Protecting Against Patent Trolls
I brought up the topic of infringement indemnification a couple of entries ago, and thought I would take it a little further by talking
about patent trolls. Patent trolls are those sleazy companies that run
around buying up business method patents and then search out people to
sue for supposed infringement. This entry is a little on the technical side, but for those of you who
know what a patent troll is and want detailed information on how to
contractually shift the liability for potential infringement to a
vendor, read on!
When it comes to buying versus building a piece of intellectual property, such as software, how should you protect your company against patent trolls? The best way is to get the vendor to protect you...
Since a vendor is in the best position to know if their product or service infringes someone else’s proprietary rights, and it is therefore the vendor's “fault” if such infringement does occur, then the vendor should be liable to defend you against any such infringement claims—and to make you whole.
To shift the liability for infringement from you to the vendor, you need a contractual obligation of “indemnification” from the vendor. Indemnification is a contractual provision which basically requires a vendor to “step in your shoes” and defend against an infringement claim by a third party. However, just having an indemnification provision in your contract is not enough. To get this added layer of protection against patent trolls, you need a solid and comprehensive contract—preferably on your form contract template, not the vendor’s. The first provision you need is a “representation and warranty” from your vendor that the associated product or service is not known to be infringing and that the vendor has a right to sell or license what you are paying them for. An example representation and warranty provision follows:
Unfortunately, a representation and warranty is a mere promise. Certainly, breaking that promise constitutes a breach of contract, but unless you have some sort of contractual remedy, you will likely have nothing to show for the broken promise unless you can enforce a successful claim against your vendor. There are two types of remedies for the breach of the representation and warranty that should be in your contract. One remedy, called “indemnification,” is more of a legal remedy, and the other remedy is more of an equitable or “make you whole” remedy. Typically, both remedies are combined in one provision:
This provision and its remedies are typical, particularly in contracts for the licensing of software (the “Product” in this example). The first sentence of the provision is the remedy of the vendor to basically “step in your shoes” and defend against the infringement claim. The second sentence is a contractual remedy that attempts to make you at least partially whole. Where you are unable to continue to using the Product due to infringement, the vendor is obligated to either: (a) buy the right for you to use the Product; (b) modify the Product so that it no longer infringes; or, (ii) if either of those two remedies cannot be provided, give you your money back. If you get your money back, you will only be made partially whole, because you will undoubtedly have transition costs and the like, which the remedy does not account for--this is what I discussed in my earlier, related post.
Although a vendor has agreed to indemnify you against claims of infringement, without additional contract language, it is not clear how the vendor will indemnify you. To describe how indemnification will be provided, your contract will need an “indemnification procedures” provision similar to the following:
Basically, this provision requires you to give notice to the vendor of an infringement claim, and upon such notice, the vendor is required to defend you against the claim and you are required to cooperate (at the vendor’s expense) in the defense. This provision is typical except for clause (a), which allows for you to defend against the claim, at the vendor's expense, if the defense is not going the way you would like it to (as you have subjectively determined). Occasionally, if a vendor catches it, they will ask that the wording in (a) be changed from “at Vendor’s expense” to “at Customer’s expense.”
There are abundant stories in the media describing how expensive lawsuits are in general and how long they can drag on. Defending against an infringement claim is no exception, and intellectual property attorneys are particularly costly. Which means that you want a vendor’s liability in the case of infringement to be unlimited. Which means that you must exclude a vendor’s obligation of indemnification from the limitation of liability in your contract, as illustrated by the clause below.
If you don't exclude the obligation of indemnification from the limitation of liability, that obligation will be limited to the dollar amount specified in the provision, which is likely to be significantly less than the cost of defending against an infringement claim. That means you, at your expense, will end up defending against, or settling with, the third party. By including the above clause, the limitation of liability won't apply to indemnification and the vendor’s corresponding obligation will be unlimited. In short, your vendor will be required to pay for the entire defense, no matter how costly it gets. Surprisingly, this type of clause is rarely contested by reputable vendors. If your vendor contests this clause, it should immediately raise a red flag in your mind, and you'll need to assess whether it really makes sense for you to do business with that particular vendor.
When all of the preceding provisions are included in your contract, the contract will contain a representation and warranty, indemnification, indemnification procedures, and an exclusion from the limitation of liability—all of which are crafted to protect you against patent trolls.
When negotiating with a vendor, make sure all of these provisions are contained in your contract. Better yet, you should have your own contract template containing these provisions that you can hand to vendors when you are considering buying their product or service. That way, before you go too far down the road with your vendor, they'll understand your requirements and have an opportunity to provide you with their perspective far in advance of “the last minute” of negotiations—when your negotiation leverage is near its lowest.
When it comes to buying versus building a piece of intellectual property, such as software, how should you protect your company against patent trolls? The best way is to get the vendor to protect you...
Since a vendor is in the best position to know if their product or service infringes someone else’s proprietary rights, and it is therefore the vendor's “fault” if such infringement does occur, then the vendor should be liable to defend you against any such infringement claims—and to make you whole.
