Dealing with the Unknown - How Does Indemnification Get Triggered and What Happens Next

By: Robert Hawn

As a start-up lawyer in Silicon Valley, I work with a number of companies that generate revenue through licensing their intellectual property, or access to it. In creating and negotiating licensing agreements, my client, as the licensor, often wants to describe what will happen if someone claiming better rights to the technology my client has licensed sues my client’s customer and tells them to stop using the property my client licensed to their customer. In that case, a customer, who is the licensee, will often look to my client, the licensor, and say, “I paid you so I could use this stuff, so get this other guy off my back.”

The fancy term for a licensor covering its licensee against claims from a third party is indemnification. Although the language used in indemnification provisions is a bit formal and tortuous, the basic ideas are pretty simple. In my prior posts on this subject ( May 18 th and August 3 rd ), I discussed the basic concept around indemnification, and the types of items, from an intellectual property context, that these provisions address. In this blog, let’s look at what happens if an indemnification claim arises.

The first issue is the trigger for the obligation. Indemnification provisions will often describe two different events that will trigger the required tasks for a licensor. Most agreements describe the first event triggering the indemnification obligation as the presence of a claim. Typically, this will occur when the customer receives what lawyers call a “cease and desist” letter. These letters allege that someone else owns the licensed IP, and demands that the customer stop using the IP if the customer does not want to be sued. Often, a cease and desist letter is the opening salvo in an attempt to extract royalties from the customer in exchange for calling off the threatened lawsuit. Related to a cease and desist letter is the filing of an actual lawsuit.

A second trigger could exist. Sometimes a licensor may suspect that its IP may become the subject of a claim from a third party. It may find out because it has received a cease and desist letter, or it becomes known in the industry that an infringement risk has arisen. It may be because the licensor itself has been sued. If so, the licensor may want to take advantage of certain tasks that will allow the licensor to minimize its risk. These risk minimization tasks will be discussed in my next blog.

The second issue is what happens once the obligation gets triggered. Essentially, two separate sets of responses are described. The first response is procedural, and discusses how the claim is going to get managed. The second concerns some of the options the licensor can take if it loses the claim, or it decides it wants to fight it.

There are a small number of key concepts with the procedural response. The first is that the licensee must provide notice of the claim to the licensor. This is really important, because if the licensor doesn’t know about the claim quickly, it can lose some valuable rights. Often, you’ll see clauses that will impact the licensor’s indemnification obligations if the notice is delayed or not sent. The second is that control for the defense of the action must be assigned to one of the parties. Usually, but not always, the licensor gets to take control, but the licensee can allow their attorneys to be involved at the licensee’s expense. The third is that the licensee will often request approval rights over any settlement.

One of the standard issues that gets discussed is what will happen if a licensor can’t beat a claim, or can’t afford to fight a claim and wants to resolve it. Because a licensee will have a strong vested interest in continuing to use the IP, a number of approaches have been developed that often appear to resolve this issue. I’ll discuss those in my next blog.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Categories: Technology Laws, Start-ups

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