but for” clarification is unnecessary (and risks involving a vague hypothetical).

General Exception

Relatedly, some indemnifying parties attempt to exclude responsibility for infringement arising from any third-party products, even if such products are embedded in or integrated with the technology delivered by the indemnifying party. This partly stems from the indemnifying party’s key licensors and service providers placing strict limits on their own liabilities and it also arises from the fact that the indemnifying party is generally not in the business of insuring IP risks for all related third-party products and supporting infrastructure. As products and services become more interdependent, (a) it becomes more difficult to know exactly who is responsible for each component under the hood, and (b) any broad third-party product exception risks eroding the infringement indemnification obligation. The indemnifying party might argue that it, too, has little insight into infringement risks associated with third-party products, and the indemnified party might assert that the indemnifying party is in a better position to assess and assume the risk of any such infringement. In some situations, a third-party product is such a market standard that the indemnified party is comfortable with what seems to be a very low risk of an infringement claim.

Depending on the circumstances, the parties might settle on excluding third-party products that (i) are commercially available (i.e., not customized for the indemnifying party), (ii) are not embedded in the underlying technology (i.e., merely ancillary), and/or (iii) are specifically identified (either by name or nature). The indemnified party may also request including a clarification that the alleged infringement is not specific to the indemnifying party’s technology or its use of such third-party product. The third-party product exception, therefore, may be narrowed such that the indemnifying party has greater responsibility as a third-party product becomes more directly involved in, or customized for, the underlying technology. And requiring specificity helps avoid surprises and limits the potential breadth of the exception. However, the indemnifying party may want to maintain operational and technical flexibility, so specificity may not be practical.

Circumstances and negotiation positions vary considerably, so an in-depth understanding of the relevant technology (including its components and dependencies) and industry is vital and may streamline the contracting process.