Session 309: Intellectual Property Considerations in

Indemnification and Liability Limitation Clauses

John Bates, General Counsel, Clarity Solution Group, LLCWilliam Becker, Former Vice-President, Associate General Counsel, Intellectual Property, now RetiredScott Forsyth, Senior Attorney, Microsoft CorporationSteven Gardner, Partner, Kilpatrick Townsend & Stockton LLP

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Next Steps

• Introduction of Speakers• Introduction of Format

• Disclaimer

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A. OftenB. ModeratelyC. RarelyD. Never

How often does litigation occur regarding indemnification clauses within written

agreements?

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Litigation Over Indemnification / Defense

• Very unusual—Almost always a negotiation

• Usually resolved commercially or “lessons learned”

• Frequently: Standstill agreement reached, later resolved

• Insurance company: More likely to litigate the issue (DJ)

• Westlaw search for “indemnif! w/10 (patent or trademark or copyright or “intellectual property”)” in all federal and state case-law databases yielded only 47 precedential opinions in the last 5 years, the vast majority of which do not address an indemnification dispute

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True Coverage by the Seller / Indemnitor Typically Comes Only For One of Two Reasons

1. Commercial reasons

• Large customer

• Seller sees significant future potential

• Not stepping up will impact sales to others

2. Very well-crafted indemnification / defense clause

(and sometimes both reasons are required …)

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What Is The Goal of Indemnification?• Minimize the out of pocket costs and

manage risk.• Minimize the business disruption.• The risk shifts directly between the buyer

and the seller.• For either side, this is not a legal technicality

and requires business input and understanding.

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Lessons From The Field• The negotiation needs to be thorough and culminate with

a detailed description of responsibilities and exceptions.• All the difficult and uncomfortable questions should be

discussed and addressed.• If anything were to happen, the parties will determine

how to interpret their own writing.• The company should have firm, well-defined rules

regarding the acceptance of offering of limitations of liability and indemnification principles.

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Practical/business considerations• Is an indemnity illusory?• How would a claim of infringement or injunction affect

your client’s business and reputation?• Are these situations where you don’t utilize an

indemnification?

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Indemnity/Damages Limitations Often Sought by Seller

I. What is CoveredII. When Coverage BeginsIII. Extent of LiabilityIV. Conduct of the Litigation

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Indemnity/Damages Limitations Often Sought by Seller --

I. What is Covered

1. No coverage for combination with other components2. Proportional coverage if other accused products involved 3. No coverage if modifications made to the product

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Exclusion for Combinations

• A chip by itself is just a piece of silicon with essentially no usefulness; a buyer will need more to be able to use it

• Software, will not do anything without a computer and at least some peripherals

• Important for counsel to work closely with IT resources who administrate the solution in order to understand how it works.

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Indemnification Exclusions

• Often, the Seller seeks provisions excluding liability if certain events occur:– To the extent Claims arise from

• Modification to Product by other than Seller• Instructions or requests by Buyer not contained in specs, etc.• Combination of Product with other products• Induces or contributes to infringement• Compliance with a ‘standard’

– To the extent Claims allege willful infringement– At some point buyer asks, “what’s covered?”!!

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Indemnity/Damages Limitations Often Sought by Seller --

II. When Coverage Begins and Ends (and Other Timing Issues)

1. Coverage trigger point (e.g., final judgment, filed lawsuit, or

assertion by IP holder)2. Coverage end point (e.g., the end of the software-

maintenance period)3. Also, notice of assertion required (e.g., 30 days or reasonable

time)

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Indemnity/Damages Limitations Often Sought by Seller --

III. Extent of Liability

1. Coverage only for damages (not defense)2. Damages and/or overall cap (e.g., specific or purchase price)3. Disclaim consequential and incidental damages4. Can fully fulfill duty (e.g., refund; replace w/ non-infringing)

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Consequential Damages• Definition: “(a) any loss resulting from … requirements and

needs of which seller [or the breaching party] at the time of contracting had reason to know and which could not reasonably be prevented … ; and (b) injury to person or property [other than the subject matter of the transaction] proximately resulting from any breach of warranty.” (UCC / UCITA)

• Can include lost profits

• Example: If seller knew buyer intended to later resell an item for 10% profit, seller’s breach might result in consequential damages equal to buyer’s expected 10% profit

• Also referred to as “special” or “indirect” damages

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Incidental Damages

• Definition: “[C]ompensation for any commercially reasonable charges, expenses, or commissions reasonably incurred … with respect to: (i) inspection, receipt, transmission, transportation, care, or custody …; (ii) stopping delivery, shipment, or transmission; (iii) effecting cover … after the breach; (iv) other efforts after the breach to minimize … loss resulting from the breach; and (v) matters otherwise incident to the breach ….” (UCITA)

• Example: Administrative and overhead cost of addressing the problem (e.g., long-distance call charges, charges for storing and transporting the infringing items, etc.); employee time?

