Many technology companies generate their revenue by providing their technology, often in the form of software, to customers through licenses, subscriptions, or software as a service platform. As a technology lawyer practicing in Silicon Valley, I work with a number of companies which actively distribute their technology though licensing deals. Their customers, who are almost always licensees or subscribers, require that they are covered if sued by a third party claiming that the licensed technology is owned by that third party. The legal term for a licensor covering its licensee against claims from a third party is indemnification.
As we discussed in my prior blog about how indemnification are triggered , indemnification obligations get triggered by the threat of a lawsuit or an actual claim. Once the threat or claim hits, the licensee is required to do certain things, e.g., provide notice to the licensor. So, what happens next?
Indemnification clauses try to keep everyone happy by striking a balance between two competing interests. The first is the interest of the licensor in trying to minimize its exposure. The second is the interest of the licensee which wants to continue to use what it has paid for. The manner in which these tensions are resolved is often a function of the relative bargaining power of the licensor and the licensee.
Typically, if a claim hits, the licensor will agree to do certain things. First, it may agree to defend the licensee from the claim and hold the licensee harmless from its effects. As part of this obligation, the licensor will outline certain remedies which will be offered to the licensee. The first is that the licensor will try to provide a work-around, and a licensee will often want a commitment that the work-around does not materially reduce the functionality they have paid for. The second is that the licensor will agree to take a license from the third party bringing the claim and pay any royalties or other damages that may result. The third is that the licensor may offer some sort of refund to the licensee, particularly if the licensor is unable to develop a workaround or get a license. The refund may also be coupled with the ability to walk from the deal without a further indemnification obligation.
As mentioned above, the indemnification obligation is often triggered when the licensee receives a threat of a claim or is hit with a claim. There are situations, however, when a licensor may want to trigger the above remedies. This might occur when the licensor believes that a claim may be forthcoming and may want to deal with the issue without having to be involved in expensive litigation. In this situation, indemnification clauses often provide that the licensor can invoke the above remedies to minimize its ultimate liability.
Indemnification provisions often contain other methods to reduce or eliminate a licensor’s liability. Stay tuned, and we’ll discuss that in our 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.