Negotiating and Drafting Patent Indemnification Provisions October 6, 2011 Ira Schreger Vinson & Elkins LLP
Agenda General Considerations Implied Warranty for Sales of Goods and Services General Drafting Considerations Considerations Unique to Patent Law IP Liability Insurance 2
General Considerations
Definitions: Indemnity An indemnity is [a] collateral contract or assurance, by which one person engages to secure another against an anticipated loss. Resolution of patent validity is not required for resolution of indemnity 4
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 5
Purpose of an Indemnification Clause The purpose of an indemnification clause is to allocate risk between the indemnifying party (the indemnitor) and the indemnified party (the indemnitee). The first and most important step is to determine what your client desires to achieve under an indemnification clause. This will be your starting point for both drafting and negotiating. 6
A Word of Caution Indemnification clauses are frequently negotiated at the end of the drafting process. This is the point where many people do not want to be bothered to spend the time negotiating what is perceived to be a boiler-plate provision. However, due to the far-reaching impact of indemnification clauses it is important to spend time thinking about how to best protect your client (whether the indemnitee or indemnitor). Indemnification clauses should not be rushed. 7
Defend, Indemnify and Hold Harmless The indemnitor hereby agrees to defend, indemnify and hold harmless the indemnitee against any claims of patent infringement brought by third parties. 8
A Sample Indemnification Provision Scope. The Licensor (the Indemnitor ) hereby indemnifies the Licensee and its directors, officers, employees, and agents and their respective successors, heirs and assigns (the Indemnitee ) against any and all damages arising out of, resulting from or related to any claim of patent infringement brought by a Third Party accusing any product manufactured by Licensee pursuant to this Agreement of infringing a U.S. patent (a Third Party Claim ), subject to the limitations set forth below. Notice. If the Indemnitee seeks indemnification, it shall give written notice to the Indemnitor promptly after the Indemnitee becomes aware of the facts giving rise to such claim for indemnification (an Indemnified Claim ), and in any event within 30 days, specifying in reasonable detail the factual basis of the Indemnified Claim and stating the amount of the damages (or if not known, a good faith estimate of the amount of damages). Control. In the event of receipt of notice of a Third Party Claim, the Indemnitor shall have the right to control and defend such Third Party Claim, in such manner as it may deem appropriate. Should the Indemnitor decline to control and defend the Third Party Claim, the Indemnitee shall have the right to control and defend the Third Party Claim in such manner as it may deem appropriate. The controlling party shall select counsel, contractors, experts and consultants of recognized standing and competence reasonably acceptable to the other party, shall take reasonable steps necessary in the investigation, defense or settlement thereof, and shall diligently and promptly pursue the resolution thereof. All parties shall cooperate fully with the party conducting the defense of any Third Party Claim. Settlement. The party controlling the defense of any Third Party Claim shall be authorized to consent to a settlement of, or the entry of any judgment arising from, any Third Party Claims subject to the following provisions. If the Indemnitor is controlling the litigation, Indemnitee must consent to any such settlement, such consent not to be unreasonably withheld. Indemnitee s consent will be deemed unreasonably withheld unless the settlement would encumber any of its assets or contains any restriction or condition that would apply to the Indemnitee or to the conduct of its business. If the Indemnitee is controlling the litigation, it may not enter into a settlement or consent to an entry of judgment with respect to any Third Party Claim without the express written consent of the Indemnitor, not to be unreasonably withheld. Limitations. The Indemnitor s minimum liability to Indemnitee hereunder shall be $750,000. The Indemnitor s maximum liability to Indemnitee hereunder shall be $10,000,000. In no case shall Indemnitor be liable for any consequential, incidental, indirect, special, punitive or exemplary damages (including, without limitation, lost profits, business or goodwill) suffered or incurred by Indemnitee. In no case shall Indemnitor be liable for any damages arising out of Indemnitee s negligent or reckless conduct. Reimbursement. Indemnitee shall responsible for paying any damages arising out of a Third Party Claim to the Third Party. Indemnitor shall reimburse Indemnitee within thirty (30) days of Indemnitee making such a payment. The amount of the reimbursement shall be reduced by any amount Indemnitee receives or will receive from 9 (a) an insurance carrier or (b) a joint infringer.