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Limitation of Liability• Exclusion of Consequential, Incidental, etc. Damages

– As a seller/licensor, should you offer/propose exclusions– As a buyer/licensee, do you expect exclusions– Should exclusion be mutual– Should there be exclusions for certain claims

• What types of damages are reasonable to exclude– Consequential– Incidental– Punitive– Others

• Consider control of litigation for indemnity where limitation of liability is present– For indemnitee grant control only if indemnitor takes full responsibility for

liability

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Dollar Cap on Limitation of Liability• Fixed $ limit • % of Purchases • % of Purchases over a period of time

• Multiple options:– Date the claim made against indemnitor– Date claim arose– Date of litigation

• Different limits for different claims (e.g. $x for contractual claims and $Y for Indemnity claims)

• Hybrid – Floor and Escalator

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Dollar Cap on Limitation of Liability

• Buyers often wish to limit their financial exposure in a contract

• What’s reasonable?– Depends on the facts– May depend on your negotiating power or market

conditions– There are multiple options for setting a damage cap

• Consider consequences of $ cap on both parties• Mutual indemnification with same caps?

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Exclusions from Dollar Cap

• Parties may exclude certain damages from the Dollar Cap (not exhaustive)– Breach of confidentiality obligations (Trade Secrets)

• Generally NDAs do not have any dollar cap limit– Indemnification obligation (Copyright, Trademark, and

Patent Claims)• If capped, consider no cap for attorneys’ fees (but what

conduct may this incentivize)• If capped, consider a separate cap altogether• If capped, consider excluding cost of appeals

– Intentional breach of obligations

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When Indirect Damages Becomes Direct Damages

• What if damages other than direct damages due to indemnification are excluded– Damage award may be calculated or characterized as:

• Lost profits• Treble damages• Attorneys fees

– Consider adding language to clarify that indemnitor must still indemnify for damages awarded/settlements of indemnified claim even if they could be characterized as consequential or indirect damages

– For IP infringement action, you are not looking for a recovery of your ‘own’ consequential damages, but only those damages awarded against you (or agreed in settlement of matter)

-- Consider if appeal costs are covered by indemnity

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Sample Provision

NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTION X (LIMITATION OF LIABILITY), THIRD PARTY DAMAGES ASSESSED OR AGREED IN SETTLEMENT AGAINST BUYER FOR CLAIMS COVERED UNDER THIS SECTION Y (INDEMNIFICATION) INCLUDING ATTORNEY’S FEES AND COST OF APPEAL SHALL BE CONSIDERED DIRECT DAMAGES AND NOT EXCLUDED UNDER SECTION X EVEN THOUGH SUCH AMOUNTS MAY INCLUDE INDIRECT OR CONSEQUENTIAL (OR OTHER EXCLUDED) DAMAGES OF THE THIRD PARTY.

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Possible Exceptions to Limitation of Liability• Breach of license/IP rights• Breach of Confidentiality (data breach)• Breach of exclusivity • Breach of compliance with laws/regulations• Intentional breach • Breach of Warranty• Willful misconduct, gross negligence• Physical or bodily harm/death.• Other actions for which no effective remedy other than

consequential, incidental, etc.

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Sample Limitation of LiabilityGeneral Limitation Of Liability. IN NO EVENT SHALL EITHER PARTY OR THEIR RESPECTIVE DIRECTORS, OFFICERS, TRUSTEES, AGENTS, OR EMPLOYEES, BE LIABLE TO THE OTHER PARTY FOR ANY REASON, WHETHER IN CONTRACT OR TORT, FOR ANY CLAIMS ARISING OUT OF OR BASED UPON THIS AGREEMENT EXCEEDING TWO MILLION U.S. DOLLARS ($2,000,000.00).

