In many corporate and technology transfer agreements, relatively little attention is paid to indemnification provisions that directly address IP. Reliance on general indemnification provisions to capture IP-specific issues often results in disappointment. In IP transactions, particularly those involving patents, there are IP-specific issues that should be considered when answering the three simple questions for any indemnification: Who? What? and How?
Who? Not just who is indemnifying whom and who is covered, but also who controls the defense in an infringement action?
The provision should always specify who controls a defense, particularly for infringement claims. The indemnifying party will most likely want maximum control over how an infringement claim is handled, or, at least, will want to reserve the right to defend such a claim, particularly if other products or services of the indemnifying party may be implicated. The indemnified party will want to retain the right to approve any settlement, particularly when there are conflicting positions on non-infringement or damages between the indemnifying and indemnified parties. In patent cases, it is also important to specify who primarily controls claim construction, usage of prior art, and parallel reexamination or other post-issuance proceedings at the Patent and Trademark Office.
What? Not just what are the limits of liability, what types of costs or damages and what types of claims are covered, but also what types of activities are covered?
Specifying what types of activities are covered is particularly important in IP indemnification. In the patent context, the indemnifying party should consider the patent infringement risks that arise if the indemnified party modifies the licensed product. Similarly, risks can surface if the licensed technology is incorporated into larger products or systems, or combined with other components. By spelling out authorized and unauthorized uses and activities in the indemnification provisions, the indemnifying party will be protected from covering claims targeting such uses.
On the other hand, in certain circumstances, the indemnified party may want indemnification in any of the above circumstances. In any infringement claim against a product, for example, the indemnification should be broad enough to cover claims that allege infringement of a larger apparatus that includes the product in its intended or reasonably foreseeable use.
It is important to delineate the types of infringement that will be subject to indemnification.
How? Not just how will the indemnitee notify the indemnitor, but also how will the defense proceed, how will the parties cooperate, how can the indemnitor remedy the situation, and how will a failure to defend be protected against?
In some cases, the parties may want to jointly defend against infringement, which requires a clear understanding on how the defense will be conducted, including agreement on who controls the defense and who can select attorneys. The provision should also identify control over settlement. While the indemnifying party often has control over settlement, the indemnified party will not want a settlement that adversely impacts its business operations by unduly limiting its use of the allegedly infringing technology.
In defending an action, the indemnifying party may need information and assistance from the indemnified party. The indemnifying party may wish to make its indemnity obligation explicitly contingent upon the indemnified party’s cooperation.
The indemnification provisions should also set forth acceptable remedies, such as the option to substitute the infringing product with non-infringing goods or obtain a license. On the other hand, the indemnifying party will want the right to ensure that any substitute is acceptable.
Finally, an indemnified party may want to safeguard its benefits by requiring the indemnifying party to maintain patent infringement insurance or create an escrow account funded by royalty payments or the purchase price, which can be drawn from should indemnification payments not be made.