Implied Warranty for Sales of Goods and Services
UCC Philosophy Generally When the goods are part of the seller's normal stock and are sold in his normal course of business, it is his duty to see that no claim of infringement of a patent or trademark by a third party will mar the buyer's title. A sale by a person other than a dealer, however, raises no implication in its circumstances of such a warranty. Nor is there such an implication when the buyer orders goods to be assembled, prepared or manufactured on his own specifications. If, in such a case, the resulting product infringes a patent or trademark, the liability will run from buyer to seller. There is, under such circumstances, a tacit representation on the part of the buyer that the seller will be safe in manufacturing according to the specifications, and the buyer is under an obligation in good faith to indemnify him for any loss suffered. 11
Sale of Goods Under UCC 2-312 Unless otherwise agreed, a seller that 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 that furnishes specifications to the seller must hold the seller harmless against any such claim that arises out of compliance with the specifications. 12
Sale of Goods Under UCC 2-312 The seller must be a merchant regularly dealing in the goods. The indemnity is limited to the goods themselves as delivered it does not cover the buyer s use of the goods. The implied warranty only covers rightful claims, which has been defined by courts to be more than frivolous or of a substantial nature. The implied warranty does not apply if the buyer gives the specifications for the product to the seller. Any patent infringement that arises here will trigger buyer s good faith duty to indemnify the seller for losses suffered. 13
And Remember Two parties can always agree to not be covered by the implied warranty provided in UCC 2-312. 14
General Drafting Considerations
Drafting an Indemnification Clause Drafting an indemnification clause is necessary when: The parties involved in a sale of goods do not wish to be bound by the implied warranty provided in UCC 2-312. The parties are involved in a transaction not covered by UCC 2-312, including: A licensing agreement A joint research and development agreement 16
Indemnification Provision Scope. The Licensor (the Indemnitor ) hereby indemnifies the Licensee and its directors, officers, employees, and agents and their respective successors, heirs and assigns (the Indemnitee ) against any and all damages arising out of, resulting from or related to any claim of patent infringement brought by a Third Party accusing any product manufactured by Licensee pursuant to this Agreement of infringing a U.S. patent (a Third Party Claim ), subject to the limitations set forth below. Notice. If the Indemnitee Scope. seeks The indemnification, Licensor it shall (the give Indemnitor ) written notice the Indemnitor hereby promptly after the Indemnitee becomes indemnifies aware of the facts the giving Licensee rise to such claim and for its indemnification directors, (an Indemnified officers, Claim ), and in any event within 30 days, specifying in reasonable detail the factual basis of the Indemnified Claim and stating the amount of the employees, damages (or if not and known, agents a good faith and estimate their of amount respective of damages). Control. In the event of receipt of notice of a Third Party Claim, the Indemnitor shall have the right to control and defend such Third successors, Party Claim, in such heirs manner and as it may assigns deem appropriate. (the Indemnitee ) Should the Indemnitor decline to control and defend against the Third Party any Claim, and the all Indemnitee damages shall have arising the right to out control of, and resulting defend the Third Party Claim in such manner as it may deem appropriate. The controlling party shall select counsel, contractors, experts and consultants from of recognized or related standing and to competence any claim reasonably of patent acceptable infringement to the other party, shall take reasonable steps necessary in the investigation, defense or settlement thereof, and shall diligently and promptly pursue the resolution brought thereof. by All parties a Third shall cooperate Party fully accusing with the party any conducting product the defense of any Third Party Claim. manufactured by Licensee pursuant to this Settlement. The party controlling the defense of any Third Party Claim shall be authorized to consent to a settlement of, or Agreement the entry of any judgment of infringing arising from, any a U.S. Third Party patent Claims subject (a Third to the following Party provisions. If the Indemnitor is controlling the litigation, Indemnitee must consent to any such settlement, such consent not to be unreasonably Claim ) withheld. Indemnitee s subject consent to the will be limitations deemed unreasonably set forth withheld below. unless the settlement would encumber any of its assets or contains any restriction or condition that would apply to the Indemnitee or to the conduct of its business. If the