No Consequential Damages. IN NO EVENT SHALL EITHER PARTY OR THEIR RESPECTIVE DIRECTORS, OFFICERS, TRUSTEES, AGENTS, OR EMPLOYEES, BE LIABLE TO THE OTHER PARTY UNDER ANY THEORY OF TORT, CONTRACT, OR OTHER LEGAL OR EQUITABLE THEORY FOR EXEMPLARY, PUNITIVE, SPECIAL, CONSEQUENTIAL (INCLUDING LOST PROFITS), OR SIMILAR DAMAGES, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES REGARDLESS OF WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

Exceptions To General Limitation of Liability. THE FOREGOING PROVISIONS OF SECTION WILL NOT APPLY TO THIRD-PARTY CLAIMS FOR DAMAGES ARISING FROM A BREACH OF A PARTY’S OBLIGATIONS OF CONFIDENTIALITY (SECTION XX OF THIS AGREEMENT), NOR TO A PARTY’S INDEMNIFICATION OBLIGATIONS DESCRIBED IN SECTION YY. IN NO EVENT SHALL EITHER PARTY OR THEIR RESPECTIVE DIRECTORS, OFFICERS, TRUSTEES, AGENTS, OR EMPLOYEES, BE LIABLE TO THE OTHER PARTY FOR ANY REASON, WHETHER IN CONTRACT OR IN TORT, FOR ANY CLAIMS ARISING OUT OF OR BASED UPON THIS AGREEMENT EXCEEDING SEVEN MILLION FIVE HUNDRED THOUSAND U.S. DOLLARS ($7,500,000.00) FOR THE AFOREMENTIONED EXCEPTIONS TO THE GENERAL LIMITATION OF LIABILITY.

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Sample ProvisionTO THE MAXIMUM EXTENT PERMITTED BY LAW, NEITHER PARTY WILL EVER BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, SPECIAL, OR EXEMPLARY DAMAGES THAT ARISE OUT OF OR RELATE TO THIS AGREEMENT. THIS EXCLUSION WILL APPLY REGARDLESS OF THE LEGAL THEORY FOR ANY CLAIM, WHETHER THE PARTIES HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER SUCH DAMAGES WERE REASONABLY FORESEEABLE, OR WHETHER APPLICATION OF THIS EXCLUSION CAUSES ANY REMEDY TO FAIL OF ITS ESSENTIAL PURPOSE. THIS EXCLUSION WILL NOT APPLY TO AN INTENTIONAL BREACH OF THIS AGREEMENT OR TO BREACH OF OR CLAIMS UNDER SECTIONS A (WARRANTIES), B (WARRANTY REMEDIES), C (INDEMNIFICATION); D (CONFIDENTIALITY), OR E (COMPLIANCE WITH LAWS AND REGULATIONS).

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Indemnity/Damages Limitations Often Sought by Seller --

IV. Conduct of the Litigation

1. Sole control of defense / settlement2. Unilateral choice of counsel 3. Full cooperation of indemnified party

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Control of Litigation• Is there an applicable dollar cap?– If yes, then need to manage shift in control

• Timing of shift of control• Who decides when shift happens

• Are attorneys fees excluded from cap?• What if multiple parties may be responsible?– Can’t grant sole control to multiple parties!

• Consider control of settlement• Consider what conduct you are incenting

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Control of the Litigation

• Sole control (issue with combination claims or if multiple parties are involved)

• Control with a damage cap– Cap and sole control– When does buyer take back control– Can Seller afford to lose control– How do you implement this

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What About Warranties of Non-Infringement?

UCC 2-312(3)Warranty of

Non-Infringement

Contract Non-Infringement Warranty

(Usual)

Contract Indemnification/Defense

(Usual)

CLAIMS COVERED

“goods shall be delivered free of the rightful claim”

of others Usually just warrant

non-infringementUsually just “claim” of others

(but not always)

EXCEPTIf buyer “furnishes

specifications” (then buyer indemnifies!)

Specified in contract Specified in Contract

BURDENOn buyer to show

“rightful claim” (maybe contradictory)

On buyer to show infringement (?)

(maybe contradictory)

On buyer to show “claim”

(usually straightforward)

ACCRUES Non-frivolous claim is made Final judgment (?) Usually when claim is made

(but not always)

ATTORNEYFEES Maybe

No (?) – Depends on contract (but usually bar

consequential, etc.)Yes

REMEDIES Rescission / termination ?

