Patent Indemnification Provisions Negotiating Indemnification Clauses to Allocate Patent Infringement Risk

Transcription

1 presents Patent Indemnification Provisions Negotiating Indemnification Clauses to Allocate Patent Infringement Risk A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Thomas J. Scott, Jr., Partner, Goodwin Procter, Washington, D.C. Laurie S. Hane, Partner, Morrison & Foerster LLP, San Francisco Robert S. Bramson, Principal, Bramson & Pressman, Conshohocken, Pa. Thursday, July 22, 2010 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions ed to registrations.

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4 Patent Indemnification Provisions Negotiating Indemnification Clauses to Allocate Patent Infringement Risk Introduction/Overview ti i Thomas J. Scott, Jr. Goodwin Procter LLP July 22, Goodwin Procter LLP

5 Patent Indemnification Provisions Overview Types of transactions ti Definitions Common clauses Goodwin Procter LLP 5

6 Types of Transactions: Sales of Goods and Services The Uniform Commercial Code Implied Warranty of Noninfringement Scope Patents and trademarks Copyrights Damages Settlements Rightful Claims Attorneys fees and litigation expenses Goodwin Procter LLP 6

7 Types of Transactions: Sales of Goods and Services The Uniform Commercial Code Implied Warranty of Noninfringement Limitations UCC 2-312(3) Special order buyer Normal course of business Merchants Use of goods No duty to investigate and/or disclose Goodwin Procter LLP 7

8 Types of Transactions: Sales of Goods and Services The Uniform Commercial Code Implied Warranty of Noninfringement Subject to negotiation Implied warranty may be contractually disclaimed Common provisions found in purchase order forms may prompt implied warranty Goodwin Procter LLP 8

9 Types of Transactions: Patent & Technology Licenses Implied obligations No implied warranty under common law principles i Subject to negotiation Various scenarios Patent license, no technology Technology license of specifications and drawings Technology and trademark licenses Tying Goodwin Procter LLP 9

10 Types of Transactions: Patent & Technology Licenses Non-contractual common law theories of liability Fraud and misrepresentation ti Strict liability Agency Indemnity based on contribution Indemnity based on contract Goodwin Procter LLP 10

11 Types of Transactions: Joint Ventures Joint ventures No standard d common law principle i Need clear unequivocal provisions to shift risk Partnership law principles p apply ppy Joint ventures cannot be implied Indemnification obligations not automatically terminated Goodwin Procter LLP 11

12 Comparison: Third Party Patent Infringement Licenses No implied warranty of non-infringement i of third party patents t Licensor may warrant that, to the best of his knowledge, the licensed products do not infringe any third party patent Sales of goods Implicit warranty that the property will be delivered free of any claims of infringement by third parties Goodwin Procter LLP 12

13 Definitions: Representation A representation is a statement as to the existence of a fact, or state of mind which acts as an inducement to contract Examples: The Licensor is the legal owner of the Licensed Patent. (Existence of fact) To the best of the Licensor s knowledge the Licensee s practice of the rights is subject to no valid claims of infringement by any third party. (State of mind) Key elements Point in time Duration of reliance True but misleading representations Goodwin Procter LLP 13

14 Definitions: Warranty A warranty is a contractual promise that assures the existence of a fact or conduct upon which the other party may rely E.g., The Licensed Patent is not [representation ], and during the Term of this Agreement shall not become [warranty], subject to any liens Remedies Contractual damages Rescission Goodwin Procter LLP 14

15 Definitions: Indemnity An indemnity is [a] collateral contract or assurance, by which one person engages g to secure another against an anticipated loss. Resolution of patent validity is not required for resolution of indemnity Goodwin Procter LLP 15

16 Definitions: Duty to Defend The duty to defend arises at the earliest stages of litigation and generally exists regardless of whether the party is ultimately found liable In contrast, indemnification only requires the indemnitor reimburse the indemnitee Goodwin Procter LLP 16

17 Common Clauses: Representations and Warranties Representations and Warranties General corporate warranties Intellectual property representations and warranties Goodwin Procter LLP 17

18 Common Clauses: Limitations of Liability Claims Indirect infringement i Personal injury, death or property damage Specific events Wrongful acts Goodwin Procter LLP 18