Indemnitee is controlling the litigation, it may not enter into a settlement or consent to an entry of judgment with respect to any Third Party Claim without the express written consent of the Indemnitor, not to be unreasonably withheld. Limitations. The Indemnitor s minimum liability to Indemnitee hereunder shall be $750,000. The Indemnitor s maximum liability to Indemnitee hereunder shall be $10,000,000. In no case shall Indemnitor be liable for any consequential, incidental, indirect, special, punitive or exemplary damages (including, without limitation, lost profits, business or goodwill) suffered or incurred by Indemnitee. In no case shall Indemnitor be liable for any damages arising out of Indemnitee s negligent or reckless conduct. Reimbursement. Indemnitee shall responsible for paying any damages arising out of a Third Party Claim to the Third Party. Indemnitor shall reimburse Indemnitee within thirty (30) days of Indemnitee making such a payment. The amount of the reimbursement shall be reduced by any amount Indemnitee receives or will receive from 17 (a) an insurance carrier or (b) a joint infringer.
What Types of Claims will be Covered? Indemnitor Goal to have as few claims covered as possible. Strategies: Limit to claims brought by specific third parties. Limit the time that the indemnification provision will apply. Limit the indemnification to the product itself, and not to use of the product. Indemnitee Goal cover as many claims as possible. Strategies: Do not accept limitations on the subject matter of the claims or who can bring them. Try to obtain indemnification for a claim that results from a misrepresentation or breach of a warranty. 18
Who Will be Covered? Strategies Indemnitor include fewer people and entities Indemnitee include as many people and entities as possible Generally the indemnification should include the indemnitee s directors, officers, employees, and agents. Consider whether the indemnification should include Indemnitee s affiliates. If the transaction allows for sublicensing, will the indemnitee s sublicensee be indemnified? Will the indemnitee s successors, heirs and assigns be covered? Will indemnitee s customers be covered? 19
Indemnification Provision Scope. The Licensor (the Indemnitor ) hereby indemnifies the Licensee and its directors, officers, employees, and agents and their respective successors, heirs and assigns (the Indemnitee ) against any and all damages arising out of, resulting from or related to any claim of patent infringement brought by a Third Party accusing any product manufactured by Licensee pursuant to this Agreement of infringing a U.S. patent (a Third Party Claim ), subject to the limitations set forth below. Notice. If the Indemnitee seeks indemnification, it Notice. If the Indemnitee seeks indemnification, it shall give written notice the Indemnitor after the Indemnitee becomes shall aware give of the written facts giving notice rise to such to claim the for Indemnitor indemnification (an promptly Indemnified Claim ), and in any event within 30 days, specifying in reasonable detail the factual basis of the Indemnified Claim and stating the amount of the after damages the (or Indemnitee if not known, a good becomes faith estimate of aware the amount of damages). the facts Control. In the giving event of receipt rise of to notice such of a Third claim Party Claim, for indemnification the Indemnitor shall have the (an right to control and defend such Third Party Claim, in such manner as it may deem appropriate. Should the Indemnitor decline to control and defend Indemnified the Third Party Claim, Claim ), the Indemnitee and shall in have any the event right to control within and defend 30 the Third Party Claim in such manner as it may deem appropriate. The controlling party shall select counsel, contractors, experts and consultants days, of recognized specifying standing and competence in reasonable reasonably detail acceptable the to the factual other party, shall take reasonable steps basis necessary of in the investigation, Indemnified defense or Claim settlement and thereof, stating and shall the diligently and promptly pursue the resolution thereof. All parties shall cooperate fully with the party conducting the defense of any Third Party Claim. amount of the damages (or if not known, a good Settlement. The party controlling the defense of any Third Party Claim shall be authorized to consent to a settlement of, or faith the entry estimate of any judgment of arising the from, amount any Third of Party damages). Claims subject to the following provisions. If the Indemnitor is controlling the litigation, Indemnitee must consent to any such settlement, such consent not to be unreasonably withheld. Indemnitee s consent will be deemed unreasonably withheld unless the settlement would encumber any of its assets or contains any restriction or condition that would apply to the Indemnitee or to the conduct of its business. If the Indemnitee is controlling the litigation, it may not enter into a settlement or consent to an entry of judgment