How to negotiate IP indemnity clauses in software licensing agreements.
Lora and Christiaan discuss how to negotiate IP indemnity clauses in software licensing agreements.
Lora’s four top tips when negotiating IP indemnity clauses:
- be specific on exactly what it is that each party is indemnifying the other for;
- check that the licence grant is clear on what it is the licensee is permitted to do with the software;
- look carefully at the licensor’s warranty disclaimers, especially when buying specifically developed software (i.e. software that is not simply an off-the-shelf products) as often it will say “this software is not warranted to be non-infringing”;
- check that the warranty language, the indemnity language and the limitation of liability do not contradict each other.
What are the licensee and the licensor seeking to protect themselves against?
The licensee is looking to get protection from IP claims resulting from the situation where the IP licensed by the software vendor contains intellectual property which is not the property of the software vendor, i.e. a third party claim.
The software vendor, or licensor, is looking to get protection from any claims resulting from the licensee breaching the licence grant. If the licensee modifies the software contrary to the licence grant in the licensing agreement, then the software vendor may be exposed to third party claims. The software vendor seeks indemnification from such claims through the IP indemnity clause.
If the software vendors is infringing on a third party’s IP, then you are too by using the product!
Remember that if the licensor is infringing on a third party’s intellectual property rights, then you, as the licensee, are also infringing on that third party’s IP. For this reason you should be especially careful to be protected from third party claims via an indemnity clause. This becomes more important if your organisation is commercially substantial and you are licensing software from a smaller software vendor, as you become a comparatively more lucrative target for the third party to claim against.
Who should have control over third party IP claims?
The software vendor will typically want control over any third party IP claims. This is normal and you should allow the software vendor full control over such claims. However, you should insist that in the event of a settlement or a court award, your consent must be required if there are obligations imposed on you as an indemnified party.
Take a strong stance when negotiating IP indemnity clauses
As a licensee, you can take a strong stance against software vendors who try to avoid giving an indemnity against third party IP claims. Software vendors should be able to stand by their products. If they have any doubts as to the ownership of the intellectual property contained in the software product, then you should not be using that software.
Limiting the geographic scope of IP claims
The IP indemnity clause should cover claims arising from any country in the world. If the software vendor wishes to limit this geographic scope, then the only limitation you should accept is that claims arising from the countries in the Berne Convention should be covered. Software vendors will often try to limit this to the geographic scope of the contract – “no way, no way” says Lora! If you are infringing on a third party’s IP, that third party could be located anywhere in the world. Therefore, a third party IP claim can originate from anywhere, regardless of the geographic scope of the agreement between you, as licensee and the software vendor as licensor. DO NOT limit the geographic scope of an IP indemnity clause.
If you are pushed by the software vendor to limit the geographic scope of an IP indemnity clause, then the only limitation you should accept is the countries having signed the Berne Convention.
How will a software vendor resolve an infringement of a third party’s intellectual property?
If a software vendor licenses a software product to you which infringes the IP of a a third party, how will the software vendor resolve this?
- purchase a licence to the infringing code in order to be able to legitimately provide it to you;
- modify the infringing code so that it no longer infringes the third party’s IP;
- replace the infringing code with code that does not infringe the third party’s IP; or, if none of the above solutions are possible,
- the software vendor will propose to refund the licences – be careful… a refund of the licence will rarely be enough to compensate you for the loss suffered if the software vendor has infringed a third party’s intellectual property.
Include contract language to protect from changes in the functionality of the software product
You should also protect against the software vendor simply removing the infringing code from the product and thereby limiting the functionality of the product. Therefore, you need to include a functionality protection clause which would prevent the software vendor from resolving the infringement of a third party’s intellectual property by reducing the functionality of the software product. Remember that particular functionality might be critical to your business.
Think about the kind of damages you could suffer in the event a third party IP claim.
The software vendor will wish to limit the amount and the types of damages they can be responsible for. As the licensee, you should argue for the types of loss covered by an IP indemnity should be both wide and uncapped. As default, software vendors typically try to limit their liability to a refund of the licence. In the event of a term licence, the software vendor may wish to have the refund prorated so that only the remaining licence term would be refundable. You should argue that this is not enough, and explain by giving examples of all the types of damages you may incur in the event that the software vendor’s product infringes on the intellectual property of a third party.
The software vendor should have insurance against third party claims
Especially with small software vendors, you should make it a contractual obligation that the software vendor have insurance coverage to cover third party IP claims. You can also request to see copies of the software vendor’s insurance policies.
Software vendors will also try to limit their liability resulting from a third party claim by saying that the “IP indemnity clause” is all you get in the event of a third party claim. Do not accept this. The IP indemnity clause will cover the consequential damages of the third party claim, but you can also claim against the software vendor for breach of contract and recover any additional loss suffered up to the limit of liability defined in the licensing agreement. The contractual damages come on top.
Carve out the IP indemnity of the limitation of liability language
What does it mean to “carve out” from the limitation of liability clause? The limitation of liability clause does what it says: it limits the liability of the parties to each other under the contract. If you carve something out of that general limitation of liability, then you are in effect saying that liability arising from this particular incident (in this case a third party IP claim) will not be subject to the liability cap, so the other party is fully liable. It is very important that you put language in the limitation of liability section which exempts the IP indemnity from the effect of the limitation.
Any questions on IP indemnity clauses? You can find us at SoftwareSpend.com or you can raise a question on “IP indemnity clauses” in the SoftwareSpend group on LinkedIn.
Get the “IP indemnity clauses” podcast on iTunes: https://itunes.apple.com/us/podcast/softwarespend-podcast/id919076232
Get a PDF version of the show notes here SSP007 IP Indemnity Clauses.