19 Common Clauses: Limitations of Damages Consequential Costs and expenses incurred to procure the services from an alternate t source as a result of vendor s breach Expenses incurred due to breach Payments or penalties Third party Lost profits Goodwin Procter LLP 19

20 Common Clauses: Indemnity Provisions Type of agreement Who has control over the design Which parties are covered What the parties know Cooperation and duty to defend Choice of law Mandatory provisions Goodwin Procter LLP 20

21 2010 Morrison & Foerster LLP All Rights Reser rved mofo.com Intellectual Property related related Representations and Warranties Laurie S. Hane

22 Purpose of Representations and Warranties Confirm existence or absence of foundational and fundamental facts. Ensure receipt of benefit of the bargain going forward. Allocation of risk. Backstop and facilitator t of due diligence. This is MoFo. 22

23 Distinguish Representation, Warranty, and Covenant Representation: a statement of the facts on a particular date (e.g., the effective date). Licensor represents that it the authority to grant the licenses set forth in this Agreement Warranty: a promise that something will be true (or remain true) in the future. Seller warrants that the Product will be free for defects for 12 months Seller warrants that the Product will not infringe.... Covenant: a promise of future action or inaction. During the Warranty Period, Seller will repair and replace any Product that fails to conform to specifications. Differences in breach standards and remedies -- damages and/or rescission. Often the introductory language will recite Party A represents and warrants.... This is MoFo. 23

24 Different Warranties and Background Law Commercial sale or license of a product Implied UCC warranties, typically disclaimed in favor of contractual warranties. Services Limited implied warranties a from case law, typically y disclaimed in favor of contractual warranties. IP license No implied warranties, generally fewer contractual warranties. M&A No implied warranties, generally many contractual warranties. This is MoFo. 24

25 IP and Related Reps/Warranties (1/2) Ownership and authority Licensor has the right and authority to enter into this Agreement. Licensor is the exclusive owner of all right, title, and interest to the Licensed Materials. Licensor has the right to grant the licenses herein, without need for consents or other rights not yet obtained. Licensor has not granted any licenses inconsistent with the license granted herein (e.g., for exclusive licenses). Non-Infringement The Program does not infringe any copyright, trade secret, patent, or other intellectual property right of any third party. Distinguish between trade secrets and copyrights versus patents? Distinguish jurisdiction (only US patents)? E.g.: The Program does not infringe any valid U.S. patent or U.S. copyright, or misappropriates any valid [U.S.] trade secret Validity The Assigned Patents are valid and enforceable. This is MoFo. 25

26 IP and Related Reps/Warranties (2/2) Open source Re use/nonuse of open source components. Services Related to performance of Services Services will be performed in a professional and workmanlike manner. Services will be performed in accordance with the highest industry standards. IP related Developer D l has all rights necessary from contractors t to assign rights in Deliverables to Customer. Consider covenant to obtain the assignments on an ongoing basis. This is MoFo. 26

27 Qualifiers Knowledge To the knowledge of Licensor, the Deliverables do not infringe. Whose knowledge? Kind and quality of knowledge (e.g., best of, reasonable, after reasonable investigation)? Qualified by materiality concept To the knowledge of Licensor, the Deliverables erables do not materially infringe... Time As of the effective date. Use When used in accordance with agreement As delivered Licensor represents that, as of the Effective Date, to the knowledge of Licensor, the Deliverables as delivered by Licensor and when used in accordance with the published specifications, do not materially infringe any [intellectual property rights] of a third party. This is MoFo. 27

28 Length of Warranty Typically, perpetual for IP warranties. As contrasted with specified warranty periods for product performance. This is MoFo. 28

29 Exclusions from Reps/Warranty (1/2) Claims based on or relating to use of other than the then-current, unaltered version of the product as provided by Licensor. Claims based on or relating to any modification of the product except as performed [or authorized] in writing by Licensor. Claims based on or relating to any use, operation or combination of the product with other non-licensor programs, data, equipment or documentation. Claims due to (i) combination or use with other hardware, software, etc.... unless (y) the other hardware, software, etc. are reasonably required to use the product for its intended purpose (as shown in Vendor documentation), or (z) Vendor would be liable for contributory infringement or inducement to infringe arising from such combination or use This is MoFo. 29