with respect to any Third Party Claim without the express written consent of the Indemnitor, not to be unreasonably withheld. Limitations. The Indemnitor s minimum liability to Indemnitee hereunder shall be $750,000. The Indemnitor s maximum liability to Indemnitee hereunder shall be $10,000,000. In no case shall Indemnitor be liable for any consequential, incidental, indirect, special, punitive or exemplary damages (including, without limitation, lost profits, business or goodwill) suffered or incurred by Indemnitee. In no case shall Indemnitor be liable for any damages arising out of Indemnitee s negligent or reckless conduct. Reimbursement. Indemnitee shall responsible for paying any damages arising out of a Third Party Claim to the Third Party. Indemnitor shall reimburse Indemnitee within thirty (30) days of Indemnitee making such a payment. The amount of the reimbursement shall be reduced by any amount Indemnitee receives or will receive from 20 (a) an insurance carrier or (b) a joint infringer.
Notice Indemnitor The indemnitee should be required to notify the indemnitor promptly (but in any event within a specified time period). The notice must in writing. The notice should include a statement of damages sought or a good faith estimate. The indemnitor should be informed of possible claims. Failure to comply with the notification provision will render the indemnification provision invalid. Indemnitee There should not be a time limit on informing the indemnitor of claims. Breach of the notification provision should not have any consequences unless indemnitor can show it was harmed by the failure to notify. The indemnitee need not inform the indemnitor of threatened suits, only of filed suits. 21
Indemnification Provision Scope. Effective as of the Closing, the Licensor (the Indemnitor ) hereby indemnifies the Licensee and its directors, officers, employees, and agents and their respective successors, heirs and assigns (the Indemnitee ) against any and all damages arising out of, resulting from or related to any claim of patent infringement brought by a Third Party accusing Control. any product In manufactured the event by Investor of receipt pursuant of to this notice Agreement of of a infringing Third a U.S. patent (a Third Claim ). Party Claim, the Indemnitor shall have the right to Notice. If the Indemnitee seeks indemnification, it shall give written notice to the Indemnitor promptly after the Indemnitee becomes control aware and of the facts defend giving rise such to Third claim for indemnification Party Claim, (an Indemnified in such Claim ), and in any event within 30 days, specifying in reasonable detail the factual basis of the Indemnified Claim and stating the amount of the manner Damages (or as if not it known, may a deem good faith appropriate. estimate of the amount Should of Damages). the Control. In the Indemnitor event of receipt of notice decline of a Third to Party control Claim, the and Indemnitor defend shall have the the Third right to control and defend such Third in such manner as may deem appropriate. Should Indemnitor decline to control and defend Party the Third Claim, Party Claim, the the Indemnitee shall have shall the right have to control the and right defend to the Third Party Claim in such manner as it may deem appropriate. The controlling party shall select counsel, contractors, experts and consultants control of recognized and standing defend and competence the Third reasonably Party acceptable Claim to the in other such party, shall take reasonable steps manner necessary in as the investigation, it may deem defense appropriate. or settlement thereof, and The shall controlling diligently and promptly pursue the resolution thereof. All parties shall cooperate fully with the party conducting the defense of any Third Party Claim. party shall select counsel, contractors, experts and Settlement. The party controlling the defense of any Third Party Claim shall be authorized to consent to a settlement of, or consultants the entry of any judgment of recognized arising from, any Third standing Party Claims and subject competence, to the following provisions. If the Indemnitor shall is controlling take the reasonable litigation, Indemnitee steps must consent necessary to any such settlement, in the such consent not to be unreasonably withheld. Indemnitee s consent will be deemed unreasonably withheld unless the settlement would encumber investigation, any of its assets or contains defense any restriction or settlement or condition that would thereof, apply to and the Indemnitee or to the conduct of its business. If the Indemnitee is controlling the litigation, it may not enter into a settlement or consent to an entry shall of judgment diligently with respect and to any promptly Third Party Claim pursue without the express resolution written consent of the Indemnitor, not thereof. to be unreasonably All withheld. parties shall cooperate fully with the Limitations. The Indemnitor s minimum liability to Indemnitee hereunder shall be $750,000. The Indemnitor s maximum