Frequently there may be a number of remedies for intellectual property infringement that get negotiated in addition to the intellectual property infringement.
a. Obtain the right the use Procure a license to use the Intellectual Property.
b. Modify their product or service so it is 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.
The key issue in negotiating these remedies is cost. For the supplier, the lower the remedy they have to provide on the list normally represent a lower cost to them. As such they may want the right to pick which remedy they want or they may want to limit their potential cost further by placing a limit on their liability or decreasing the amount they have to pay. For example, they may want to pay a refund on a depreciated basis taking into account the buyer’s use of the item. For the buyer the lower the remedy is on the list the higher the buyer’s potential cost. Obtaining the right to use the infringing item costs the buyer nothing. Modifying the product or service, even if the supplier came to the buyer or buyer’s customers location, has a cost in that you will lose the use of the item while it is being modified. If it needed to be returned for rework the costs go up substantially. Replacing a product or service with a non-infringing one can have a cost, especially if you had the item integrated with other products or software which now need to be compatible with the new item. The ability to cancel open orders without liability can have a cost as you purchased the item for a specific need and now that need may not be met or it could take some time and have losses as a result. For example it you had a single sourced item that was determined to be infringing cancellation doesn’t provide you with the product or service you need and it could require you to re-design your product to use another company’s product. Providing you with a full refund of the price you paid may not make you whole, especially if you invested money to integrate that product. For example, if you license a piece of software and then developed additional software to fully integrate it into your systems and have it play with other software, getting a refund of the license price doesn’t compensate you for those other investments.
As a buyer if you weren’t the cause for the infringement, why should you be forced to pay more because of it? As a buyer, you want to either limit the remedies to only those that are acceptable to you or better yet, require the supplier to perform the first remedy they can perform. I’ve seen language that said that the “Supplier shall provide first of the following remedies that is practicable. "Practicable" means able to be done, used or put into practice successfully). In establishing that, the supplier would need to be able to show that what are higher cost remedies for them couldn’t be done before moving down the list to provide another remedy that may have a cost for the buyer.
Good post. I agree that its all about cost and generally, the buyer will want to stay higher up on your list. One technique that works well when the modify (b) and replace (c) do not cause significant expense is to group a-c as options to the seller and termination (e) as a last resort / "if none of the preceding are practicable". I'm leaving (d) out of this comment; I do not usually see that one (probably by the nature of the contracts I do).
ReplyDeleteThe cost of these remedies can be further defined / allocated. I've seen contracts that permit the seller to replace or modify so long as the seller picks up the cost of re-deploying or integrating the new version. I've also seen different variations on the refund (e) scenario; the refund might be pro-rated and might be limited to particular elements of the contract.
One last comment: "As a buyer if you weren’t the cause for the infringement, why should you be forced to pay more because of it?" Assuming the issue is a patent claim rather than a trademark or copyright claim, the answer may be that neither the buyer nor seller are well positioned to avoid the claim. The seller has "caused" the infringement by unknowingly incorporated some patented technology into its product, and the buyer as "caused" the infringement by unknowingly using a product that incorporates some patented technology. The argument is often made that the seller is better positioned to know of the infringement and also to control the infringement. While that's generally true, the seller may view patent infringement as a third party risk that isn't priced into its offerings. In my view, this seller argument doesn't hold up well if applied to copyright, trademark, or trade secret IP types. The seller is probably not likely to infringe any of those without some knowledge or bad act.
Andrew, I think it may be a choice of drafting preference. If you don't include d) then they may have no remedy other than to breach the agreement. If you include d) there will be few, if any, times they will get that as the language requires them to do the first of the list that was practicable, not what is commercially reasonable.
ReplyDeleteIn negotiating it you do make a point that I do use when a supplier wants to select which remedy. I will give that option only if that is cost neutral to me. So for them to select one option they will have to incur any incremental cost I incur resulting from that option..