IP Agreements: Structuring Indemnification and Limitation of Liability Provisions to Allocate Infringement Risk

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1 Presenting a live 90-minute webinar with interactive Q&A IP Agreements: Structuring Indemnification and Limitation of Liability Provisions to Allocate Infringement Risk TUESDAY, OCTOBER 4, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Kenneth A. Sprang, Managing Member, Washington International Business Counsel, Washington, D.C. Jeremy Younkin, Partner, Foley Hoag, Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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6 Indemnity means an acknowledgement and promise by one party to cover the potential liability suffered by the other. English law defines indemnity as a promise to save a person harmless from the consequences of an act; the promise may be express or implied from the circumstances of the case In short, an indemnity enables the "indemnified" to seek reimbursement ("indemnity") for money forced to pay to a third party as a result of an injury, caused by the indemnifier. 6

7 Some agreements will have representations and warranties made by one party or the other. Statements of fact about a party's business, assets and financial condition. Allocate economic risk between the parties indemnification provisions must provide a remedy if reps and warranties are breached For example, a seller or licensor might represent and warrant that the licensed product does not infringe upon the intellectual property of any other entity. 7

8 Purpose of indemnification provisions is for Indemnitor to hold Indemnitee harmless, and secure Indemnitee against losses or damages; Losses or damages usually from third party Indemnitee seeks to include indemnification provisions in its legal agreements to maximize the protection it can receive from its business partners, and allocate some of the inherent risk in the deal to its business partner. 8

9 Indemnification seeks to protect Indemnitee from the unknown. Cannot control the actions or omissions of Indemnitor In sale must rely on representations and warranties of seller Indemnification clause provides remedy for Errors and omissions of indemnitor Criminal conduct of indemnitor Breach of warranties and representations of indemnitor Failure of indemnitor to exercise due diligence Could be unknown risks of infringement on intellectual property of third parties Think of indemnification like insurance 9

10 Contractual Indemnity Contractual indemnity is different from common law indemnity. Indemnity provisions in a contract allocate the risk of a business transaction between the two parties by obligating one party to pay the expenses incurred by the other party under certain circumstances. 10

11 Expansion of class of protected parties Expansion of recoverable losses Mechanics Completeness Customized protection. Indemnity should expressly identify the parties and scope of claims covered by the provision. Ordinarily, seller or licensor will indemnify buyer or licensee. Consider whether parents, subsidiaries, affiliates, officers, directors, employees and agents as well as successors, heirs, and assigns should be covered. 11

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13 What is the purpose of the indemnification provision in your agreement? Supplier of goods/services Supplier of goods/services using component parts/services Supplier of component parts/services Buyer/user of goods/services Buyer/user of goods/services using component parts/services Retailer 13

14 Buyer only. Buyer plus directors, officers, employees, stockholders and affiliates (parent, subsidiary, etc.). Buyer plus directors, officers, employees, stockholders and affiliates plus funding sources or other assignees. Seller. Look carefully at state legislation with regard to directors and officers. Avoid piercing of the veil. 14

15 What products must be accused in order to trigger indemnification obligation? Consider: Products made to buyer s specifications. Products altered by buyer. Buyer s combination of seller s product with 3 rd party products. Will meritless claims trigger indemnification obligation? Will assertion of patents issued after agreement was signed trigger obligation? Consider each potential IP infringement claim that could arise. 15

16 Indemnification In IP Agreements Strafford Webinar October 4, 2016

18 How Will Indemnification Affect You? What is the purpose of the indemnification provision in your agreement? - Supplier of goods/services Supplier of goods/services using component parts/services - Supplier of component parts/services - Buyer/user of goods/services Buyer of goods/services using component parts/services - Retailer 2015 Foley Hoag LLP. All Rights Reserved. 18

19 What Claims Are Covered? What products must be accused in order to trigger indemnification obligation? - Consider: Products made to buyer s specifications. Products altered by buyer. Buyer s combination of seller s product with 3 rd party products. Will meritless claims trigger indemnification obligations? Will assertion of patents issued after agreement was signed trigger obligations? 2015 Foley Hoag LLP. All Rights Reserved. 19

20 Control and Management of Defense Does indemnitee have right to separate counsel? Who selects counsel? How are decisions about litigation strategy made? What are the rights of the indemnitee to approve settlement? 2015 Foley Hoag LLP. All Rights Reserved. 20

21 Financial Considerations Should amount of indemnification be capped? - What is the relationship between revenue from sale or indemnitor s goods/services and revenue from sale of accused product? Does indemnitor have the funds to cover litigation costs? An adverse judgment? What happens if the indemnitee is enjoined? 2015 Foley Hoag LLP. All Rights Reserved. 21

23 U.C.C (3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications Foley Hoag LLP. All Rights Reserved. 23

24 U.C.C (3) Do you want to otherwise agree? What constitutes a rightful claim may vary from jurisdiction to jurisdiction. - Pac. Sunwear of Calif. v. Olaes Enters. 167 Cal. App. 4 th 466 (2008) - EZ Tag Corp. v Casio Am., Inc., 861 F.Supp.2d 181 (S.D.N.Y. 2012) Consider who should pay for the defense of baseless infringement claims Foley Hoag LLP. All Rights Reserved. 24