liability party to Indemnitee conducting hereunder shall the be $10,000,000. defense In of no any case shall Third Indemnitor Party be liable for any consequential, incidental, indirect, special, punitive or exemplary damages (including, without limitation, lost profits, business or goodwill) Claim. suffered or incurred by Indemnitee. In no case shall Indemnitor be liable for any damages arising out of Indemnitee s negligent or reckless conduct. Reimbursement. Indemnitee shall responsible for paying any damages arising out of a Third Party Claim to the Third Party. Indemnitor shall reimburse Indemnitee within thirty (30) days of Indemnitee making such a payment. The amount of the reimbursement shall be reduced by any amount Indemnitee receives or will receive from 22 (a) an insurance carrier or (b) a joint infringer.
Who Will Control the Defense? Indemnitor Since the indemnitor will ultimately have to pay the damages, the indemnitor has a strong interest in controlling the litigation. The indemnitor should also ensure that the indemnitee is required to cooperate with the defense efforts. Indemnitee While the indemnitee may like to control the litigation, its interest probably isn t as strong as the indemnitor. The indemnitee will likely have control of the relevant documents and witness, and should be prepared to cooperate with the indemnitor. 23
Indemnification Provision Scope. The Licensor (the Indemnitor ) hereby indemnifies the Licensee and its directors, officers, employees, and agents and their respective successors, heirs and assigns (the Indemnitee ) against any and all damages arising out of, resulting from or related to any claim of patent infringement brought by a Third Party accusing any product manufactured Settlement. by Licensee pursuant The to party this Agreement controlling of infringing the a U.S. defense patent (a Third of Party any Claim ), subject to the limitations set forth below. Notice. If the Indemnitee Third Party seeks indemnification, Claim shall it be give written authorized notice to the to Indemnitor consent promptly to after a the Indemnitee becomes aware of the facts giving rise to such claim for indemnification (an Indemnified Claim ), and in any event within settlement 30 days, specifying of, in or reasonable the entry detail the of factual any basis judgment of the Indemnified arising Claim and stating the amount of the from, damages any (or if Third not known, Party a good faith Claims estimate subject of the amount to of damages). the following Control. In the event of receipt of notice of a Third Party Claim, the Indemnitor shall have right to control and defend such Third provisions. Party Claim, in such If manner the Indemnitor as may deem appropriate. is controlling Should the the Indemnitor litigation, decline to control and defend Indemnitee the Third Party Claim, must the consent Indemnitee shall to have any the such right to control settlement, and defend the such Third Party Claim in such manner as it may deem appropriate. The controlling party shall select counsel, contractors, experts and consultants consent of recognized not standing to and be competence unreasonably acceptable withheld. to the other party, shall take reasonable steps necessary in the investigation, defense or settlement thereof, and shall diligently and promptly pursue the resolution Indemnitee s thereof. All parties consent shall cooperate will fully be with deemed the party conducting unreasonably the defense of any Third Party Claim. withheld unless the settlement would encumber any of Settlement. The party controlling the defense of any Third Party Claim shall be authorized to consent to a settlement of, or its the assets entry of any or judgment contains arising from, any Third restriction Party Claims or subject condition to the following that provisions. If the Indemnitor is controlling the litigation, Indemnitee must consent to any such settlement, such consent not to be unreasonably would withheld. apply Indemnitee s to consent the Indemnitee will be deemed unreasonably or to the withheld conduct unless the of settlement its would encumber business. any of its assets or If contains the Indemnitee any restriction or condition is controlling that would apply the to the litigation, Indemnitee or to the conduct of its business. If the Indemnitee is controlling the litigation, it may not enter into a settlement or consent to an entry it may of judgment not with enter respect into any a Third settlement Party Claim without or consent the express written to an consent of the Indemnitor, not to be unreasonably withheld. Limitations. The entry Indemnitor s of judgment minimum liability with to Indemnitee respect hereunder to any shall be Third $750,000. Party The Indemnitor s Claim maximum liability without to Indemnitee the hereunder express shall be written $10,000,000. consent In no case shall of the Indemnitor Indemnitor, be liable for any consequential, incidental, indirect, special, punitive or exemplary damages (including, without limitation, lost profits, business or goodwill) not suffered to be or unreasonably incurred by Indemnitee. withheld. In no case shall Indemnitor be liable for any damages arising out of Indemnitee s negligent or reckless conduct. Reimbursement. Indemnitee shall responsible for paying any damages arising out of a Third Party Claim to the Third Party. Indemnitor shall reimburse Indemnitee within thirty (30) days of Indemnitee making such a payment. The amount of the reimbursement shall be reduced by any amount Indemnitee receives or will receive from 24 (a) an insurance carrier or (b) a joint infringer.
