“Round II: A Closer Look at IP Infringement Indemnities”
September 27, 2011
Presented By:
Douglas Luftman, VP & Chief Patent Counsel, CBS Interactive
Bill Becker, Senior Director of Intellectual Property, Align Technology
Michael S. Pavento, Partner, Kilpatrick Townsend & Stockton
SAMPLE IP INFRINGEMENT INDEMNITY CLAUSES
Sample #1 (Fairly simple IP indemnity clause for a product sale or software license agreement; does not include any geographic limitations or exclusions for combination claims):
Indemnification. Licensor [Supplier]shall defend, indemnify and hold harmless Licensee [Customer]and its Related Parties from and against any and all Third Party claims and liabilities (including, without limitation, reasonable attorneys' fees and costs), regardless of the form of action, arising out of or in connection with a claim that the Licensed Software [Licensed Product], when used within the scope of this Agreement, infringes, violates or misappropriates a valid third party patent, copyright or other proprietary right, provided that Licensor [Supplier]is notified promptly in writing of the action, Licensee [Customer] has not reached any compromise or settlement of such action or made any admissions in respect of the same, and Licensor [Supplier] is given the option, at its expense, to control the action and all requested reasonable assistance to defend the same.
[Some possible exclusions to consider when negotiating such a clause: limit to United States Patents; limit to patents issues as of the Effective Date of this Agreement or patents based on patent applications published as of the Effective Date of this Agreement.]
Sample #2A (IP indemnity exclusion clause for a situation where Seller manufactures and provides products, e.g., semiconductors; excludes, among other things, infringement claims based on combination of the Product with certain components):
Exceptions to Seller Indemnity. Seller will not be obligated to defend or be liable for costs or damages to the extent the infringement arises out of (a) required compliance with Buyer specifications that are custom and exclusive to Buyer, but only with respect to Custom Products, (b) Buyer’s combining with, adding to, or modifying the Product beyond such combinations, additions, or modifications which are (i) contemplated under this Agreement (ii) necessary for the operation of the Product or (iii) are otherwise proposed by Seller, or (c) Buyer’s failure to use reasonable materials or instructions provided by Seller which would have rendered the Product non-infringing after sufficient time, after receipt by Buyer and before actual infringement, for Buyer to reasonably implement them but only provided that (i) use of such materials and instructions are communicated in writing to an appropriate Buyer contact, (ii) no substantial material or labor cost addition or re-tooling costs shall be incurred as a result of using such materials or carrying out such instructions and (iii) the implementation of such instructions or use of such materials can be completed in a commercially reasonable timeframe and do not adversely affect the ability of the Product to meet the requirements as agreed upon by the parties herein. If any Product delivered to Buyer is held to infringe any patent, trademark, trade secret or copyright, or other proprietary right and Buyer is enjoined from using that Product, Seller will, as soon as is reasonably possible, using all reasonable efforts and at its expense, do one of the following: (i) procure for Buyer the right to continue to use the Product free from any liability for that infringement, or (ii) replace the Product with a non-infringing substitute which substantially complies with the requirements of this Agreement.
Sample #2B (Another IP indemnity exclusion clause focusing on infringement claims resulting from combination of the Product with other components):
Exceptions to Seller Indemnity. Seller shall have no obligation under Sections __ and ___ above to the extent any claim of infringement or misappropriation results from: (i) the use of the Product in combination with any other products or materials not provided by Seller, except where such combination is (x) reasonably necessary for the Intended Use of the Product (as used herein, “Intended Use” of the Product shall be ______) or (y) suggested in writing by Seller; and, (ii) any alteration or modification of the Product not provided or authorized by Seller, if the infringement would not have occurred but for such alteration or modification.
Sample #2C (A more sophisticated IP indemnity clause for use in situations where the Seller produces and sells Products (e.g., semiconductors) under a master purchase agreement):
Indemnification. Except as stated below, Seller will at its expense, indemnify, hold harmless, and defend any claim brought against Buyer (including its officers, employees, and subsidiaries) and will pay all costs and damages, court judgments or awards finally awarded against Buyer (including direct damages and damages for willful infringement) and all reasonable associated costs and expenses (including without limitation, reasonable attorney’s fees, expert fees, and costs and expenses related to any appeal (such as bond)) subject to the dollar amount limitations of this Section XX.1, to the extent the proceeding is based on a claim that a Product delivered to Buyer infringes a copyright, trade secret, trademark, mask work, other proprietary right of a third party (excluding patents, which are addressed immediately below), or any United States, European Union, Japanese, Canadian or Australian patent (a “Covered Claim”). Such indemnity is conditioned upon Buyer promptly (i) notifying Seller of the Covered Claim, (ii) giving Seller a copy of each communication relating to the Covered Claim it receives from the claimant (except that, with respect to confidential communications, Seller and Buyer will mutually agree on an appropriate non-disclosure agreement and such disclosure is subject to the prior approval of the third party claimant ) and (iii) giving Seller the authority, information and assistance necessary to defend or settle the Covered Claim at Seller’s sole expense, provided however, that Seller agrees to provide complete (subject to the limits of liability specified herein)indemnification with respect to such Covered Claim and provided further, that in no event will Seller have the right to enter into a settlement which would involve any payment of consideration by Buyer without Buyer’s prior written consent. If the litigation involves claims other than the Covered Claim, then Seller agrees to negotiate in good faith with Buyer matters relating to the direction of the defense and sharing the cost of defense; provided, however, that nothing in this paragraph shall limit Seller’s ability and authority to defend in its sole discretion any Covered Claim for which Seller agrees to provide complete (subject to the limits of liability specified herein)indemnification and nothing herein shall alleviate Seller’s responsibilities and liabilities hereunder.