30 Exclusions from Reps/Warranty (2/2) Claims based on or relating to unauthorized use or misuse. Claim based on or relating to features, functions or other elements provided or requested by Customer. Claim based on...(iii).. features, functions or other elements specifically requested by Customer, unless the features, functions or elements are also applicable to or included in the standard, or generally available, products of Vendor. UCC implied obligation of Buyer. Scheduled d exceptions: known variances from absolute representations, e.g., existing claims, licenses. This is MoFo. 30

31 Disclaimer of Implied Warranties Implied warranties are creation of background law, such as the Uniform Commercial Code (UCC). Merchantability: must be specifically and conspicuously disclaimed. Fitness for a particular purpose: must be specifically and conspicuously disclaimed. Non-infringement / title: some question about need to be specifically disclaimed. Arising from course of dealing, course of performance, or usage of trade. This is MoFo. 31

32 Remedies Remedies can be limited to those expressly set forth in the agreement. For example, repair, replace or refund (depreciation). Indemnities can be sole remedy for infringement. Provide sole remedy for goods: under UCC, other remedies could be implied if remedy provided is not explicitly defined as customer s sole remedy. Duty to mitigate damages. Background law requires parties to use commercially reasonable efforts to mitigate damages. Contract can require specific mitigation actions (e.g. cease use of infringing items) in addition to limitation on remedies and/or as a condition to a particular remedy. This is MoFo. 32

33 Restriction on Time Period for Claims Consider defining the statute of limitations for any action that could be brought for breach of the agreement. Consider limiting any claims that can be brought for breach of warranty to a certain defined warranty period. These kind of time period limitations are more typical in the context of performance-related warranties than IP-related warranties. This is MoFo. 33

34 UCC Implied Warranty By seller who is a merchant regularly dealing in goods of the kind. That goods shall be delivered free of the rightful claim of any third person by way of infringement or the like. What is a rightful claim? Claim need not be proved at trial; a rightful claim under section 2312(3) is a nonfrivolous claim of infringement that has any significant and adverse effect on the buyer's ability to make use of the purchased goods. Pacific Sunwear of California, Inc., v. Olaes Enterprises, Inc., 167 Cal. App. 4th 466 (2008) But buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specification. Remedy for breach = indemnity? This is MoFo. 34

35 Limitations on Liability: Kinds of Damages (1/2) Typically disclaimed: indirect, special, exemplary, punitive, incidental and consequential damages -- everything other than direct damages. Direct: Damages which arise naturally and ordinarily from the act. Special: Direct damages caused by the special nature of the victim. Punitive: Damages in excess of compensation to punish wrongful acts, Exemplary: Generally similar to punitive damages. Incidental: Charges and expenses incurred in covering losses. Consequential: Damages that do not result directly from, but are a consequence of, the act, Indirect: Generally similar to consequential damages. Specific types of excluded damages: due to loss of profits, loss of revenue, loss resulting from interruption of business or loss of use or data. Define what are direct damages? This is MoFo. 35

36 Limitations on Liability: Kinds of Damages (2/2) Exclusions Consider excluding liability for breach of the warranties relating to intellectual property infringement. Consider whether language of the limitation on liability may inadvertently tl affect the scope of an indemnity it right. No liability under this Agreement for consequential damages.... Make clear that the limitation on liability provision does not limit the scope of the losses that are included within an indemnity obligation that is, if a third party claims and recovers consequential damages, the indemnitor has an obligation to pay such damages. What if a party breaches the obligation to indemnify? Should indemnitee be able to claim all damages allowable under law, whether direct or consequential, etc., for such breach? This is MoFo. 36

37 Limitations on Liability: Monetary Cap Parties seek to limit the total aggregate liability of a party. Typical limits are to: (a) the amounts paid under the agreement (or some multiplier), (b) the amounts payable under the agreement (or some multiplier), or (c) a specific monetary amount. Consider liability under versus damages under the agreement. Consider different caps for different categories. Exclusions from monetary cap. Consider excluding indemnification obligations. Consider excluding liability for breach of the warranties relating to intellectual property infringement. This is MoFo. 37