Settlement Generally, the controlling party will have settlement authority, subject to the other s party consent. The indemnitee should only be able to withhold consent if it will affect any of indemnitee s rights. The indemnitor should have broader discretion to reject a settlement because it will ultimately have to reimburse indemnitee for any damages. By way of example, indemnitee should have the right to consent to settlement if such settlement would prevent indemnitee from practicing a patent licensed under the agreement. 25
Indemnification Provision Scope. The Licensor (the Indemnitor ) hereby indemnifies the Licensee and its directors, officers, employees, and agents and their respective successors, heirs and assigns (the Indemnitee ) against any and all damages arising out of, resulting from or related to any claim of patent infringement brought by a Third Party accusing any product manufactured Limitations. by Licensee pursuant The to Indemnitor s this Agreement of infringing minimum a U.S. patent liability (a Third Party to Claim ), subject to the limitations set forth below. Notice. If the Indemnitee Indemnitee seeks indemnification, hereunder it shall shall give written be notice $750,000. to the Indemnitor The promptly after the Indemnitee becomes aware of the facts giving rise to such claim for indemnification (an Indemnified Claim ), and in any event within Indemnitor s 30 days, specifying maximum in reasonable detail liability the factual to basis Indemnitee of the Indemnified Claim and stating the amount of the damages (or if not known, a good faith estimate of the amount of damages). Control. In the hereunder event of receipt of shall notice of be a Third $10,000,000. Party Claim, the Indemnitor In no shall case have the shall right to control and defend such Third Party Claim, in such manner as it may deem appropriate. Should the Indemnitor decline to control and defend Indemnitor the Third Party Claim, be liable the Indemnitee for any shall have consequential, the right to control and defend the Third Party Claim in such manner as it may deem appropriate. The controlling party shall select counsel, contractors, experts and consultants incidental, of recognized standing indirect, and competence special, reasonably punitive acceptable or to exemplary the other party, shall take reasonable steps necessary in the investigation, defense or settlement thereof, and shall diligently and promptly pursue the resolution damages thereof. All (including, parties shall cooperate without fully with limitation, the party conducting lost the profits, defense any Third Party Claim. Settlement. The business party controlling or the goodwill) defense of any suffered Third Party Claim or shall incurred be authorized by to consent to a settlement of, or the entry of any judgment arising from, any Third Party Claims subject to the following provisions. If the Indemnitor Indemnitee. is controlling the litigation, In no Indemnitee case must shall consent Indemnitor any such settlement, be liable such consent not to be unreasonably withheld. Indemnitee s consent will be deemed unreasonably withheld unless the settlement would encumber for any any of its assets damages or contains arising any restriction out or condition of Indemnitee s that would apply to the Indemnitee or to the conduct of its business. If the Indemnitee is controlling the litigation, it may not enter into a settlement or consent to an entry negligent of judgment with or respect reckless to any Third conduct. Party Claim without the express written consent of the Indemnitor, not to be unreasonably withheld. Limitations. The Indemnitor s minimum liability to Indemnitee hereunder shall be $750,000. The Indemnitor s maximum liability to Indemnitee hereunder shall be $10,000,000. In no case shall Indemnitor be liable for any consequential, incidental, indirect, special, punitive or exemplary damages (including, without limitation, lost profits, business or goodwill) suffered or incurred by Indemnitee. In no case shall Indemnitor be liable for any damages arising out of Indemnitee s negligent or reckless conduct. Reimbursement. Indemnitee shall responsible for paying any damages arising out of a Third Party Claim to the Third Party. Indemnitor shall reimburse Indemnitee within thirty (30) days of Indemnitee making such a payment. The amount of the reimbursement shall be reduced by any amount Indemnitee receives or will receive from 26 (a) an insurance carrier or (b) a joint infringer.
