Intellectual Property Indemnity – generally
If one party wishes to transfer certain risk the other, indemnity clauses become commonly used. They can also be called indemnification agreements or hold harmless clauses. In the case of intellectual property indemnification clauses the risk is usually related to patent infringement, copyright infringement, trademark violation, trade secret misappropriation software-related issues or any other intellectual property (IP) related risk. An indemnity clause could only cover indemnification, but it may also include obligations to “defend” or “hold harmless” the other party. Vendors should be cautious of intellectual property indemnity clauses. The cost of defending the typical IP claim can easily exceed the amount that the vendor must pay.
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Intellectual Property Indemnity Limits on liability
Since the liability potential in the event of indemnification obligations, particularly in the case of IP indemnity claims can be quite high, sellers tend to try to limit or cap their liability. One way this can be accomplished is including the limitation of liability clause in the agreement , and expressly applying this clause to cap or restrict the indemnification clause. For instance, if an agreement provides a fee of $50,000 to the vendor for developing and provide a software solution and the vendor is liable for that, it could be held accountable for a lot more if it has to defend a third-party copyright infringement lawsuit. If the limitation of liability clause limits the vendor’s total liability to payments actually received under the agreement and that limitation applies to the indemnification clause, the liability of the vendor could be capped at $50,000 even though litigation of the claim could cost $100,000s. Many purchasers who have leverage will need unlimited or uncapped intellectual propriety indemnification. A potential compromise is for both the purchaser and the vendor to agree that the indemnification liability will be capped at some multiple of the vendor payments under the contract.
IP Indemnity: Representations and Warranties
clauses frequently include representation and warranties provisions, which provide a trigger for indemnification obligations. Licensors and purchasers of software often require representations and warranties to ensure that software delivered is not subject to third-party claims and that third-party materials and materials without the developer’s permission are not integrated into the software. These provisions are meant to protect the purchaser/licensor from third-party claims for copyright infringement , as well as trade secret misappropriation. The purchaser/licensor may attempt to oblige the developer to defend the claim and paying any settlements or damages.
Darin M. Klemchuk is an intellectual property (IP) trial lawyer, with extensive experience in the enforcement of patent, trademark, copyright, and trade secrets rights. He is the founding partner of Klemchuk LLP, an intellectual property and technology law firm based in Dallas, Texas. Additional information about Mr. Klemchuk can be found at his firm website.