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Patent Indemnification: Overview and Examples
By Robert W. Dickerson and Michael D. Owens
Orrick, Herrington & Sutcliffe, LLP, Los Angeles, CA ∗
There are several truisms about patent litigation, but two are particularly beyond
peradventure: 1) there is a lot of it; and 2) it can be very expensive to defend, let alone taking
into consideration the expense of a settlement, or heaven-forbid, a sizeable adverse money
judgment. 1
And smart (and even the not-so-smart) businessmen and women, when faced with the
risk of having to "buy" something expensive that they don't really want or need, typically have
the same reaction – can I get someone else to pay for it?
In the patent world, this usually means either insurance or indemnity. Regarding
insurance, after the first few cases a decade or two ago held that the obligation to defend patent
infringement claims existed in the fine print of general liability policies, other cases quickly
quashed that notion, and the insurance companies equally quickly expressly excluded such
coverage in their policies. Patent infringement insurance is still available, but not prevalent
given its cost/benefit perception.2
Accordingly, buyers of patent rights increasingly demand an indemnification provision in
sale, assignment or license agreements relating to patents and technology. 3 These buyers seek
assurances that their investment is in usable technology and saleable goods and services, and not
future infringement lawsuits. But, this is not always possible, especially in a crowded field of art.
So one way purchasers try to protect their investments is through indemnities.
Patent indemnification typically is a contractual guarantee or a default provision that in
the event a third party makes an infringement claim against a patent rights purchaser (or licensee)
the seller (or licensor) will pay some specified amount of the potential damages and/or costs. 4
Patent indemnity issues can arise in a variety of transactions including mergers and acquisitions,
∗
The views and opinions expressed herein are solely those of the authors (at the moment) and do not necessarily represent the
views of Orrick, Herrington & Sutcliffe, LLP, or any of it clients.
1
According to the AIPLA 2009 Report of Economic Survey, the Median Cost to litigate a medium-sized patent case
in Los Angeles is $3,000,000, and in San Francisco, $4,000,000.
2
"Patent infringement insurance is generally considered too expensive to be worth it." Wikipedia, on "Patent
Infringement".
3
So that we start with a clear definition of the term, "indemnification" is the action of compensating for loss or damage sustained.
BLACK’S LAW DICTIONARY (2nd Pocket Ed. 2001). Definitionally, then, "indemnification" does not ipso facto include the
obligation to "defend" (and everything that is included in a defense), just the obligation to pay for it. 4
The indemnity can also flow from buyer to seller or between the parties as a cross indemnity.
OHS West:260809251. 1 1 asset purchases, business formation, joint ventures, technology sharing or consultation, and
patent licensing or cross licensing. 5
Like many contractual issues, the purchaser wants all possible liabilities covered and the
seller wants to cover as little as possible. The parties' relative bargaining power and the
desirability of other deal points to the respective negotiators typically determine the balance
between these extremes and the contours of any contractual indemnity provision. So, there is no
one boilerplate clause that covers all situations.
I.
General Indemnification Principles
State contract law governs a court’s construction and application of indemnity provisions
in the U.S. While federal patent law jurisdiction is potentially quite broad, 6 simply because a
question of patent law arises in interpreting a contract does not qualify a contract law claim as
arising under patent law for federal jurisdiction. 7 Thus, even though patent rights may ultimately
be at stake a party can properly bring a patent indemnity claim in state court. 8 Courts read
indemnity clauses narrowly and, consistent with general principles of contract construction,
construe any ambiguity against the drafter. 9 There is a limited amount of patent specific
indemnification case law available. Thus, general contract principles supply the rules of
construction.
When parties analyze the acceptable risk allocation, there is a variety of considerations.
One concern is which party can best assess the field of art.10 Another is which party receives the
most economic benefit from the technology and the potential future infringement. 11 Because
express indemnity is a contract law matter, the parties are free to negotiate the precise terms of
the coverage. But, indemnity contracts generally consist of most of the following items, but
individual clauses may vary: 1) a condition triggering coverage; 2) a list of covered entities; 3)
an expression of the types of damage coverage; and 4) claim notice and defense opportunity
5
James Hanrath, Before You Agree . . . Consider Alternatives to Patent Indemnity (2001), available at
http://www.muchshelist.com/471.htm (last visited January 12, 2010).
