Indemnification is not just a fee-shifting provision
To offset risk of litigation arising out of intellectual property disputes, Indemnity provision is the powerful tool which not only a fee-shifting reform in patent infringement litigation but also define obligations imposed and address some critical issues in its absence.
Indemnification is very simply put “making good of a loss”. If between two parties, one party incurs a loss attributed to the other party, through the Indemnity provision, the party to whom the loss is attributed to, agrees to make good of the loss incurred to the other party.
So, A typical indemnity is a private agreement between two parties where the “insurer”—the indemnitor—promises to protect the indemnitee from losses sustained as a result of some specified act or omission.
To shift risk associated with breaches or failure to perform certain obligations, liabilities or claims, the provisions of indemnity have almost become a boilerplate as it addresses the myriad issues that arise in intellectual property issues. An obligation to indemnify arises from a contract, in an implied way or liability imposed by law.
In the context of Intellectual Property, the manufacturer, seller, or licensor of a product, technology, or service will often agree to indemnify the buyer or licensee against any losses sustained by virtue of third-party claims for infringement of a patent, trademark, or copyright.
Let us give an example, where it matters: Suppose Seller is licensing a Software to a Buyer which is built upon pieces of code, the Copyright to which is unknowingly owned by a third party.
Suppose, the third party comes and sues for a Copyright infringement, you know what happens: the Buyer may need to stop the use of the Software, for no fault of theirs, just because the Buyer did not have IP clearance.
Now, see the role play in the context of Seller/Buyer:
If there is any infringement case filed against buyer, then seller will try to take control of it at its own expense, defend for proceeding and pay all damages as per settlement to the buyer. She will ask buyer to send a reasonable notice in writing and therefore give all control to seller to defend and/or settle such claim. If buyer wants to have a separate counsel participate in defense then it will be on his own expense. Seller will make clause more specific by adding points like he will not be liable of infringement if caused by modification, servicing or addition by a third party without his permission, say, in any parts or devices or software. On the other hand, buyer will make sure not to have any liability to seller if seller knows, or through due diligence infringe intellectual property rights.
If such Software, equipment, or services in such suit is held to constitute infringement and its use is enjoined, then seller will try to take right by its own election, and at its expense, either to procure the right for continued use of such Software, equipment, or services, or to replace or modify so that it becomes non-infringing. Buyer will further add that, provided that the performance thereof will not be materially adversely affected, then only right to procure/replace or modification will be allowed.
Now, after a suit is filed, next question comes regarding the recourses against those who infringe IP. such recourses are often called “Remedies” in the form of:
- An injunction
- Costs
- Damages or an account of profits
- Delivery up
- Tracing orders
The Injunction: It is a right to stop others doing certain things without the rights owner’s consent. Practically its possible through a prohibitory injunction, a court order which refrain individuals from doing certain defined acts as they are the exclusive preserve of the IP owner. Since IP owner does not have to wait till trial of matter is pending so in certain circumstances, he obtains an injunction on an interim emergency basis. Like we said, the Buyer could just get restricted from using the Software!
Costs: General rule says that losing party pays a proportion of the successful party’s costs on the claims on which it has lost.
Damages or an account of profits: These are the defendant’s profits made as a result of his infringement. As an alternative to restitution, the IP owner can seek the compensatory remedy of an award of damages. But! she cannot claim both an account of profits and damages; she must choose one or the other.
Delivery up or destruction: Court considered the need for proportionality between the seriousness of the infringement and the remedy ordered and the interests of third parties.
Tracing remedies: An infringer can be ordered to provide details of where he got his supplies of infringing goods. Failure to provide the information sought in the face of such an order can amount to a contempt of court.
So, to be or not to be?
IP infringement indemnification provisions are extremely nuanced.
Such a provision should be understood in order to put you in a good position should that indemnity ever be activated, specially where the contract revolves around the IP.
While no “magic words” are required, an effective IP indemnity provision will address the parties, their obligations, and the procedures for initiating and fulfilling those obligations.
By addressing these issues during contract negotiations in a product manufacturer/customer relationship, both parties can minimize uncertainty and avoid the potential for conflicts and litigation.
So, in take the wise words- it is better to be than not to be!
We are extremely grateful if you have read till here. We enjoyed writing this piece as much as you have enjoyed reading it.
This is an opinion piece and must not be construed as a Legal advice.
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