Intellectual Property Indemnity- Generally
If one party wishes to transfer certain risks an additional party, indemnity clauses are commonly used. They may also be called indemnification agreements or harmless clauses. In the case of intellectual property indemnification clauses the risk is usually related to patent infringement, trademark infringement, copyright infringement, trade secret misappropriation software problems, or some other intellectual property (IP) related risk. A clause of indemnity may only provide for indemnification, or it could also include obligations to “defend” or “hold harmless” the other party. Vendors must be cautious about IP indemnity clauses. The costs involved in fighting an typical IP claim could easily be more than the amount that the vendor has to pay.
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Limits on Liability – Intellectual Property Liability
Since the liability potential for indemnification obligations, specifically in the case of IP indemnity claims, may be so high, vendors tend to try to limit or limit their liability. This can be done by incorporating a clause of limitation in the agreement that limits or restricts liability. For instance, if the agreement provides a $50,000 fee to the vendor to develop and deliver a software solution and the vendor is liable for that, it could be liable for significantly more if it has to defend a third party copyright infringement lawsuit. If the clause on limitation of liability limit vendor’s total liability to actual payments made in the contract, and that limitation applies to the indemnification clause, then the liability of the vendor may be limited at $50,000, despite the fact that litigation over the claim could reach 100,000. Many purchasers who have leverage will require an unlimited or uncapped intellectual propriety indemnification. The buyer and the vendor can decide to limit their liability at the amount of payments.
IP Indemnity Representations and Warranties
clauses frequently include representation and warranties provisions, which provide a trigger for indemnification obligations. For example, software purchasers/licensors often require a representation and warranty guarantee that the software they deliver is not subject to the threat of infringement by third-party parties and that no materials from third parties or other materials that the developer does not have permission have been incorporated into the software delivered. These terms are designed to protect the purchaser/licensor from third-party claims for copyright infringement and trade secret misappropriation. The purchaser or the licensor can attempt to force the developer into defending the claim and paying any compensation or settlement.
Darin M. Klemchuk, an intellectual property (IP) lawyer, trial lawyer, has a lot of experience enforcing trademark, copyright and trade secret rights. Klemchuk LLP is a Dallas-based intellectual property and technology law firm. Additional information about Mr. Klemchuk can be found on the website of his firm.