IP Warranties and Indemnification: How Much is Reasonable?

Knowledgeable licensees of intellectual property (IP) seek indemnification protection to ensure that the licensed IP legitimately belongs to the licensor and not to a third party. This post explores the interplay between indemnification provisions and IP warranties.

While indemnification provisions vary from contract to contract, the following is illustrative:

Licensor will defend, indemnify and hold Licensee harmless from all costs, expenses, and damages arising from any third-party claim alleging that the Licensed IP infringes any patent or copyright or misappropriates any trade secret (a “Claim”), provided that Licensee has given Licensor prompt notice of the Claim, allows Licensor sole control of the defense of the Claim and of all negotiations for its settlement or compromise, and cooperates in all reasonable ways with Licensor’s defense or settlement of the Claim. If a Claim results in an injunction precluding Licensee’s use of the Licensed IP, Licensor will, at its option and expense, either (a) procure for Licensee the right to continue the enjoined use, or (b) replace or modify the Licensed IP so it is no longer subject to the injunction. If Licensor, after all commercially reasonable efforts, is unable to perform under either option (a) or (b) above, then Licensor will refund to Licensee an amount equal to the remaining undepreciated/unamortized value of the Licensed IP carried on Licensee’s books for U. S. federal income tax purposes as of the date that use of the Licensed IP was enjoined.

A client-licensor who was negotiating with a licensee who wanted to add the following provision:

Licensor warrants that the Licensed IP does not infringe any patent or copyright or misappropriate any trade secret of any third party.

To my client, the requested warranty seemed to be an innocuous addition that reinforced the indemnification language. I pointed out, however, that the warranty actually presented at least two significant problems:

1. The client could not offer the warranty in good faith. Although the client believes that there is no third-party infringement or misappropriation, there is no way to know for sure whether this is the case.
2. Breach of the warranty would constitute breach of the agreement, allowing the licensee to terminate the agreement and recover damages. This would defeat the indemnification provision’s purpose of avoiding breach and establishing a procedure for resolving third-party infringement claims.

The licensee relented after we explained these points, and the parties signed the agreement.

Here are insights that both licensors and licensees can take from this story:

• Indemnification provisions are important and should be drafted carefully to meet the needs of the parties, the applicable IP, and the specific licensing transaction.
• Warranties have consequences and are not merely legal boilerplate.

Related post: IP Indemnification: Who Will Be There to Satisfy the Obligation?

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.