Rescission / termination?

Usually not rescission / termination

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Tender-Time Disputes

1. How will certain indemnification terms be interpreted?

2. Has a “Claim” been made if not lawsuit has been filed?

3. Why is the indemnitor reacting so slowly and requiring the possibly-indemnified party to spend time and money?

4. What happens if the accused infringer’s products are supplied by more than one company?

5. What happens if there is more than one indemnitor?

6. What does “sole control of the defense” looks like practically? How nervous should I be about giving up control?

7. What if there are non-indemnified claims in the suit?

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More Tender-Time Disputes

8. Will the indemnifying party have access to the indemnified party’s confidential documents?

9. Will the indemnifying party have access to all attorney-client communication with the indemnified party?

10. What happens if indemnitor’s choice of counsel has a conflict?

11. Does the indemnified party have to sign the law firm’s engagement letter?

12. What does the law-firm engagement letter say about who pays after the coverage amount runs out?

13. Can the law firm continue advising the indemnitor regarding indemnification?

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Compliance with Standards

• People buy devices ‘because’ they comply with standards – 802.11 wireless standard– Bluetooth– Ethernet– USB– GSM, CDMA

• Same is true for a device maker buying a component• Who should bear responsibility for infringement of a

standard, the device maker or component supplier?– Who is better capable of defending – What about shared responsibility

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Trends in the Market• OEMs moving away from direct sales to small and mid-

size clients.• OEMs utilizing a VAR/Channel Partner as a middle-man

for the transaction.• VARs unable to change terms of indemnification from

OEM, but could offer additional warranties and/or indemnifications.

• OEMs will carve out protections from third-party claims regarding Open Source Software, combination with other hardware/software, etc.

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Additional Best Practices• Determine which vendors are critical to IT

infrastructure and could not be replace quickly or without extensive cost.

• For single-source solutions and those that would require extensive labor/time, conduct reoccurring financial assessment of the vendor.

• Review agreements with indirect, low cost vendors and see if the contracts are appropriate for the business case or dollar threshold.

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Sample IndemnificationsIndemnification.(a) Consultant shall indemnify, defend, and hold harmless COMPANY, its Affiliates, its and their directors, officers, employees and agents from and against any and all suits, claims, demands, losses, damages, costs and expenses of any nature whatsoever, including, without limitation litigation expenses (including, without limitation, consultant’s and experts’ fees and expenses), attorney’s fees and liabilities incurred in connection therewith arising out of: (i) injury to, or death of, any person whatsoever or damage to property of any kind by whomever owned, caused in whole or in part by the acts or omissions of Consultant, any of its members, Personnel or other persons directly or indirectly employed by, engaged by, or associated with Consultant; or (ii) any claim arising from or related to any breach by Consultant of a representation, warranty or covenant contained herein or in any Schedule or Purchase Order.(b) Consultant shall indemnify, defend, and hold harmless COMPANY, its Affiliates, its and their directors, officers, employees and agents from and against any and all suits, claims, demands, losses, damages, costs and expenses of any nature whatsoever including, without limitation, litigation expenses (including, without limitation, consultant’s and experts’ fees and expenses), attorney’s fees and liabilities incurred in connection therewith, arising out of any third party claim as to rights in and to any Deliverable (including, without limitation, any software) or for any claim associated with Section XXX. Such third party claims may include, without limitation, claims of infringement of any patent, copyright, trademark or trade secret or unfair competition rights of any third party. Company agrees, at Consultant’s expense, to: (i) promptly notify Consultant in writing of any suit or any claim of infringement; (ii) cooperate with Consultant in Consultant’s defense of any such claim; and (iii) not settle any claim without Consultant’s prior written consent, such consent not to be unreasonably withheld.(c) If a claim covered by the infringement indemnification pursuant to Section YYY has been made, Consultant shall have the right to, at its option and expense, either: (i) obtain for COMPANY the right to continue using the Deliverable; or (ii) replace or modify the Deliverable so that such Deliverable becomes non-infringing; provided however, that such replacement or modified Deliverable must provide equal or greater functionality than the replaced Deliverable. In the event that, after exhausting commercially reasonable efforts, Consultant is unable to obtain either of the above two results, then Consultant shall return all amounts paid by COMPANY under the applicable Schedule or Purchase Order relating to the infringing Deliverable, including without limitation all fees associated with maintenance of and support to such Deliverables.