Pitfalls to Avoid in Indemnification Clauses in Tech Licensing agreements

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Before signing a technology licensing agreement, carefully review all its provisions, including the indemnification clauses. Regrettably, this very important part of a licensing agreement is often treated as a boilerplate provision. Don’t make the mistake of waiting till the last minute to review the indemnification clauses and giving them only a cursory glance before signing the contract. Indemnification clauses could have far-reaching consequences for your business.

Indemnification Clauses Typically Protect Both Parties
A) If you’re the licensor or vendor, you agree to compensate your licensee or customer for any losses from third-party intellectual property infringement claims resulting from use of the licensed technology. If another person or company sues your customer because the licensed technology allegedly violates a patent that the third party owns, you’ll have to pay your customer’s legal fees and any damages owed to the plaintiff.

B) If you’re the licensee, you agree to compensate your licensor
for damages in the event that you commit, among other things, a breach of confidentiality or misuse the product, especially software.

Each party in a licensing contract naturally wishes for limited liability for themselves and unlimited liability for their counterparty. Avoid signing a lopsided agreement that’s unfavorable to you by carefully reading the “limitation of liability” provisions.

Indemnification of the Licensee
If you’re the licensee, pay close attention to the indemnification clause that applies to third-party IP infringement claims. If a court rules that the licensed technology violates someone else’s patent, you want to make sure that your business isn’t disrupted by not being able to use the technology. Typically, the licensee indemnification clause requires the licensor to:

Procure for you the right to use the technology on the same terms as stated in the contract;

Modify the technology so that it’s non-infringing while delivering substantially equivalent performance;

Provide you with a substantially equivalent technology; or

Refund you all monies paid under contract.

Make sure that your right to indemnification against third-party IP infringement claims isn’t compromised by the following stipulations:

1) The licensor will provide indemnification only during the term of the licensing agreement. What if you get hit with an IP lawsuit after your licensing contract ends? Make sure your right to indemnification doesn’t end with your contract.

2) The licensor won’t indemnify you if the IP rights that form the basis of the IP infringement claim were issued or registered after the date of the licensing agreement. Reject such a stipulation, since you can still get sued if the IP rights are issued or registered after your contract date.

3) If you distribute products incorporating the licensed technology in other countries, you won’t be indemnified. Reject this stipulation. Make sure the scope of your indemnification includes all countries where you plan to distribute your product. If the licensor refuses, try to negotiate lower royalties or even no royalty in countries where your indemnification doesn’t apply or where the licensed technology isn’t patented.

4) The licensor will indemnify you for costs, damages, and legal fees as “finally” awarded in a third-party IP infringement claim. The term “finally” means you may not get indemnified until a final judgment is reached on the lawsuit – which could take many years. You don’t want such a constraint in your indemnification clause.

Indemnification provisions carry high financial stakes, so you don’t want to give them short shrift when reviewing your licensing contract. Before signing the licensing agreement, work with an experienced attorney to ensure you understand all the stipulations and negotiate with your counterparty to obtain reasonable terms.

This article has been authored by Padmaja Chinta a Lawyer based out in New York, United States of America. She is a partner at Cittone & Chinta LLP and a graduate of the University of Pennsylvania Law School.

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