Negotiation - Thoughts on Negotiating Intellectual Property Infringement Indemnification

Negotiators should involve their law department in any intellectual property infringement clause negotiations.

An Intellectual Property (IP) Infringement Indemnification is intended to provide the Buyer with protection against 3^rd party claims that the Supplier’s product or service infringes the intellectual property rights of the 3^rd party.  A valid IP infringement claim can:

·       Prevent the Buyer or their customer from using the product or service. That could cause the Buyer to stop production, breach commitments to deliver the product or service to their customer.

·       Subject the Buyer to paying royalties on products already in use.

·       Require the Buyer to recall affected products from their customers.

·       Require the Buyer to Correct the problem at their expense for their customers.

·       Cause the Buyer to have an inventory of products they can’t sell or use or that need to be reworked  

Normal IP Indemnification Provisions are made up of the following:

1. The Supplier’s obligations in the even to a claim which is usually:

1.     To defend against the claim.

2.     To indemnify the Buyer against the claim (including the cost of any legal fees) .

3.     Hold the Buyer harmless on the claim

4.     Pay all costs and damages awarded.

5.     Meet additional obligations of:

a.     Obtain the right the use Procure a license to use the Intellectual Property

b.     Modify their product or service so its non-infringing

c.     Replace the product or service with non-infringing products or service

d.     Allow cancellation of open orders without liability

e.     Refund the amount paid for any all inventories of infringing product

2. Typical Exceptions to the Supplier’s obligation to indemnify the Buyer are normally given for acts where the Buyer was in control.

·       Claims that based on combination of Suppliers product with another product that weren’t reasonably foreseeable.

·       Implementation by the Supplier of a Buyer specified or provided design.

·       Modifications to the Suppliers Product made by Buyer where the Buyer modification is the source of the infringement.

The things that typically get negotiated in an IP Infringement Section are:

1.     When the Supplier is obligated to take action. Is it when the claim is made or is it when there is actual litigation?

2.     Who controls the defense of the claim, the Supplier or Buyer? Something to consider in this is what assets does the Supplier have and will they be able to pay all the costs? If they can’t do you really want them to be defending against what will become your costs if they lose? 

3.     For the additional obligations listed in 1.5 above, who determines which of those is provided. The higher on the list, the more cost there is to the Supplier. The lower you go on the list the more costs there will be for the Buyer. For example, it will cost the Buyer nothing if the Supplier gets the right to use the product or service, but the costs to the Buyer could be substantial if the Supplier can merely refund the price paid and leave the Buyer with the problem. Suppliers traditional want it to be at their option. Buyers want the actions to be the first one that can be done by the Supplier on that list.  For example if the 3^rd party won’t provide a right to use the IP, then you would want the product made non-infringing.

Intellectual Property Indemnification Sections need to be carved out of the limitation of liability section for two reasons. First, the nature of the damages you sustain are more incidental or consequential. Second, in many locations if the infringement is willful, laws may allow for special damages. For example under US Patent law a willful infringement can be subject to treble (3X) damages. Normal limitation of liability provisions will exclude special damages.

To set the right expectations with the Supplier, there are two messages you may want to give.  First, if there isn’t protection for IP Claims, we aren’t interested in buying their product. Second, any risk they assume in providing the Buyer IP infringement protection under is something they have the ability to control. They control it by how they manage their IP and their contract relationships with their Suppliers. If they do what they should, the risk is small and it’s a cost of doing business. It doesn’t mean they can’t be sued by 3^rd parties even though their product was developed independently. That’s a risk they have by being in the business, it’s not a unique risk associated with your contract.

If the Supplier wants to place a cap on their liability for IP Indemnity the thing to remind them of is the things that you have control over you have already included as exceptions to the indemnification. They are not responsible to those. What remains are items that only they control and they need to have full responsibility for those.