Patent infringement cases can be expensive to litigate, and very expensive to lose. They can also cast a wide net. For example, the 2010 infringement suit brought by Canon against Ninestar for allegedly marketing a too-similar inkjet toner cartridge named all the distributors of the product, as well. A contractual indemnity clause can protect companies in such a situation by obtaining the indemnitor's guarantee that it will compensate the indemnitee (distributor) for any losses caused by a third-party patent infringement suit.
Washington D.C. intellectual property attorney John Hutchins suggests in "Anatomy of an Indemnification Provision: Identifying and Addressing Basic Indemnification Issues," that companies often underestimate the importance of patent infringement indemnification clauses and that the simplicity of "boilerplate" provisions seen in many contracts may be damaging to the indemnitor. Hutchins points out that the lack of specificity regarding scope, timing, contingencies and limitations of the indemnification may expose the indemnitor to virtually unlimited risk and further litigation.
An agreement's indemnification provision should specifically and clearly name the indemnitor and indemnitee. In a licensing agreement, the terms "licensee" or "vendor" and "licensor" will suffice. For the indemnitee's sake, Hutchins says it is wise to include in the provision any entity that stands to benefit from the agreement, including the indemnitee's board of directors, divisions, subsidiaries and employees. To avoid confusion, the provision should also clearly assign control of the defense of any infringement suit to the indemnitor.
Although most indemnification provisions are unilateral, they also may be multilateral. As an example, Hutchins suggests a joint development agreement in which each party contributes its own technology to the final development. A well-crafted indemnity provision in such an agreement would include each party's promise to indemnify each of the other partners against any infringement claim arising from each of the partners' particular contribution. In crafting such a provision, consideration should be given to each party's levels of potential fault and risk tolerance, as well as the level of infringement suit probability.
In addition to licensing, other agreements requiring indemnification provisions include mergers, acquisitions and institutional research and development ventures. Because of the potentially high cost of defending and/or losing an infringement suit, an infringement indemnity clause can affect the monetary terms of the agreement. Chicago patent attorney, James P. Hanrath Eager, suggests insurance as an alternative. Although coverage for "advertising injury" found in many general business liability policies may cover patent infringement, Eager believes it is safer to obtain a patent infringement policy that specifically covers the expense of bringing or defending a patent infringement lawsuit.
- Actionable Intelligence; Part 2: Canon Takes Aim at Ninestar, Should Others Worry?; October 2010
- American Intellectual Property Law Association; Anatomy of an Indemnification Provision: Identifying and Addressing Basic Indemnification Issues; John Hutchins
- Much Shelist; Before You Agree, Consider Alternatives to Patent Indemnity; James P. Hanrath; 2001
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