6
See e.g. Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (1988).
7
See Applera Corp. v. MP Biomedicals, LLC., 173 Cal. App. 4th 769, 93 Cal. Rptr. 3d 178 (2009) (court analyzes of the impact
of Christianson, 486 U.S. 800 and discusses the proper application of "arising under" patent jurisdiction as applied in Holiday
Matinee, Inc. v. Rambus, Inc., 118 Cal.App.4th 1413, 1425, 13 Cal. Rptr. 3d 766 (2004); and Linear Tech. Corp. v. Applied
Materials, Inc., 152 Cal.App.4th 115, 125, 61 Cal. Rptr. 3d 221 (2007)).
8
Id.
9
See Hooper Assoc. v AGS Computers, 74 N.Y.2d 487, 491, 548 N.E.2d 903, 549 N.Y.S.2d 365 (1989); Sievert v Morlef Holding
Co., 241 A.D.2d 445, 663 N.Y.S.2d 978 (1997); Custom Weld Indus. v Chabina Co., 272 A.D.2d 364, 707 N.Y.S.2d 364 (2000).
10
This is especially important in a crowded art field.
11
If the buyer is receiving the most benefit from the use of the technology (such as greater profit margins), they may be expected
to shoulder a greater share of the potential risk.
See Theresa Gillis, Patent Indemnities (2007), available at
http://www.aipla.org/Content/ContentGroups/Speaker_Papers/Annual_Meeting_Speaker_Papers/200717/Gillis-paper.pdf.
OHS West:260809251. 1 2 requirements. A condition triggering coverage in a patent indemnity is generally a third party
infringement claim. The covered entities list includes or excludes such groups as employees,
affiliates, customers, sub-licensees, etc. as the parties have agreed. The damage coverage might
include monetary caps or exclusions of specific types of damages. The notice and defense
control requirements may be part of the indemnity provision or in their own separate clauses.
This paper discusses the last three items in more detail.
II.
Express and Default Indemnity
One of the first questions the parties should contemplate is whether to have an express
indemnity clause, to rely on an indirect one, or to disclaim any warranties entirely. An express
provision crafted specifically to allocate the desired risk between the parties is generally
preferred. In the alternative, if the agreement provides no express indemnity or disclaimer
provisions the applicable law may provide a default one. The primary default provision is for
sales of goods under the Uniform Commercial Code ("UCC") as applied in most states. 12 The
UCC provides a default warranty against infringement if: 1) the seller was a regular merchant in
these kinds of goods; 2) the goods were subject to a rightful claim of a third party on delivery; 3)
the buyer did not furnish specifications to the seller; and 4) the parties did not otherwise agree. 13
Similarly, if one sells goods across international borders the United Nations Convention on
Contracts for the International Sale of Goods ("CISG") may apply an indemnity through article
42, if both parties’ countries are members. 14
The UCC provisions are generally favorable toward a buyer, so they may be willing to
accept an implied indemnity over an express one. Another reason parties may choose to rely on
default provisions is that some courts have used express indemnity provisions to assert personal
12
The UCC warranty provisions are not preempted by U.S. Patent law, see Cover v. Hydramatic Packing Co., 83 F.3d 1390,
1392-93, 38 U.S.P.Q.2d 1783 (Fed. Cir. 1996) cert. denied, 519 U.S. 869, 117 S. Ct. 183, 136 L. Ed. 2d 122 (1996).
13
See e.g. Ca. Comm. Code §2312 (codifying UCC §2-312); see also 84 Lumber Co. v. MRK Technologies, Ltd., 145 F. Supp.2d
675, 678-679 (W.D. Pa. 2001) (a court's application of the UCC provisions); accord Phoenix Solutions, Inc. v. Sony Electronics,
Inc., 637 F. Supp. 2d 683 (N.D. Cal. 2009).