38 Relationship to Indemnity Rights Breach of representation/warranty gives rise to claim for breach of contract, rescission, not an independent obligation by the other party to do something about the claim. Losses caused by third party claims, may be recoverable damages for breach (subject to any limitations on damages in the agreement), but an indemnity specifically includes losses associated with such third party claims. A mere allegation of infringement may not give rise to a claim for breach of a representation/warranty of noninfringement. Make sure any indemnity obligation is triggered not just by breach of a representation or warranty, but by an allegation that, if true, would constitute a breach of a representation or warranty (or just an allegation/claim of infringement). To show breach of a noninfringement representation/warranty, does plaintiff need to prove/admit infringement? Consider using language based on the UCC: will be free of a rightful claim of infringement... This is MoFo. 38

39 Relationship to Indemnity Rights But, depending on what kind of indemnity is negotiated ( defend and indemnify judgments and settlements ), a claim for breach of contract may give rise to broader damages (e.g., cost of cover?). If indemnity is only triggered by a third party claim (and is sole and exclusive remedy), customer may not be able to recover pre-claim damages from breach of a noninfringement representation/warranty. If customer decides the risk of the third party claim is too great and wants to take action before a claim is brought/filed. E.g., where the parties basically concede infringement (e.g., of a copyright or trademark), and customer wants to issue recall or alter product to avoid litigation, a defend and pay indemnity may not be sufficient. If rescission is an attractive alternative, indemnity alone (as sole and exclusive remedy), will not provide that relief. This is MoFo. 39

40 Bramson Pressman PATENT INDEMNITY CLAUSES FOR VENDOR PRODUCTS AND SERVICES By: Robert S. Bramson Bramson & Pressman Phone: Fax:

41 Bramson Pressman WHAT ARE THE ISSUES? Should there be an indemnity? What if both vendor and customer contribute to the infringement? i What is the nature and extent of the infringement? Should liability be shared? How to address the disproportionate revenues of vendor and customer? The $10 component of $1,000 product? How is this affected by Lucent v. Gateway, 580 F.3d 1301 (Fed. Cir. 2009)? Should vendor s liability have a cap? How much? How determined? 41

42 Bramson Pressman WHAT ARE THE ISSUES? (2/2) What is the role of the financial strength of vendor v. customer? Should the vendor indemnify and defend or indemnify only? Should the customer relinquish to the vendor control of its financial exposure? Applicability of insurance? Scope of the indemnity? What is excluded? Political issues between the IP lawyers and vendor s sales staff in getting the deal done. Drafting issues clarity and completeness Everything is negotiable! 42

43 Bramson Pressman WHEN IS INDEMNITY APPLICABLE? A Product Sold for resale Component of consumer product ASIC in a cellphone Component of non-consumer system, e.g. wireless router Made and sold by A for $500 each, totaling $5MM Incorporated by B in telcom system sold for $100MM C operates the system, with $5B per year in revenues 43

44 Bramson Pressman WHEN IS INDEMNITY APPLICABLE? (2/2) A Manufacturing System Product is manufacturing system Product is a component of a manufacturing system A makes component, sold for $1MM B incorporates component in system, sold for $100M C uses system to make widgets with annual sales of $2B A Manufacturing Process A is catalyst in manufacturing process A process or service is provided Semiconductor fab Pharmaceutical contract manufacturer Outsourced service Telecommunications service 44

45 Bramson Pressman WHAT IS THE INFRINGEMENT? Product or Process is: Itself direct infringement Non-staple element which is a contributory infringement Element of co-infringement, e.g. claim specifies A+B; vendor sells A, not B, to customer No infringement by Vendor per se,, but infringement by active inducement E.g. Infringing method functionality is latent in A s product. A advises B how to turn on functionality. B practices the infringing g method. 45

46 Bramson Pressman WHAT IS THE INFRINGEMENT? (2) There may be an exception to indemnity, when the infringing product was made to the customer s s specifications. Who designed the infringing product? Product design is: Completely vendor s indemnity is proper Customer s as to some or all infringing components - Shared indemnity may be proper Designed by vendor to customer s specs indemnity may not be proper 46