Floors and Caps Floors are also known as nickel dime provisions. Floors and caps can be useful to the indemnitor. Floors can be used to ensure that the indemnitee cannot seek indemnification for small claims. Caps allow the indemnitor to know its maximum exposure (in a license transaction, caps are often tied to royalties). The indemnitee does not benefit from floors and caps. 27
Limitations Indemnitor Specifically exclude all claims arising out of indemnitee s acts or omissions, including willful patent infringement. The reimbursement should be reduced by: Insurance proceeds paid to indemnitee Third party payments to indemnitee (such as from a joint infringer) Tax benefits enjoyed by indemnitee due to the damage award Indemnitee All claims should be covered, regardless of how they accrue (if there is a carve-out for indemnitee s acts or omissions, then limit to negligence and recklessness). Specifically include claims related to willful patent infringement. If there is a reimbursement, it should only be reduced by: Insurance proceeds paid to indemnitee Third party payments to indemnitee (such as from a joint infringer) 28
Indemnification Provision Scope. The Licensor (the Indemnitor ) hereby indemnifies the Licensee and its directors, officers, employees, and agents and their respective successors, heirs and assigns (the Indemnitee ) against any and all damages arising out of, resulting from or related to any claim of patent infringement brought by a Third Party accusing any product manufactured by Licensee pursuant to this Agreement of infringing a U.S. patent (a Third Party Claim ), subject to the limitations set forth below. Notice. If the Indemnitee seeks indemnification, it shall give written notice to the Indemnitor promptly after the Indemnitee becomes Reimbursement. aware of the facts giving rise Indemnitee to such claim for indemnification shall responsible (an Indemnified for Claim ), and in any event within 30 days, specifying in reasonable detail the factual basis of the Indemnified Claim and stating the amount of the paying damages any (or if not damages known, a good faith arising estimate out of the of amount a Third of damages). Party Control. In the event of receipt of notice of a Third Claim, the have the right to control and defend such Third Claim Party Claim, to the in such Third manner Party. as it may deem Indemnitor appropriate. Should shall the reimburse Indemnitor decline to control and defend Indemnitee the Third Party Claim, within the Indemnitee thirty (30) shall have days the right of to Indemnitee control and defend the Third Party Claim in such manner as it may deem appropriate. The controlling party shall select counsel, contractors, experts and consultants making of recognized such standing a and payment. competence reasonably The amount acceptable to of the other party, shall take reasonable steps necessary in the investigation, defense or settlement thereof, and shall diligently and promptly pursue the resolution reimbursement thereof. All parties shall shall cooperate be reduced fully with the party by conducting any amount the defense of any Third Party Claim. Indemnitee receives or will receive from (a) an Settlement. The party controlling the defense of any Third Party Claim shall be authorized to consent to a settlement of, or insurance the entry of any judgment carrier arising or (b) from, a any joint Third Party infringer. Claims subject to the following provisions. If the Indemnitor is controlling the litigation, Indemnitee must consent to any such settlement, such consent not to be unreasonably withheld. Indemnitee s consent will be deemed unreasonably withheld unless the settlement would encumber any of its assets or contains any restriction or condition that would apply to the Indemnitee or to the conduct of its business. If the Indemnitee is controlling the litigation, it may not enter into a settlement or consent to an entry of judgment with respect to any Third Party Claim without the express written consent of the Indemnitor, not to be unreasonably withheld. Limitations. The Indemnitor s minimum liability to Indemnitee hereunder