25 U.C.C (3) Damages for breach may also vary from jurisdiction to jurisdiction. - EZ Tag Corp. v. Casio Am., Inc., 861 F. Supp.2d 181 (S.D.N.Y. 2012) - Insituform Techs., Inc. v. AMerik Supplies, Inc., 850 F. Supp.2d 1336 (N.D. Ga. 2012) Foley Hoag LLP. All Rights Reserved. 25

26 U.C.C (3) The hold harmless clause of 2-312(3) protects sellers in some situations. - [S]hifts all costs, including attorneys fees to the buyer who furnishes a seller with specifications that lead to a claim of patent infringement. RFR Indus. v. Rex-Hide Indus., 2005 U.S. Dist LEXIS 44809, at *3 (N.D. Tx. 2005) Foley Hoag LLP. All Rights Reserved. 26

27 U.C.C (3) The seller may also be protected if the infringement claim arises from the buyer s combination of the seller s product with some other products. See Chemtron, Inc. v. Aqua Prods., 830 F. Supp. 314, 316 (E.D. Va. 1993). Consider who should pay when infringement claim is based on: - a party s alteration of the contracted-for product - a party s combination of the contracted-for product with third-party products 2015 Foley Hoag LLP. All Rights Reserved. 27

28 U.C.C (3) U.C.C. specifies procedures for invoking rights. A seller that recognizes its duty to indemnify and defend will often be entitled to control the defense and settlement - The U.C.C. allows the seller to demand that the buyer turn over control of the litigation to the seller. U.C.C (5)(b). Consider the parties rights in litigation, including rights to select counsel and experts, make (or approve) strategic decisions, and control settlement Foley Hoag LLP. All Rights Reserved. 28

30 Does indemnitee have right to separate counsel? Who selects counsel? How are decisions about litigation strategy made? What are the rights of the indemnitee to approve settlement? 30

31 Consider all types of damages that could occur due to claims of infringement. Should amount of indemnification be capped? What is the relationship between revenue from sale of indemnitor s goods/services and revenue from sale of accused product? Does indemnitor have the funds to cover litigation costs? An adverse judgment? What happens if the indemnitee is enjoined? 31

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33 Indemnity provision should be integrated with other risk allocation provisions Dispute resolution mechanism. What law governs? Where will dispute resolution be held? What will you include or exclude? What about consequential damages? 33

34 Is funding of indemnity obligation necessary? Use of escrow? Is there a right to set off amounts owed to cover expenses related to indemnity? 34

35 In asset purchase agreement, Buyer could assume only specifically enumerated liabilities. For example, buyer might exclude any liability for patent infringement. Purchase price may be contingent and tied to reps and warranties. Deferred purchase price, with right of set off in event of breach. Escrow portion of purchase price. Use of a subsidiary to effect the acquisition in order to limit Buyer's risk to the amount invested in the subsidiary. 35

36 Absent agreement to the contrary, many provisions of the Agreement, including reps, warranties, will not survive closing. Survival clause provides that reps and warranties survive the closing of the deal. Indemnitor will likely want a clause which limits the time of survival of the reps and warranties. Indemnification provisions, through which reps and warranties are enforced, should clearly survive as well. 36

37 Without a survival clause, a court might conclude that reps and warranties addressing pre-closing state of facts merge with the consummation of the transaction and do not form the basis of a remedy after the closing. Most deals provide for survival of reps and warranties ABA survey found that only 4% of M&A deals provide expressly for no survival while only 1% were silent on the issue. Public targets: Reps and warranties generally do not survive. Large private targets with significant leverage are often able to negotiate away the survival clause. In one law firm survey of a random sample of deals with large private targets, 25% of the agreements provided for no survival. 37

38 A clause limiting the time of survival of reps and warranties, etc. works in conjunction with the survival clause. Time limitation clause acts as a general limitation on the bringing of claims arising from reps and warranties and from obligations to be performed pre-closing. Time limit is heavily negotiated provision. One of several elements to be negotiated in the context of indemnification and related issues. Need enough time to reasonably discover inaccuracies in reps and warranties. Need at least one post-closing audit ABA survey found that 12 and 18 months are the most common time limits for reps and warranties 38

39 Agreements often provide for exceptions to the time limits on reps and warranties. ABA Model Stock Purchase Agreement provides that claims arising from breach of reps and warranties relating to capitalization, ownership of shares, taxes, ERISA matters and environmental matters may be made at any time For exceptions to the general time limitation, agreements often provide a different formulation: until [90] days following the end of the applicable statue of limitations for breach of reps and warranties relating to statutory matters, such as taxes, ERISA matters and environmental matters; indefinitely for breach of fundamental reps and warranties, such as capitalization and stock ownership reps and warranties 39

40 Indemnity provisions often have clauses reducing the statute of limitations that might otherwise govern claims. Drafting point: Use clear, unequivocal language to reduce statutory limitations periods 40

41 Recognize interests of Indemnitor and Indemnitee are different. Indemnitor may wish to settle as a strictly pragmatic, business decision. Indemnities may prefer to fight a claim on principle or because of future implication. If matter indemnified is covered by insurance, neither party may have much voice. 41

42 KENNETH A. SPRANG Washington International Business Counsel, LLP Washington, DC/Philadelphia, PA (202) FAX: (202)

IP Agreements: Structuring Indemnification and Limitation of Liability Provisions to Allocate Infringement Risk

Presenting a live 90-minute webinar with interactive Q&A IP Agreements: Structuring Indemnification and Limitation of Liability Provisions to Allocate Infringement Risk TUESDAY, SEPTEMBER 1, 2015 1pm Eastern