47 Bramson Pressman WHERE DOES VENDOR S OBLIGATION COME FROM? As a matter of law UCC 2 312(3) Can be negated Waiver of warranty clause UCC 2 316(2) As a matter of contract Indemnity can be broad, narrow or shared 47

48 Bramson Pressman CUSTOMER ISSUES IN INDEMNIFICATION Should vendor indemnify and defend? Does customer want vendor to control customer s potential liability? Does vendor have the financial strength to support the indemnity and defense? Is customer unwilling to relinquish control of litigation? Solution shared loss? How much? 50/50? Does vendor have a patent defense insurance policy? What are its limits? How will it apply if multiple vendor customers are sued? The policy limit applies to all suits! Caveat: Most patent defense policies are claims made! 48

49 Bramson Pressman CUSTOMER ISSUES IN I INDEMNIFICATION (2/2) What is indemnified? Damages Compensatory and willfulness Attorneys fees Injunction Lost profits Lost customers/business Should there be liability sharing between vendor and customer? What are reasonable caps on vendor s liability? What are comparative negotiating positions of the parties? Has a freedom to operate analysis been done? How common is patent litigation is in the industry? What are vendor s obligations to obtain a paid-up license or provide a design-around? If design-around, will it meet the performance specifications of the replaced product? Will the cost be comparable to the replaced product? 49

50 Bramson Pressman VENDOR ISSUES IN INDEMNIFICATION Relationship of vendor s revenues/profits to customer s revenues/profits What is a fair risk sharing? What is a reasonable cap? What about joint and several liability if Vendor and Customer are both infringers? What if customer is financially weak? Insurance? Who pays? Should customer contribute? Coverage? Limits? Liability sharing with other customers? Sales Department view of IP Lawyers killing good deals Political vs. substantive aspects Dealing with joint and several liability when vendor and customer are both defendants and infringers? What is the effect of the cap? 50

51 Bramson Pressman ELEMENTS OF THE INDEMNIFICATION CLAUSE Notice to indemnitor of infringement Indemnified parties Include customers of indemnitee Payment of assessed damages, costs and attorney fees Right/obligation to defend Counsel of indemnitor s choice Right of indemnitee to approve counsel? Right of customer to defend Does customer then indemnify vendor? Does vendor share costs? Obligation to provide assistance Right to settle at expense of indemnitor Right to take license from patent owner 51

52 Bramson Pressman ELEMENTS OF THE INDEMNIFICATION CLAUSE (2/2) Right to substitute equivalent non-infringing product/component Quality Price Same price as substituted product This is usually missing from indemnification clauses Cap on indemnity Limit to vendor s sales to customer or a fraction thereof Limit to coverage of patent infringement defense insurance policy Sharing the liability/indemnity Insurance Limitation of Liability This clause is standard, but usually excludes punitive damages, which may be assessed in exceptional cases or in the event of willfulness Waiver of Warranty It is usual to waive implied warranties, including the implied warranty of freedom from infringement, UCC 2-312(3), which is replaced by the indemnification clause 52

53 Bramson Pressman WHEN TECHNOLOGY/PATENTS ONLY ARE LICENSED My experience is that there is no indemnification There could/should be a basis for seeking indemnification, if the licensor is licensing i a detailed d product design, as with IP circuit it designs The UCC will not apply, because there will not be a product sale However, there may be reps and warranties of: no infringement this is unlikely to be given by the licensor to the best of licensor s knowledge, no known infringement this is more likely and should give rise to an indemnification, but limited to licensor s knowledge, so likely not valuable. This would be a poorly written representation, because it leaves unresolved whether licensor should have done a freedom to operate analysis. to the best of licensor s knowledge, no known infringement, but limited to a freedom to operate analysis which has been shared with the licensee whether there is an indemnification ifi must be negotiated, t but it will usually be quite limited to the best of licensor s knowledge, no known infringement, with no investigation having been made or required to be made indemnification limited to breach of the representation is appropriate, but is not likely to be 53 meaningful