14
The U.S. is a signatory of CISG. Similar to the UCC, CISG Article 42 provides that: "(1) The seller must deliver goods which
are free from any right or claim of a third party based on industrial property or other intellectual property, of which at the time of
the conclusion of the contract the seller knew or could not have been unaware, provided that the right or claim is based on
industrial property or other intellectual property: (a) under the law of the State where the goods will be resold or otherwise used,
if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used
in that State; or (b) in any other case, under the law of the State where the buyer has his place of business. (2) The obligation of
the seller under the preceding paragraph does not extend to cases where: (a) at the time of the conclusion of the contract the buyer
knew or could not have been unaware of the right or claim; or (b) the right or claim results from the seller's compliance with
technical drawings, designs, formulae or other such specifications furnished by the buyer."
CISG, available at
http://www.cisg.law.pace.edu/cisg/text/treaty.html (last visited January 11, 2010).
OHS West:260809251. 1 3 jurisdiction over foreign companies. 15 Also, some plaintiffs attempted to use patent indemnity
provisions alone as a basis for inducement liability, but courts have rejected this. 16
III.
Scope of Coverage
As with most contracts, the parties are free to negotiate the exact terms of the indemnity
given their business requirements and bargaining power. The following categories demonstrate
some concerns that the parties should consider in negotiating the final specific indemnity clause.
A.
Limitations on the Indemnified Parties
If a party intends to provide indemnity, they should then consider exactly how broadly
they wish to define the indemnified party. The indemnitor might choose to cover or limit any
subset they desire including only the partying signing the contract, the party and its management
and employees, the party and their affiliates or sub-licensees, etc. Covering more downstream
entities may increase the likelihood of the technology's use in an infringing method or
combination.
B.
Indemnified Damages Types and Limits
In an express provision, the parties may seek to limit indemnity to specifics types of
infringement, such as only direct rather than contributory or inducement. Courts have not
answered whether parties can indemnify willful infringement damages. Parties can make strong
arguments both in support and against such indemnification. Public policy generally excludes
punitive damages from indemnity. 17 Normally courts award punitive damages for intentional
misconduct. The argument and fear is that if the government allowed indemnification of
intentional conduct it would encourage such misconduct. 18
The Federal Circuit has
19
characterized willful infringement damages as punitive. A party could therefore make a strong
argument that a court should exclude willful damages from an indemnity obligation since they
are punitive. In the alternative, one could argue that in some instances willful infringement is the
result of negligence rather than intentional misconduct. 20 Thus, the public policy arguments
15
See Engineered Sports Products v. Brunswick Corp. 362 F.Supp. 722 (D. Utah 1973) superseded by statute §271(C) b. L. 103465 § 533(a)(1) (1994), as recognized in Honeywell Int'l, Inc. v. Acer America Corp., 2009 U.S. Dist. LEXIS 8208 (E.D. Texas
2009), however neither overruled applying a state's long arm statute to assert personal jurisdiction over a foreign company).
16
See Hewlett-Packard Co. v. Bausch & Lomb, Inc., 909 F.2d 1464 (1990).
17
However, Hawaii, Montana and South Carolina allow indemnity of punitive damages, if the contract expressly provides for
them.
18
For a detailed discussion of the arguments see John Daniel, Indemnification can it Extend to Damages for Willful Patent
Infringement?, THE METRO. CORPORATE COUNSEL, INC. (NE. ed. July, 2003).
19
Id.
20
Id.
OHS West:260809251. 1 4 against coverage may not apply and courts might allow indemnity coverage for willful
infringement. It is more likely courts would choose to exclude such coverage. The parties may
also seek to exclude specific types of damages through the indemnity or related provisions. One
such example disclaims indemnity for consequential damages follows. "In no event shall the
indemnification to be provided by the Licensor in the event of any third party claim of
infringement or misappropriation include any loss of profits or other consequential or indirect
damages that the Licensee might incur.” 21 In addition, parties may also choose to set a specific
monetary limit on the indemnity.
Further, the indemnitor could choose to indemnify only damages awarded after a final
adjudication of the claim on the merits and the exhaustion of all appeals. This limitation type
puts the obligation to shoulder the entire litigation costs on the indemnitee for years before they
can recover from the indemnitor. The indemnitor must carefully evaluate if the business risk of
alienating the indemnitee is worth the perceived savings in such a provision. Finally, larger
indemnitees may require a smaller indemnitor to carry insurance naming the indemnitee as a
covered party. This ensures that the protection within provision has the actual backing to enforce
it in the event of a substantial adverse judgment.
