Intellectual Property Indemnification - Generally
Indemnity clauses (sometimes referred to as hold harmless clauses) are common in agreements where one party wishes to shift certain risks to another party. In intellectual property indemnification clauses, the risk is commonly associated with patent infringement, trademark infringement, copyright infringement, trade secret misappropriation, software issues, or some other intellectual property (IP) related risk. An indemnity clause may be limited to indemnification or it may also include the obligation to "defend" and/or "hold harmless." Intellectual property indemnity clauses are particularly dangerous to vendors because the costs to defend a typical IP claim could far exceed the payments to the vendor under the agreement.
Intellectual Property Indemnification - Representations and Warranties
Indemnification clauses often incorporate representation and warranties, which serve as additional grounds to trigger an indemnification obligation. For example, purchasers or licensors of software frequently include a representation and warranty that the software deliverable will be free from third-party claims and further that no materials owned by a third-party or for which the developer does not have permission have been incorporated into the software deliverable. Later, if a third party makes a claim for copyright infringement, the purchaser/licensor will seek to take advantage of the indemnification clause and force the developer to defend the claim and pay for any damages or settlements.
Intellectual Property Indemnification - Limits on Liability
Because the potential liability for indemnification obligations, particularly for IP indemnity claims, can be so high, vendors will typically attempt to limit or cap their liability. One way this can be accomplished is including a limitation of liability clause in the agreement and expressly applying that clause to the indemnification clause. For example, if the agreement provides a $50,000 fee to the vendor to develop and deliver a software solution, the vendor could likely be liable for significantly more if it is required to defend a third-party copyright infringement claim. However, if the limitation of liability clause limits the vendor's total liability to payments received under the agreement and that limitation applies to the indemnification clause, then vendor's liability is potentially capped at $50,000 even though the litigation over the claim could costs $100,000s. Many purchasers with leverage will demand unlimited or uncapped intellectual property indemnification. A potential compromise is for the purchaser and vendor to agree that the indemnification liability will be capped at some multiple of the vendor payments under the agreement.
Interested in learning more about intellectual property indemnification, see our blog posts and articles related to indemnification clauses and agreements in general as well as other content on patent indemnification, trademark indemnification, copyright indemnification, trade secret indemnification, and software indemnification.
In addition to Thriving Attorney, Darin M. Klemchuk is founder of Klemchuk LLP, a litigation, intellectual property, and transactional law firm located in Dallas, Texas. He also co-founded Project K, a charity devoted to changing the world one random act of kindness at a time. Click to read more about Darin Klemchuk's practice as an intellectual property lawyer.