54 Bramson Pressman PATENT INDEMNITY CLAUSES FOR VENDOR PRODUCTS AND SERVICES I. INDEMNIFICATION BY VENDOR FOR IP INFRINGEMENT a) Vendor shall: i. defend Customer and its Affiliates with respect to any claim asserted or suit brought by a third person and alleging that the manufacture, sale, importation, use or disposition by Customer, the Affiliates or any of their customers of a Product, a component of the Product, equipment ii. incorporating the Product or a process utilizing the Product, directly or indirectly infringes any IP of the third person ( Claim ); and indemnify Customer with respect to all damages, costs and expenses incurred by or assessed against Customer with respect to a Claim and its settlement. Provided, however, that the term Claim and therefore Vendor s obligations in subparagraphs I(a) and (b) shall not apply to any claim or suit as to IP: a) for which: i. the Product is a component of equipment alleged to infringe the IP or is utilized in a process alleged to infringe the IP; and ii. the Product cannot reasonably be considered to infringe the IP, directly, contributorily or by active inducement; or b) which applies to features designed by Vendor to Customer s specifications. 54

55 Bramson Pressman PATENT INDEMNITY CLAUSES FOR VENDOR PRODUCTS AND SERVICES b) If Vendor fails to assume the defense of any Claim within fifteen (15) calendar days after receipt of notice of the Claim, Customer shall (upon notice to Vendor) have the right to undertake, at Vendor s expense, the defense, compromise or settlement of the Claim on behalf of and for the account and risk of Vendor, subject to paragraph p III(b). c) If Vendor assumes the defense of the Claim, it shall keep Customer reasonably informed of the progress of the defense, compromise or settlement and permit Customer to participate in the suit in an advisory capacity. d) [Optional] If Customer wishes to assume the defense and control of the Claim and Vendor is not a party to the Claim, Customer may: i. upon notice to Vendor, elect to control the defense of the suit and defend the suit with ii. counsel of Customer s choice; and if Customer elects to assume the defense and control, Customer shall consult with Vendor s counsel as to all significant decisions. If Customer makes the election of subparagraph (d)(i), Vendor and Customer shall share the costs of Customer s counsel and any damages assessed in the suit or payments required to be made in any settlement thereof on a [50-50] 50] basis, subject to the cap of paragraph III(b) as to Vendor s liability. 55

56 Bramson Pressman PATENT INDEMNITY CLAUSES FOR VENDOR PRODUCTS AND SERVICES e) The obligations of Vendor under paragraph I(a) are conditioned upon Customer providing po Vendor with: i. prompt written notice of the Claim ii. full authority to (A) settle or defend the Claim, at the option of Vendor, with counsel of Vendor s choosing, so long as settlement does not impose liability on Customer to the third person, and (B) control the iii. defense of the Claim; and at Customer s expense, reasonable cooperation and assistance in the defense of the Claim. f) In connection with any Claim, at Vendor s option and expense, Vendor may, at any time, and shall, if a Product is held to infringe and the use or sale of the Product is enjoined: i. procure for Customer and its customer(s) the right to continue all acts in ii. relation to the Product; or if procurement of rights is not a reasonable or viable option, replace the Product with a non-infringing alternative with performance and pricing that is (A) at least equal to the performance and pricing of the Product and (B) approved in writing by Customer, which approval shall not be withheld unreasonably. g) Optional] Vendor s liability to Customer under paragraph I(a) shall be g) Optional] Vendor s liability to Customer under paragraph I(a) shall be limited to the coverage of the Policy. 56

57 Bramson Pressman PATENT INDEMNITY CLAUSES FOR VENDOR PRODUCTS AND SERVICES II. [Optional] INSURANCE. During the term of this Agreement, Vendor shall, at its expense, obtain and maintain an Intellectual Property Infringement Defense Policy (the Policy ). The Policy shall: a) Be placed with an insurer and have terms reasonably acceptable to Customer; b) Insure the payment of all legal fees, expenses, costs and damages in connection with the defense of any Claim against Vendor or Customer; c) Have policy limits of at least Twenty Five Million Dollars ($25,000,000); d) Name Customer as an additional insured; and e) Provide that it cannot be canceled or not renewed without at least thirty (30) days prior notice to Customer. On the Effective Date, Vendor shall provide Customer with a copy of the Policy and a Certificate of Insurance reflecting all of the terms set forth above. 57

