The importance of intellectual property(IP) indemnification clauses
Disclaimer: The information provided in this factsheet is meant as an educational resource only and should not be construed as legal advice.
- When building a system (hardware or software), it is often prudent to include third-party modules or systems that are already available. Including components that are already proven and tested often saves time and reduces costs.
- The third-party components may be covered by intellectual property (IP) (e.g., patents or trade secrets) and could be subject to infringement claims.
- IP litigation can be extremely expensive. An IP indemnification agreement or clause can provide significant protection and can limit risk of liability if infringement issues arise.
- Often, someone seeking a license for IP infringement will attack at the top of the chain in order to get more damages and ongoing royalties, reaching out to the end-system provider as opposed to the component provider.
- Generally, infringement damages and royalties can only be awarded once for a given component. Therefore, if the supplier of the component is already covered by a license, the system developer would not be subject to infringement claims (for the same patents and claims).
- “Battle of the forms” refers to a known issue where two parties will each attempt to impose their own terms and conditions on the relationship/transaction by incorporating them into the contract language (e.g., purchase orders vs. invoices). For example, the system developer uses a purchase order to buy components and the components are delivered with an invoice. The purchase order may have an IP indemnification clause, but the supplier’s invoice has a clause negating it. In many cases, since there is no signed purchase agreement or supply contract, the last form prevails and the inclusion of the component in the system based on the invoice is considered acceptance of the terms in the invoice, i.e., no indemnification.
Example: Company A builds an innovative system that includes an MPEG CODEC. They buy the CODEC from Company B using a purchase order with an IP indemnification. Company B sends the CODEC with an invoice negating the IP indemnification. By including the CODEC in the product, Company A implicitly accepts the terms of the last form exchanged (the invoice). If Company A is approached for infringement of MPEG patents executed by the CODEC it may not be able to ask Company B to deal with the issue or make Company B accept any liability.
Example: Company A builds an innovative system that includes an MPEG CODEC. They sign a purchase agreement with Company B to supply the CODEC. The purchase agreement includes an IP indemnification clause requiring Company B to handle, and be liable for, any infringement claims against its product. If Company A is approached for infringement of MPEG patents related to the CODEC, it will be able to turn to Company B to handle the issue at Company B’s expense.
Key considerations for Canadian companies:
- Companies should sign supply agreements with all component providers (hardware and software) to ensure the providers are responsible for any infringement claims directly related to the use of their component.
- IP indemnification does not preclude the possibility of infringement claims as the component may only be a contributory piece to the infringement claim (performing a portion of the claimed infringement), but the indemnification may require the component supplier to participate and to contribute to the cost of the defense.
- If the component supplier is licensed for the key features it provides (e.g., fully licensed by the MPEGLA consortium) the risk of IP infringement claims against the component are lower, and the IP indemnification clause may not be as important. However, such a license does not guarantee that MPEG related patent owners, not part of MPEGLA consortium, will not claim infringement.
- The indemnification clause should cover patents, trade secrets and copyrights (in the case of software). The latter is particularly important if the software component includes open-source software.
- Indemnification clauses should be written or reviewed by an IP lawyer.
- The supplier may push back at including an IP indemnification provision and may ask for a higher price for their component. The system developer must trade off the higher price against the likelihood and cost of IP litigation, and in some cases may want to consider whether there are alternative components or suppliers they can use.
- According to Natalie Giroux, President at Stratford Intellectual Property, “Signing proper purchase agreements with IP indemnification clauses for all components of the system supplied by third parties is the best practice to avoid costly litigation or licensing”.
Additional information:
- For information about IP protection in the US, please see the Canadian Intellectual Property Office’s publication on Doing business abroad: Protecting your IP in the United States
- For more material relating to the export of goods to the US, please see the Doing Business in the United States page
- For more information on going global with your IP, visit Canada.ca/export-ip
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