shall be $750,000. The Indemnitor s maximum liability to Indemnitee hereunder shall be $10,000,000. In no case shall Indemnitor be liable for any consequential, incidental, indirect, special, punitive or exemplary damages (including, without limitation, lost profits, business or goodwill) suffered or incurred by Indemnitee. In no case shall Indemnitor be liable for any damages arising out of Indemnitee s negligent or reckless conduct. Reimbursement. Indemnitee shall responsible for paying any damages arising out of a Third Party Claim to the Third Party. Indemnitor shall reimburse Indemnitee within thirty (30) days of Indemnitee making such a payment. The amount of the reimbursement shall be reduced by any amount Indemnitee receives or will receive from 29 (a) an insurance carrier or (b) a joint infringer.
Reimbursement Indemnitor The indemnitor should reimburse the indemnitee within a reasonable amount of time after indemnitee has paid damages to the third party. The reimbursement should exclude the limitations discussed previously, including monies paid to indemnitee by insurance or by joint defendants. Should be limited to monies paid to the third party and expressly exclude consequential or incidental damages. Indemnitee The indemnitor should pay the third party directly. In the case of reimbursement, indemnitor should be required to reimburse indemnitee within a specified maximum period after indemnitee pays the third party. Indemnitor should also be required to reimburse indemnitee for any consequential or incidental damages it suffers as a result of the suit. 30
Considerations Unique to Patent Law
Indemnifying Willful Patent Infringement Enhanced damages for willful patent infringement are considered to be punitive damages. Some states have codified or common law public policy against indemnifying a party against punitive damages. The UCC, however, does allow for indemnification of punitive damages (see UCC 2-715). 32
Joint Liability Under patent law, a party cannot ask for contribution from jointly and severally liable parties, so indemnification clauses need not take that into account. In a joint infringement situation, the court will apportion damages between the joint infringers. In such a case, the amount of damages should be limited to the damages actually incurred by the indemnitee. 33
Unconsidered Uses of Products It is possible that some uses of a product will infringe a third party patent while other uses will not. An indemnitor can protect itself from unconsidered uses by limiting the indemnification to certain uses of the product. 34
IP Liability Insurance
Indemnification Shortfalls 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 36
Patent Infringement Liability Insurance Policies Comprehensive General Liability policies exclude intellectual property Advertising injury rarely covers patent infringement Specialty policies for intellectual property Offensive Enforcement Liability (also Pursuit Coverage and Infringement Abatement ) Defensive Infringement Liability Multi-Peril Liability (also First-party IP Coverage ) 37
Defensive Infringement Policies Costs Defense Damages Settlement Parties Indemnified customers Products Component part or material products; finished products Claims Injunctive relief Damages Counterclaims Mix of covered and uncovered claims 38
Offensive Enforcement Policies Costs - Reimbursement to insurers Patents Claims Invalidity counterclaims Reexamination proceedings Declaratory judgment actions 39
Multi-Peril Policies Loss of intellectual property value Business income Profits Royalties Declared Value 40
Important Terms for Any Policy Temporal limitations Geographic limitations Prior knowledge of potential infringement or threat of infringement Self-insured retention or deductible Coinsurance Endorsements Appeals 41
Patent Insurance: Vulnerabilities Limited policy availability Cost Scope of coverage Exclusions Endorsements Uncertainty in valuation of claims Calculation of infringement damages Direct vs. contributory infringement 42
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 43
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