58 Bramson Pressman PATENT INDEMNITY CLAUSES FOR VENDOR PRODUCTS AND SERVICES III. IV. LIMITATIONS OF LIABILITY. a) Vendor shall not have any liability to Customer for incidental, id consequential or punitive damages related to any Claim, including without limitation liability for claims for lost profits or revenues. b) Vendor s total liability to Customer under paragraph I [Indemnification Clause] shall be limited to the lesser of (i) () the amounts paid by Customer under this Agreement from the Effective Date to the date of its termination for all allegedly infringing Products or (ii) Y Dollars ($Y). c) Each party acknowledges that the limitations of liability in paragraph III(b) reflect the allocation of risk agreed by the parties and Customer acknowledges that Vendor would not have entered into this Agreement without such limitations of liability. WAIVER OF WARRANTY. Except as set forth in paragraphs I and [Reps and Warranties], Vendor makes no express or implied representations or warranties to Customer, including without limitation warranties of merchantability and fitness for a particular purpose. 58

59 One Response to Indemnification Risk Intellectual Property Liability Insurance Thomas J. Scott, Jr. Goodwin Procter LLP July 22, Goodwin Procter LLP

60 IP Liability Insurance Overview Indemnification shortfalls areas which h standard d indemnification ifi is inadequate Patent Infringement Liability Insurance Policies Important Terms for Defensive Infringement Policies Important Terms for Offensive Enforcement Policies Important Terms for Multi-Peril Policies Important Terms for Across All Policies Current Vulnerabilities of Patent Insurance Goodwin Procter LLP 60

61 Indemnification shortfalls areas which standard indemnification is inadequate Customer loss of revenue Damage to downstream customer relationships Customer modifications to components Overseas Suppliers Enforcing indemnity Identifying and locating original suppliers Multiple indemnitees or suppliers Performing financial due diligence Performing due diligence on IP As a result, customers often contractually require suppliers to carry insurance Goodwin Procter LLP 61

62 Patent Infringement Liability Insurance Policies CGL policies exclude intellectual property Advertising i injury rarely covers patent t infringement i Specialty policies for intellectual property Offensive Enforcement Liability (also Pursuit Coverage and Infringement Abatement ) Defensive Infringement Liability Multi-Peril il Liability (also First-party t IP Coverage ) Goodwin Procter LLP 62

63 Important Terms for Defensive Infringement Policies Costs Legal defense Damages Settlement Parties Indemnified customers Products Component part or material products Finished products Claims Warning letters Injunctive relief Damages Counterclaims Mix of covered and uncovered claims Goodwin Procter LLP 63

64 IP Liability Insurance Survey Richard S. Betterley, Intellectual Property and Media Liability Insurance Market Survey 2010 (2010) Goodwin Procter LLP 64

65 IP Liability Insurance Survey Patent Infringement Liability Insurance Policies Defensive Enforcement Policies- Definition of Coverage Carrier Blanket Patents Trademarks Copyrights Chartis No. However, available on a case by case basis Yes No No Glencairn Yes, unless not requested Yes Yes Yes IPISC For scheduled products, product categories, activities Yes Yes Yes Kiln Possible depends on size of Patent Yes Yes Yes Portfolio and industry class SAMIAN Yes, notably, SAMIAN insures the products, processes, services of the insured as well Yes Yes Yes Goodwin Procter LLP 65

66 IP Liability Insurance Survey Patent Infringement Liability Insurance Policies Defensive Enforcement Policies- Definition of Coverage Carrier Assertion of Patent Invalidity Counterclaims Chartis No No Reexamination in Patent Office of Named Insured s Patent Glencairn No No IPISC Yes N/A. However, as to third-party patents, yes Kiln N/A N/A Goodwin Procter LLP 66

67 Important Terms for Offensive Enforcement Policies Costs Reimbursement to insurers Economic benefits of offensive litigation Patents Claims Invalidity counterclaims Reexamination proceedings Declaratory judgment actions Goodwin Procter LLP 67

68 IP Liability Insurance Survey Patent Infringement Liability Insurance Policies Offensive Enforcement Policies- Definition of Coverage Carrier Blanket Patents Trademarks Copyrights Glencairn Yes Yes Yes Yes IPISC Scheduled IP Yes Yes Yes SAMIAN Yes Yes Yes Yes Goodwin Procter LLP 68