1.
Attorney’s Fees
Under the American system, Court's generally will not award attorney's fees to either
party unless the indemnity provision specifically includes them. In contrast, in California unless
definitively denied in the contract, the default rule provides the defense costs. 22 Parties seeking
indemnity protection should generally include an attorney's fees provision that either expressly
includes or excludes them. Given the cost to defend patent cases, this could be the most material
provision in the contract, so it is ignored at one's sizeable risk.
C.
Defense, Control of the Defense and Notice Requirements
Does the indemnity also require the indemnitor to provide the defense, and not just pay
for it. In other words, if the indemnitee gets sued, does he send the Summons and Compliant to
his or her indemnitor, and then get out of the way. Or does the indemnitee have to hire the
attorneys, and do all of the work, but just sends the bills to the indemnitor to pay. Who has the
greatest stake in the outcome of the litigation will probably want to assume control. Is the
indemnitor who has to pay the bills, or the indemnity who will be put out of business if an
injunction is entered. Therefore, the parties should consider who will conduct and control the
defense and make litigation or settlement decisions. Most sellers would not want to be bound to
pay any settlement without a chance to examine the merits of the claim. This issue is also
21
ROBERT M. MILGRIM, MILGRIM ON LICENSING, §22.28 (2009).
22
CAL. CIV. CODE §2778 (2009).
OHS West:260809251. 1 5 generally tied to a notice requirement, making the buyer responsible to notify the seller of any
potential or actual infringement claims. If there is an express provision the indemnitee generally
has no duty to notify the indemnitor in advance of making a claim unless the contract so
requires. 23 However, some courts have inferred a participation requirement where the express
provision was absent. Absent notice and an opportunity to participate some courts will require
an indemnitee to show that they were liable under the claim for the amount paid. 24 Some courts
have even found that notice is equivalent to an invitation to participate in the defense and binds a
party that fails to participate. 25 Other courts have found a formal participation and defense
control offer necessary for due process reasons before the indemnitor can be bound, whether
there was an express provision silent on notice and control or if indemnity was implied. 26 For
these reasons, parties should memorialize their joint expression of how they will deal with notice
and defense.
1.
UCC Default Defense and Notice Requirements
If there is no express indemnity provision UCC §2-607(3) provides a default provision
requiring the buyer to give notice to receive indemnification. The UCC also provides that a
buyer may request the seller to conduct the defense.27 Under the UCC, if the seller chooses not
to defend the action, the seller is bound by determinations of common facts in any later litigation
between the buyer and seller. 28 Further, the seller may demand the buyer to turn over control of
the defense. 29 If they do not their UCC indemnity remedy is barred. 30
D.
Geographic Limitations
Another potential concern for drafters is whether to include geographic constraints on the
indemnity obligation. While a concern generally to limit exposure and typically included in a
23
Crystal River Enters. v. Nasi, 399 So. 2d 77, 78 (Fla. 5th DCA 1981) (“Generally, in the absence of a specific provision in the
indemnity agreement, there is no requirement to notify the indemnitor to come in and defend as a condition precedent to
recovery.”); L.B. Kaye Associates, Ltd. v. Libov, 139 A.D.2d 440, 527 N.Y.S.2d 215 (1st Dep't 1988) (same), citing Delaware &
Hudson R. R. Corp. v Adirondack Farmers Coop. Exch, 33 AD2d 962, 963 (3d Dep't 1970).
24
See Hendershot v. Consolidated Rail Corp., 1998 U.S. Dist. LEXIS 6748, 1998 WL 240495 (S.D.N.Y. May 11, 1998) (this
requirement is generally imposed out of equity to ensure that the indemnified does not make volunteer payments knowing their
losses will be covered).
25
D.G. Shelter Prods. Co. v. Moduline Indus., 684 P.2d 839, 841 (Alaska 1984) (citations omitted).
26
See Jennings v. United States, 374 F.2d 983, 986 (4th Cir. 1967); Atlantic Richfield Co. v. Interstate Oil Transport Co., 784
F.2d 106, 111 (2d Cir. 1986) (express clause silent on notice); Whisenant v. Brewster-Bartle Offshore Company, 446 F.2d 394,
402-03 (5th Cir. 1971) (implied indemnity).
