Basics of Intellectual Property Indemnification


Intellectual Property Indemnity – Generally

Indemnity clauses (sometimes referred to as "hold harmless clauses", "indemnity agreements" or "indemnity agreements") are common in agreements where one party desires to shift certain risks to another party. In intellectual property indemnification clauses, the risk is commonly associated with patent infringement, trademark infringement, copyright infringement, trade secrets, software issues, or some other intellectual property (IP) related risk. An indemnity clause may be limited to indemnification or it may also include the obligations to "defend" and / or "hold harmless" the other party. Intellectual property indemnity clauses are particularly dangerous for vendors because the costs to defend a typical IP claim could have exceeded the payments to the vendor under the agreement.

Intellectual Property Indemnity – Limits on Liability

Because the potential liability for indemnification obligations, especially for IP indemnity claims, may be so high, vendors will typically try to limit or cap their liability. One way this can be accomplished is to include a limitation of liability clause in the agreement and expressing applying that clause to cap or limit the indemnification clause. For example, if the agreement provides a $ 50,000 fee to the vendor to develop and deliver a software solution, the vendor may potentially be liable for significantly more if it is required to defend a third-party copyright infringement claim. However, if the limitation of the liability clause limits the vendor's total liability to payments actually received under the agreement and that limitation applies to the indemnification clause, then the vendor's liability is potentially capped at $ 50,000 even though the litigation of the claim could cost $ 100,000. Many purchasers with leases will demand unlimited or uncapped intellectual property indemnification. A potential compromise is for the buyer and vendor to agree that the indemnification liability will be capped at some of the vendor payments under the agreement.

IP Indemnity – 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 often require a representation and warranty that the software deliverable is free from claims by third parties and further that no third-party materials or materials for which the developer do not have permission have been incorporated into the software deliverable. These provisions are intended to protect the purchaser / licensor in the event a third party subsequently makes a claim for copyright infringement or trade secret misappropriation. If this occurs, the buyer / licensor will likely attempt to force the developer to defend the claim and pay for any damages or settlements.