69 IP Liability Insurance Survey Patent Infringement Liability Insurance Policies Offensive Enforcement Policies- Definition of Coverage Carrier Suits Brought Against Third Party Defense of Patent Invalidity Claims Reexamination in Patent Office of Named Insured s Patent t Suits Against Terminated Licensees Glencairn Yes Yes Yes No, unless still contractually bound Reissue Costs to Strengthen Patent Claims Yes IPISC Yes Yes Yes Yes, for infringement Yes SAMIAN Yes Yes Yes Yes Yes Goodwin Procter LLP 69

70 Important Terms for Multi-Peril Policies Loss of intellectual property value Business income Profits Royalties Declared Value Currently no authority interpreting the Multi-Peril policy language Goodwin Procter LLP 70

71 Important Terms for Any Policy Temporal limitations Geographic limitationsit ti Prior knowledge of potential infringement or threat of infringement Self-insured retention or deductible Coinsurance Endorsements Appeals Goodwin Procter LLP 71

72 Important Terms for Any Policy- Survey of Exclusions Chartis Carrier Product Pre-existing Infringement Patent Infringement Indemnity Insurance Dishonest, Fraudulent Criminal Malicious Acts Intentional Acts Yes Yes Yes No Liability for Judgments and Damages Glencairn Agreement, Pursuit, Defense Yes Yes Yes Optional IPISC Enforcement Yes Yes Yes Judgments and damages usually included Defense No Yes Yes Judgments and damages usually included Kiln First-party IP Excluded unless there are exceptional circumstances Yes Yes Yes SAMIAN IPEnforcer Yes, but only if known Yes Yes No in respect of Enforcement by the Insured prior to inception 'Opponents costs which are covered Yes in respect of Damages arising from failed enforce-ment action by the Insured IPGuard Infringement Defense Yes Yes Yes No Goodwin Procter LLP 72

73 Important Terms for Any Policy- Survey of Exclusions Carrier Product Expenses Incurred Prior to Authorization Breach of Contract by Licensees Antitrust Counterclaims Patent Infringement of Another Where Named Insured Must Defend Chartis Patent Infringement Indemnity Insurance Yes Yes, Yes Yes Glencairn Agreement, Pursuit, Defense Yes Only if Agreement section not opted for No Only if Agreement section not opted for IPISC Enforcement No Yes Yes Yes Defense No Yes Yes No Kiln First-party IP N/A N/A N/A N/A SAMIAN Enforcement Yes No No Yes Infringement Yes No No Yes First-party Loss of Value and/or Related Revenue N/A N/A N/A N/A After the Event Yes Yes Yes Yes Enforcement Yes No No Yes Goodwin Procter LLP 73

74 Important Terms for Any Policy- Survey of Exclusions Carrier Product Declaratory Judgments Punitive Damages Consequential Damages Chartis Patent No Yes Yes Yes Infringement Indemnity Insurance Glencairn Agreement, Pursuit, Defense No Yes Yes Yes IPISC Enforcement No Yes Yes Yes Defense Yes Yes Yes Yes Fines or Penalties Kiln First-party IP N/A N/A N/A N/A SAMIAN Enforcement No Yes Yes Yes Infringement Yes Yes Yes Yes First-party Loss of Value and/or Related Revenue N/A N/A N/A N/A After the Event No N/A N/A N/A Enforcement No Yes Yes Yes Goodwin Procter LLP 74

75 Current Vulnerabilities of Patent Insurance Limited policy availability Cost Scope of coverage Exclusions Endorsements Uncertainty in valuation of claims Calculation of infringement damages Direct vs. contributory infringement Goodwin Procter LLP 75

76 How to Use Patent Insurance to Address Risks Share the cost of insurance policies Add coverage to vendor insurance programs Broaden insurance policy Include indemnitees Include customers not indemnified by supplier Cover situations where supplier cannot honor its indemnification obligation Cover situations where indemnification does not apply or only partially applies Cover situations where indemnification is capped or there is a limitation of liability Goodwin Procter LLP 76

77 IP Liability Insurance Special thanks to Kimberly Klein Cauthorn Director, DUFF & PHELPS 1111 Bagby, Suite 1900 Houston, Texas Phone: Mobile: Fax: com Goodwin Procter LLP 77