Creatively Covering Customers’ Catastrophes: Cover THIS!

As a San Jose corporate lawyer, many of our clients make their money through software licenses.  As part of their deals, a number of risks have to be allocated. One major risk is that our client’s customer may get sued for infringement due to the software they have received from our client.  To allocate this risk, a process called indemnification is used.  Indemnification means that if the customer is sued, the licensor will defend the customer and, if an infringement occurs, agree to cover the customer for any damages.  Software licensors will often, but not always, indemnify their customers from this risk.

One issue is what types of intellectual property the indemnification will cover. 

Before we dive in, let’s discuss some background.  Generally, intellectual property is thought of as falling into four major categories: patents, trademarks, copyrights, and trade secrets.  There are others, but we’ll ignore them for now.  Each form of intellectual property covers certain items.  Although it is a gross overgeneralization, you can think of patents as covering inventions and their improvements, trademarks as symbols of the source of a good or service, copyrights as a creative work, e.g., music, a book, or software, and a trade secret as something that is subject to reasonable efforts to be kept secret and has some economic value.

Typically, an infringement clause will cover all intellectual property, and a clause is often added which says this.  Licensors will often, however, attempt to limit the intellectual property to specific categories.  The blanket indemnification that is often provided may be unnecessary under certain circumstances.  One area concerns territory.  For example, if the key technology that is being licensed, whether directly or by incorporation into licensed software, is protected by a patent, and the license limits use to the United States, then there probably isn’t much need to protect the customers from patents granted in other countries.  It’s a good idea, where license rights are constrained, particularly to geographic areas, to match the indemnification obligation to those areas.

Another way indemnification can be limited is by corresponding the item licensed with the appropriate intellectual property right.  This occurs most often with trademarks.  Remember, trademarks are words or symbols that tell the consumer the source of a product or service.  If a customer is merely licensing technology that they are going to distribute under their own name, there’s really no reason for that customer to be protected from an infringement claim against the licensor’s trademark, because the customer isn’t going to be using it.  On the other hand, if the customer is licensed to use the trademark, such as in a franchise agreement, and the customer is motivated to enter into the deal because of the strength of the mark, you can bet that an infringement indemnification concerning the licensor’s (or franchisor’s) mark will be a key part of the agreement.

A third limitation occurs when an item licensed is composed of intellectual property that comes from third parties.  This is very common these days when licensing software, because software often includes “open source” software that is free to developers and free to distribute, but often disclaims any obligations regarding any commitments regarding intellectual property.  When this occurs, a licensor will often attempt to exclude any coverage for such software that has been licensed by the licensor and incorporated into its products.  This often makes for a very spirited discussion!

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.