Indemnity clauses (sometimes referred to as hold harmless clauses, indemnification agreements, or indemnity agreements) are common in agreements where one party wishes to shift certain risks to another party. In intellectual property indemnification clauses, the risk is commonly associated with patent infringement, trademark infringement, copyright infringement, trade secret misappropriation, software issues, or some other intellectual property (IP) related risk. An indemnity clause may be limited to indemnification or it may also include the obligations to “defend” and/or “hold harmless” the other party. Intellectual property indemnity clauses are particularly dangerous to vendors because the costs to defend a typical IP claim could far exceed the payments to the vendor under the agreement.
Intellectual Property Indemnity – Limits on Liability
Because the potential liability for indemnification obligations, particularly for IP indemnity claims, can be so high, vendors will typically attempt to limit or cap their liability. One way this can be accomplished is including a limitation of liability clause in the agreement and expressly applying that clause to cap or limit the indemnification clause. For example, if the agreement provides a $50,000 fee to the vendor to develop and deliver a software solution, the vendor could likely be liable for significantly more if it is required to defend a third-party copyright infringement claim. However, if the limitation of liability clause limits the vendor’s total liability to payments actually received under the agreement and that limitation applies to the indemnification clause, then vendor’s liability is potentially capped at $50,000 even though the litigation of the claim could cost $100,000s. Many purchasers with leverage will demand unlimited or uncapped intellectual property indemnification. A potential compromise is for the purchaser and vendor to agree that the indemnification liability will be capped at some multiple of the vendor payments under the agreement.
IP Indemnity – Representations and Warranties
Intellectual property indemnification clauses frequently include representation and warranties provisions, which provide a trigger for indemnification obligations. For example, software purchasers/licensors frequently require a representation and warranty provision that the software deliverable is free from claims of infringement by third parties and further that no third-party materials or materials for which the developer does not have permission have been incorporated into the software deliverable. These provisions are intended to protect the purchaser/licensor in the event a third party later makes a claim for copyright infringement or trade secret misappropriation. If this occurs, the purchaser/licensor will likely attempt to force the developer to defend the claim and pay for any damages or settlements.