Monday, April 9, 2012

Intellectual Property Indemnification – When to commence remedies

Most Intellectual Property Indemnification clauses consist of several elements. The first element is the indemnification element. The second is remedies or actions the supplier must take in the event of an infringement. The third element is a list of situations that excuse the supplier from needing to provide the indemnification or remedies. One of the key issues in the negotiation of an intellectual property indemnification is those actions or remedies and especially what triggers the supplier to pursue those remedies. The typical remedies that a buyer may want in descending order are:
1. Obtain the right to use the Intellectual Property. (A license)
2. Modify their product or service so it’s non-infringing.
3. Replace the product or service with non-infringing products or service.
4. Allow cancellation of open orders without liability.
5. Refund the amount paid for any all inventories of infringing product
The reason why they are in that order is because the impact and cost to the buyer increases as you descend down the list.

To a supplier, the item that is the least expensive for the buyer may be the most expensive for the supplier. As such, suppliers will always be concerned about what triggers the obligation to take those actions and provide those remedies. I’ve seen contracts that require remedies to be provided upon either a reasonable belief that a claim will be filed or the actual filing of a claim. The problem with that is while there may be a third party claim of infringement, the claim may not be valid and immediately responding to that may be adding unnecessary work or cost.

If you wait for the final claim to be decided in court, the impact to the buyer would be a disruption in supply until one of the remedies is provided. That disruption to supply isn’t acceptable to buyers as it would cause their supply chain to break if there wasn’t a second source of supply.

If there was a claim, as a buyer the latest you could wait before either you need to have the supplier commence those actions work or be qualifying another supplier would be the combined lead time for the product purchased plus the estimated period to either develop or qualify another supplier to provide an alternative product. That time period could be well over a year.

Another way you could look at what makes sense in terms of when a supplier needs to commence the actions is to consider what a reasonable period would be for both parties to perform discovery after the claim has been filed. If that period has lapsed and the claim was still being litigated, I would want the supplier to commence providing the remedies.

If the supplier felt that they still could defend against the claim, their preference would be to work on modifying the product to make it non-infringing. If they lose, they will normally be ordered to pay a license fee on the infringing products that exist and have been sold. They may not be able to negotiate a license. As a buyer, as long as I can still use the products and the solution provided for the future is cost neutral, I would have less of a concern.

If you encounter this in a negotiation involve your law department. They should be able to help provide a solution and identify how long the litigation could last and what a reasonable period would be for discovery.