27
UCC §2-607(5).
28
UCC §2-607(5)(a).
29
UCC §2-607(5)(b).
30
Id.
OHS West:260809251. 1 6 license already, this is potentially more important in a patent indemnity provision. This is
especially true when the indemnity obligation extends to sub-licensees and the licensee's
consumers, who may use the technology outside the original contemplated area of use. The
drafter should carefully construct the provision to apply only in the country or countries of
intended use where they already have vested patent rights and no further. Conceivably a poorly
worded provision could warrant that a technology is free from infringement claims and provide
indemnity exposing the seller to liability on claims brought against the buyer in other
jurisdictions, such as contributory infringement in a first to file patent countries, if later used
there.
E.
Exclude Modification and Combination Coverage
The seller should attempt to exclude indemnity coverage for modifications, whether by
the buyer or by the seller at the buyer's request. The parties should also contemplate the use of
the technology in combination with third party materials or in a method and include or exclude
coverage as appropriate. Absent a contrary agreement, the UCC obliges the buyer to indemnify
the seller against infringement claims if the buyer provides specifications to the seller. 31
IV.
Severability
Finally, a contract containing an indemnity should include a clause that the indemnity
provision is severable and survives the contract. This is to prevent a situation where a party
might breach the contract in an attempt to avoid indemnity obligations.
V.
Example Provision Types
The following are sample provisions demonstrating the potential variety of possible
indemnity claims. Most are from actual publicly available agreements.
A.
Buyer Indemnification of Seller
Somewhat counter-intuitively and as discussed above the most aggressive seller
orientated indemnity provision is -not- the absence of one at all. Instead, an aggressive seller
would need to expressly disclaim any indemnity in the contract benefiting the buyer or risk the
UCC or other applicable law providing an unintended default indemnity. An aggressive
provision might also seek to have the buyer provide an indemnity for the seller for any claims
under the contract. An example of such a provision from a university license reads:
"WARRANTIES: [Licensor] will expressly disclaim any warranty of
merchantability or fitness of the licensed technology for a particular purpose and
31
UCC §2-312(3).
OHS West:260809251. 1 7 any other warranty, including that the licensed products will not infringe any
patent or other proprietary right.
INDEMNIFICATION: Licensee will indemnify [Licensor] against any claims
arising out of the agreement. [Licensor] will require Licensee to carry insurance
to back up such indemnification and to name [Licensor] as an additional
insured." 32
Unlike most provisions, this example allocates most of the risk on the buyer. Another example
would be requiring the buyer to indemnify the seller against contributory infringement claims if
the buyer later used the technology in an infringing method or combination. 33
B.
Duty to Indemnify Limited to Seller Gross Negligence or Willful Misconduct
Another example of a semi-aggressive seller orientated indemnity taken from a Securities
Exchange Commission (“SEC”) filing reads:
“INDEMNIFICATION.
LICENSOR will indemnify, defend and hold
LICENSEE harmless from and against any and all liability, loss, damage, cost or
expense (including court costs and attorneys fees) arising in connection with
LICENSORS patents that are incurred as a result of the gross negligence or
willful misconduct of LICENSOR.”
Here, while the recitation of covered damages seems broad, the seller specifically limits the
indemnity narrowly to only to cases of gross negligence or willful misconduct on the part of the
seller (licensor).
C.
No Knowledge of Infringement Duty to Indemnify
Another seller orientated indemnity is one that limits coverage only to infringement
claims the seller knew or should have known about at the time of the agreement. The following
is an example from Milgrim on Licensing:
“The Licensee's practice under this License Agreement [in the form and manner
authorized or instructed by the Licensor] shall not with respect to the Territory
and the Field of Use, infringe or otherwise violate the industrial or intellectual
property rights of any third party of which the Licensor has knowledge. If any
third party of whose claim the Licensor had [, or in the exercise of reasonable
diligence, should have had,] knowledge shall assert that the Licensee's practice of
the Licensed Rights under this Agreement shall constitute an infringement or
32
Licensing Harvard Patent Rights: a Guideline to the Essentials of Harvard’s License Agreements, available at
http://otd.harvard.edu/resources/guidelines/license/ (last visited Jan. 11, 2010).