Exceptions. Seller will not be obligated to defend or be liable for costs or damages to the extent the infringement arises out of and, but for the following, there would be no infringement:
(a) required compliance with Buyer provided technology or Buyer provided specifications which are not substantially the same as or included in Seller’s specification for its comparable part prior to receiving the Buyer provided specifications (if there is no commercially reasonable way to implement such Buyer provided technology or specifications without such infringement),
(b) modification of the Product (except modifications provided by Seller);
(c)Buyer’s combination of the Product with hardware, software or other materials not provided by Seller except where:
(i) required by Seller to meet specifications or otherwise,
(ii) there is no substantial use for the Product absent such combination, or
(iii) required in order to be able to use functionality resident in the Product which is not merely enabled in the Product and which is identified in Seller's specifications or features list, but only if there is no possible, commercially reasonable, non-infringing alternative to such combination that would permit use of such functionality;
(d) Buyer’s failure to use reasonable materials or instructions provided by Seller which would have rendered the Product non-infringing after sufficient time, following receipt by Buyer, for Buyer to reasonably implement them, but only provided that (i) use of such materials and instructions are communicated in writing to Buyer and identified as required to be implemented to avoid loss of IP indemnification (ii)no substantial material or labor cost addition, or qualification or re-tooling costs shall be incurred as a result of using such materials or carrying out such instructions (unless Seller reimburses such costs) and (iii) the implementation of such instructions or use of such materials can be completed in a commercially reasonable timeframe and do not materially and adversely affect the performance and specifications of the Product; or
(e) use of the Product not in accordance with required specifications, which have been communicated to Buyer in writing and which have been clearly marked as required prior to its ordering its first production order for such Product.
Sample #3(Example of exclusions from indemnity obligations, including exclusion of liability relating to standard essential IP):
Exceptions to Supplier’s Indemnity. Supplier shall have no obligation under Section XX to the extent any claim of infringement is caused by (i) use or sale of a Licensed Product in combination with any other products not provided or combinations that may not be reasonably anticipated by Supplier if the infringement would not have occurred but for such combination; (ii) any material alteration or modification of a Licensed Product not intended, authorized by Supplier, or subsequently incorporated into the Licensed Product by Customer, if the infringement would not have occurred but for such alteration or modification; (iii) any material alteration or modification of the Specifications by Customer if the infringement would not have occurred but for such alteration or modification; (iv) Supplier’s compliance with Customer’s unique written specifications if the infringement would not have occurred but for such unique written specifications excepting any implementation thereof by Supplier; (v) Customer failure to substantially comply with Supplier’s reasonable written instructions which if implemented would have rendered the Licensed Product non-infringing, provided that a sufficient time period is given to Customer to enable it to implement the written instructions and that Supplier remains obligated under Section XX with respect to any infringement occurring up to the end of such time period; or (vi) incorporation by the Licensed Technology of any Essential IP . Notwithstanding the foregoing, Supplier shall not be relieved of its obligation under Section XX if there is no commercially reasonable non-infringing use for the Licensed Product in any combination.
"Essential IP" means IP that is declared essential or determined to be essential to standards that are implemented by the Licensed Technology, including without limitation standards issued by the European Telecommunications Standards Institute (ETSI) and Third Generation Partnership Project (3GPP). In this context, IP that is essential is IP which has been included within a standard and where it would be impossible to implement the standard without making use of this IP, whether or not this IP has been declared to the relevant standards body.
[Consider whether phrases like: “combinations that may not be reasonably anticipated” and “modification… not intended… by Supplier” are too vague. Consider whether definition of Essential IP is too vague.]
Sample #4 (Sample IP indemnity clause for a software license agreement that accounts for unauthorized use of open source software):
Indemnification by Supplier. Supplier will indemnify, defend,and hold harmless Customer and each of its respective officers, directors, partners, employees, agents, successors, and assigns, or any of them (collectively the “Indemnified Parties”) from and against all claims, suits, demands, actions, causes of action, proceedings, judgments, assessments, deficiencies, and charges brought against the Indemnified Parties or tendered to the Indemnified Parties for defense or indemnification (collectively “Claims”), and for all damages, losses, costs, liabilities, and expenses (including reasonable attorney and professional fees and costs) (collectively “Losses”) arising from or incidental to Claims, which in whole or in part, directly or indirectly: (i) allege that the Licensed Software, or any part thereof, or its manufacture, use, import, support, sale or distribution infringe, misappropriate, or violate any Intellectual Property rightsof any third party; or (ii) allege any required disclosure of source code due to Open Source Technology incorporated by Supplier into the Licensed Software. In addition to the above, Supplier will pay all amounts agreed to in a monetary settlement of the Claims and all Losses that result or arise from the Claims.
