Intellectual Property Compensation – Generally
Indemnification clauses (sometimes called liability release clauses, indemnity agreements, or indemnity agreements) are common in agreements where one party wishes to transfer certain risks to another party. In intellectual property indemnification clauses, the risk is commonly associated with patent infringement, trademark infringement, copyright infringement, misappropriation of trade secrets, software problems, or some other risk related to the intellectual property (IP). An indemnification clause may be limited to indemnification or may also include obligations to “defend” and/or “hold harmless” the other party. Intellectual property indemnification clauses are particularly dangerous for providers because the costs of defending a typical IP claim could far exceed payments to the provider under the agreement.
Intellectual Property Indemnification – Limits of Liability
Because the potential liability for indemnification obligations, particularly for intellectual property indemnification claims, can be so high, providers will normally seek to limit or limit their liability. One way to accomplish this is to include a limitation of liability clause in the agreement and expressly apply it to limit the indemnification clause. For example, if the agreement provides a fee of $50,000 to the vendor to develop and deliver a software solution, the vendor will likely be liable for a significantly higher amount if it has to defend itself against a claim of copyright infringement from a third party. . However, if the limitation of liability clause limits the provider’s total liability to payments actually received under the agreement and that limitation applies to the indemnification clause, then the provider’s liability is potentially capped at $50,000 even if the litigation of the claim could cost $100,000s. Many leveraged buyers will demand unlimited or uncapped IP compensation. One potential compromise is for the buyer and seller to agree that the indemnification liability will be limited to some multiple of the seller’s payments under the agreement.
Intellectual Property Indemnification – Representations and Warranties
Intellectual property indemnification clauses often include representation and warranties provisions, which provide a trigger for indemnification obligations. For example, software purchasers/licensors frequently require a statement and warranty provision that the software being delivered is free from claims of infringement by third parties and, furthermore, that no third party materials or proprietary materials have been incorporated. for which the developer does not have permission. deliverable software. These provisions are intended to protect the buyer/licensor in the event a claim of copyright infringement or trade secret misappropriation is filed by a third party. If this occurs, the buyer/licensor will likely try to force the developer to defend the claim and pay damages or settlements.
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