33
See BRUNSVOLD & O’REILLEY, DRAFTING PATENT LICENSE AGREEMENTS, ¶ 15.01 (6th ed. 2008).
OHS West:260809251. 1 8 misappropriation of that party's industrial or intellectual property rights, the
Licensor shall in accordance with [and subject to the limitations of] this Article
defend, indemnify and hold the Licensee harmless against any and all such
claims.” 34
This provision type attempts to limit liability, such as in a crowded field of art where the licensor
may not be able to assess potential claims fully. Due to the "should have known" language, this
provision moves the culpable conduct triggering coverage from the previous example's gross
negligence to simple negligence.
D.
Example of Seller Indemnifying Buyer for any Damages, Liabilities and
Attorney's Fees from any Infringement Claim
This example is more buyer orientated and contains broader coverage. This is the type of
agreement most typically associated with indemnity provisions. It is from another SEC filing
and reads:
“[Seller] shall indemnify, defend and hold harmless Licensee from any damages
and liabilities (including reasonable attorneys fees and costs) arising from (a) any
breach of [sellers] representations, warranties and covenants unless(sic) this
Agreement and (b) any claim that the Licensed Technology infringes the patent or
intellectual property rights of any third party.”
In the above example, “under” is most likely the intended word instead of “unless.” Here the
seller is agreeing to pay all damages and attorney’s fees incurred in an infringement action on the
licensed technology. Buyers typically bargain for this broad coverage of damage and costs.
E.
Broad Coverage Definition with Exclusion for Buyer Misconduct.
This is another sample provision taken from an SEC filing that covers any damages
incurred from and to wide entity descriptions:
"[Seller] shall indemnify [Buyer], [Buyer's] directors, officers, employees and
agents (a "[Buyer] Indemnified Party"), and defend and save each of them
harmless, from and against any and all suits, investigations, claims, damages,
liabilities, costs, and expenses (including, without limitation, reasonable attorneys'
fees and expenses) (collectively, "Losses" ) arising from or occurring as a result
of the development, clinical testing, manufacture, use, or sale of a Licensed
Product by [Seller], its Affiliates or Sub-licensees, except to the extent such
Losses arise from or occur as a result of the misconduct of a [Buyer] Indemnified
Party or any breach by [Buyer] under this Agreement."
34
§22.13. OHS West:260809251. 1 9 Here the drafter included a semi-broad indemnified party description, including not only the
company but also its management and employees. In addition, the indemnity runs not only for
the claims arising from the seller's conduct, but also through their affiliates and licensees. This
example also specifically excludes indemnity for the buyer's own misconduct.
F.
Indemnification through Warranty or Representations
Finally, it is possible to have an indemnity indirectly. Parties should carefully examine
the contract to avoid unintended indemnity through warranties. A general warranty might
include a long string of seller (or licensor) warranties including a segment on infringement. This
segment might state that title is free from any potential third party infringement claims. A
separate clause then states that the breaching party is liable for any and all damages including
attorney's fees incurred because of a breach of any warranty. In this example, an infringement
claim violates this warranty and triggers the damages provision.
VI.
Conclusion
At first glance, indemnity provisions may seem to be standard clauses and an afterthought
to a major deal, and they usually are. But, they can potentially have a large financial impact on
the parties. No boilerplate clause can cover every situation. Moreover, one can draft a variety of
possible indemnity provisions. s in most contract law matters, the parties’ respective bargaining
power and well-defined needs will usually determine many of the specific details in a given
provision. The parties should consider and include appropriate coverage or limitation in an
express indemnification on the following: 1) the facts trigging coverage (e.g. third party
infringement claim against indemnitee); 2) a defined scope of covered parties (company,
company and their affiliates, etc.); 3) the types of covered damages (direct, contributory, costs,
attorney's fees, etc.); and 4) claim notice and defense opportunity requirements. Thus, parties
should draft and agree to indemnity only after a careful analysis of the proper risk allocation.
Robert W. Dickerson
Michael D. Owens
OHS West:260809251. 1 10 
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