Sample #5 (Exemplary IP indemnity clause for use in situations where there could potentially be more than one indemnifying party):
Indemnification by Seller. If Supplier agrees in writing that such claim or suit is fully covered by this indemnity provision, then Supplier shall be permitted to direct the defense or settlement of such claim except that Supplier may not enter into a settlement arrangement which would result in a significant adverse affect on Buyer or any payment or other consideration by Buyer without Buyer’s prior written consent. If Supplier does not agree that the claim or suit is fully covered by this indemnity provision, then the parties agree to negotiate in good faith an equitable arrangement regarding the control of the defense of the claim or suit and any settlement thereof consistent with Supplier’s obligations hereunder.
Sample #6 (Fairly sophisticated IP indemnity clause contemplating that the Customer can either demand that the Supplier defend a Claim or assume defense of the Claim itself):
Infringement Claim. The term “Infringement Claim” means any claim that the manufacture, use, offer to sell, sale or other exploitation of any Product infringes, misappropriates or otherwise violates any patent right, copyright, trademark right, trade dress right or other intellectual property right of any Third Party in any jurisdiction worldwide, provided that such claim does not, in whole or in part, result from or is not based upon: (a) the design, modification or customization of the Product, or any portion thereof, (i)according to specifications provided or required by Customer, or (ii)pursuant to the request of Customer; (b) any act or omission of Customer; or (c) use by Customer of the Product in connection with or in combination with any hardware, software, network system, network protocol, products, equipment, material, content, information or data not supplied by Supplier.
Indemnification – Demand to Defend. If Customer makes a demand for Supplier to defend an Infringement Claim made against Customer, Supplier shall indemnify, defend and hold harmless Customer from, against and in respect of any and all Losses arising out of or relating to such Infringement Claim and, in the case of Losses that involve obligations in the nature of an injunction, shall secure for Customer the right to continue exploiting the applicable Product or shall provide non-infringing specifications for a new Product and secure the right to continue to exploit any remaining inventory of the existing Product. Once Customer makes a demand for Supplier to defend an Infringement Claim, Customer may defend against the Infringement Claim in any manner it reasonably may deem appropriate unless and until Supplier assumes control of such defense. If Supplier assumes the defense of the Infringement Claim, Supplier must do so using counsel that is reasonably acceptable to Customer. Customer shall reasonably cooperate with Supplier, at Supplier’s expense, in the defense or settlement of any such Infringement Claim and shall provide access to its records and personnel as reasonably requested by Supplier for the purpose thereof. If Supplier refuses or fails to assume or maintain control of any such Infringement Claim, Customer’s right to indemnification pursuant to this Section shall not be adversely affected by virtue of Customer assuming or continuing the defense thereof.
Indemnification – No Demand to Defend. If Customer elects, in its sole discretion, to control the defense of any Infringement Claim made against Customer (alone or together with Supplier), Customer shall do so using counsel of its choice and shall be responsible for all costs and expenses, including attorneys’ fees, incurred in connection therewith, but shall not be responsible for Supplier’s costs, expenses, and fees incurred in participating in such defense as permitted pursuant to the paragraph below. In such a case, Supplier shall indemnify and hold harmless Customer from, against and in respect of any and all other Losses resulting from a final judgment or settlement relating to such Infringement Claim and, in the case of Losses that involve obligations in the nature of an injunction, shall secure for Customer the right to continue exploiting the applicable Product or shall provide non-infringing specifications for a new Product and secure the right to continue to exploit any remaining inventory of the existing Product.
Participation by Non-Controlling Party. In any action, arbitration or proceeding for which indemnification is being sought hereunder, the Party not assuming the defense thereof shall have the right to participate in such defense and to retain its own counsel at its own expense. The Party in control of the defense shall at all times use reasonable efforts to keep the other Party reasonably apprised of the status of the defense. The Parties agree to cooperate in good faith with each other with respect to the defense of any such Infringement Claim.
[Consider whether Supplier should pay for defense costs even in the case where customer assumes and controls the defense of an Infringement Claim.]
Sample #7 (Exemplary limitation of liability clause contemplating a separate cap for indemnification liability):
To the extent Seller is found to have any liability hereunder whatsoever, such liability shall not exceed the aggregate dollar amount paid Customer to Seller hereunder for the year in which the applicable claim occurred; provided however that with respect to Seller’s indemnification obligations to Customer for a Claim of Infringement, Seller’s liability shall not exceed the aggregate dollar amount paid by Customer to Seller hereunder for the period in which any infringement is alleged to have occurred.