As a business lawyer to many technology start-ups in Northern California, I work with software companies to assist them in licensing their code to OEMs and end users. When providing code to large company licensors, the licensing agreements are often extensively negotiated, particularly when it comes to determining what happens if my client’s software infringes someone else’s technology. In past blogs discussing infringement clauses and indemnification , I’ve described how license agreements deal with this issue through a provision that requires the licensor to indemnify the licensee.
One of the discussions that often occurs in crafting intellectual property infringement indemnification language is what will happen if an infringement claim arises, or, in some cases, if the licensor believes a claim will occur. The first issue is determining who will deal with the claim. Typically, the licensor will be responsible for handling the matter in court, or otherwise. The licensor is believed to be in the best position to deal with the matter because it is their technology. An obligation to handle the matter is also part of the risk the licensor takes on when providing indemnity to the licensee.
There are two additional clauses that accompany a licensor’s obligation to defend. One addition, which is relatively common, is where the licensee wants to be involved in dealing with the claim. The licensor will usually allow this if the licensor retains ultimate control over the matter and the fees of the licensee’s counsel are paid by the licensee. A second addition occurs where a licensee believes that a licensor does not have resources, or is not sufficiently responsive, to the claim. In this situation, the licensee can completely take over the defense of the claim, all at the licensor’s expense. A licensor will typically resist this, because it wants to have control over the matter if it is paying the bill.
The second issue is what happens if an infringement is found to have occurred or is suspected of occurring. In this situation, a licensor often requests three options. The first option is for the licensor to provide a workaround that has the same functionality but resolves the infringement issue. As a practical matter, this type of provision is useful when the licensor’s code is not infringing a patent, although each situation is different.
The second option is for the licensor to get a license, either from the holder who sued in the first place, or from another owner who may have non-infringing code that can be used. In these cases, the licensor is expected to pay the additional royalties that will need to be paid as a result of the secondary license.
The third option is for the licensor to refund the licensee for the cost of the software, less an amount to account for licensee’s use, and terminate the license without further liability. Licensors sometimes resist this approach. The parties can compromise by allowing the refund right, but providing that the licensor must still cover the licensee for the claim that initially gave rise to the indemnification obligation.
Intellectual property indemnification provisions are very much like the proverbial “black swan”. A black swan is a term used in the financial world, among other places, to describe a rare event that can have catastrophic consequences. Because of the existential threat an infringement claim can create for a small start-up company, agreements will often limit the licensor’s liability in an infringement, whether it arises from a no infringement representation in the license or otherwise, to the indemnification obligation specially contained in the license. Although licensees may initially object to this, many will recognize that the vast amount of their exposure in an infringement is covered by the indemnification claim, and ultimately agree to the limitation.
Bob Hawn is a founding partner of Strategy Law, LLP in downtown San Jose, California. His practice focuses on emerging growth technology companies, technology licensing, angel and venture capital financing, business entity formation, corporate governance, mergers and acquisitions, and U.S. market entry. He speaks regularly on technology law related issues and was the 2014-15 Chair of the Business Law Section of the State Bar of California.
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.