Creatively Covering Customers Catastrophes: The Exciting World of IP Infringement Indemnification

By: Robert Hawn

As a business attorney in Silicon Valley practicing in our firm’s office in San Jose, I spend a lot of time creating license agreements for our licensor clients. In creating and negotiating licenses, a number of risks need to be allocated. One of the most important of these goes by the fancy name of intellectual property infringement indemnification.

So, what is intellectual property infringement indemnification? In plain English, this means if you license something you don’t own, then you have to cover your licensee against a claim from the real owner. But, wait, you say: “I created this stuff on my own. What’s the problem?”

Remember, a license is nothing more than a licensee giving you money in exchange for you giving it the right to use your intellectual property. The rub here is that we are dealing with intellectual property. Unlike tangible property, such as a house, where you can run a title report and see who owns it, the ability to see if there are others that have superior rights to intellectual property can be difficult. Patent searches, for example, can be expensive and time consuming, and they don’t uncover patents in process that have yet to be published. Copyright, which is one of the key protective schemes for software, is rarely registered. Trade secrets are, by their very nature, secret.

Because of this uncertainty, or risk, a licensee will look at you and say “What happens if you don’t own this stuff?” Because you want the deal, you’ll say, “I’ll cover you if someone says ‘my stuff is their stuff’”. At this point, your attorney is saying “Are you crazy? If you get hit with an infringement suit, the costs alone in fighting it will kill your company!” So, why do you ignore your attorney’s advice? Because few if any licensees will buy your stuff if you don’t cover them against this risk. In other words, if you don’t provide this protection, you won’t have a company left to kill.

Now, there are some exceptions to offering intellectual property infringement in licensing deals. Often, in “direct consumer” licensing, particularly with downloads where few if any customers actually read the license to which they are agreeing, a licensor will not only leave out infringement protection, a licensor will affirmatively disclaim it, often in all capital letters. In other situations, a licensor may have sufficient market power to refuse to offer this protection. In others, the use of certain types of technology are understood to be a shared risk.

So what’s a young start-up, or even a sophisticated multi-national company, to do? First, you can close your eyes and jump, and this seems to be the most common choice. It is also one of the worst. Second, you can employ lots of high priced attorneys and other advisors to conduct searches and reviews of current technology to determine if what you are doing will infringe on anybody else’s technology. The problem with this approach, putting aside the expense, is that this type of broad approach is best suited to patented technology, and still can’t account for technology that is not yet publicly disclosed, e.g., in an unpublished patent application or if the owner has maintained it as a trade secret. Third, you can take a look at your technology, and the technology of your competitors or active trolls, and ask yourself what is the key item that would lead your competitor to sue you. You can then perform an analysis, using your developers and attorneys, to determine the risk you face in covering your customers against lawsuits. Although this method has many of the disadvantages of the second method discussed above, it is more directed and based on a practical assessment of where your exposure may exist.

As you might guess, provisions dealing with coverage against infringement risk tend to be highly complex and heavily negotiated. In upcoming blogs, we’ll explain some of these moving parts and how you, as a businessperson, can work through them.

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.