To shift the liability for infringement from you to the vendor, you need a contractual obligation of “indemnification” from the vendor. Indemnification is a contractual provision which basically requires a vendor to “step in your shoes” and defend against an infringement claim by a third party. However, just having an indemnification provision in your contract is not enough. To get this added layer of protection against patent trolls, you need a solid and comprehensive contract—preferably on your form contract template, not the vendor’s. The first provision you need is a “representation and warranty” from your vendor that the associated product or service is not known to be infringing and that the vendor has a right to sell or license what you are paying them for. An example representation and warranty provision follows:
The Product and any other work performed by Vendor hereunder shall
not infringe upon any United States or foreign copyright, patent, trade
secret, or other proprietary right, or misappropriate any trade secret,
of any third party, and Vendor further represents and warrants that
it has neither assigned nor otherwise entered into an agreement by
which it purports to assign or transfer any right, title, or interest
to any technology or intellectual property right that would conflict
with its obligations under this Agreement.
Unfortunately, a representation and warranty is a mere promise. Certainly, breaking that promise constitutes a breach of contract, but unless you have some sort of contractual remedy, you will likely have nothing to show for the broken promise unless you can enforce a successful claim against your vendor. There are two types of remedies for the breach of the representation and warranty that should be in your contract. One remedy, called “indemnification,” is more of a legal remedy, and the other remedy is more of an equitable or “make you whole” remedy. Typically, both remedies are combined in one provision:
Vendor agrees to indemnify, defend, and hold Customer, its officers,
directors, agents, and employees (each, an “Indemnitee” and
collectively, the “Indemnitees”) harmless from and against any and all
any and all liabilities, damages, losses, expenses, claims, demands,
suits, fines, or judgments (collectively “Claims”), including
reasonable attorneys' fees, costs, and expenses incidental thereto,
which may be suffered by, accrued against, charged to, or recoverable
from any Indemnitee, arising out of a claim that the Product infringes
or misappropriates any United States or foreign patent, copyright,
trade secret, trademark, or other proprietary right. In the event that Vendor is enjoined from delivering either preliminary or permanently,
or continuing to license to Customer, the Product and such injunction
is not dissolved within thirty (30) days, or in the event that Customer
is adjudged, in any final order of a court of competent jurisdiction
from which no appeal is taken, to have infringed upon or
misappropriated any patent, copyright, trade secret, trademark, or
other proprietary right in the use of the Product, then Vendor shall,
at its expense: (a) obtain for Customer the right to continue using
such Product; (b) replace or modify such Product so that it does not
infringe upon or misappropriate such proprietary right and is free to
be delivered to and used by Customer; or, (c) in the event that Vendor is unable or determines, in its reasonable judgment, that it
is commercially unreasonable to do either of the aforementioned, Vendor shall recover such Product from Customer, in which event in
addition to the foregoing indemnification: (i) the license of such
Product shall be void as between Vendor and Customer as of the date Vendor retakes possession; and, (ii) Vendor shall reimburse to
Customer the full cost for such Product.
This provision and its remedies are typical, particularly in contracts for the licensing of software (the “Product” in this example). The first sentence of the provision is the remedy of the vendor to basically “step in your shoes” and defend against the infringement claim. The second sentence is a contractual remedy that attempts to make you at least partially whole. Where you are unable to continue to using the Product due to infringement, the vendor is obligated to either: (a) buy the right for you to use the Product; (b) modify the Product so that it no longer infringes; or, (ii) if either of those two remedies cannot be provided, give you your money back. If you get your money back, you will only be made partially whole, because you will undoubtedly have transition costs and the like, which the remedy does not account for--this is what I discussed in my earlier, related post.
Although a vendor has agreed to indemnify you against claims of infringement, without additional contract language, it is not clear how the vendor will indemnify you. To describe how indemnification will be provided, your contract will need an “indemnification procedures” provision similar to the following:
Promptly after receipt by Customer of a threat of any action, or a
notice of the commencement, or filing of any action against an
Indemnitee, Customer shall give notice thereof to Vendor, provided
that failure to give or delay in giving such notice to Vendor shall
not relieve Vendor of any liability it may have to an Indemnitee
except to the extent that Vendor demonstrates that the defense of
such action is prejudiced thereby. Customer shall not independently
defend or respond to any such claim; provided, however, that: (a)
Customer may defend or respond to any such claim, at Vendor's
expense, if Customer’s counsel determines, in its sole discretion, that
such defense or response is necessary to preclude a default judgment
from being entered against Customer; and, (b) Customer shall have the
right, at its own expense, to monitor Vendor's defense of any such
claim. Vendor shall have sole control of the defense and of all
negotiations for settlement of such action. At Vendor's request,
Customer shall cooperate with Vendor in defending or settling any
such action; provided, however, that Vendor shall reimburse Customer
for all reasonable out-of-pocket costs incurred by Customer (including,
without limitation, reasonable attorneys’ fees and expenses) in
providing such cooperation.
Basically, this provision requires you to give notice to the vendor of an infringement claim, and upon such notice, the vendor is required to defend you against the claim and you are required to cooperate (at the vendor’s expense) in the defense. This provision is typical except for clause (a), which allows for you to defend against the claim, at the vendor's expense, if the defense is not going the way you would like it to (as you have subjectively determined). Occasionally, if a vendor catches it, they will ask that the wording in (a) be changed from “at Vendor’s expense” to “at Customer’s expense.”
There are abundant stories in the media describing how expensive lawsuits are in general and how long they can drag on. Defending against an infringement claim is no exception, and intellectual property attorneys are particularly costly. Which means that you want a vendor’s liability in the case of infringement to be unlimited. Which means that you must exclude a vendor’s obligation of indemnification from the limitation of liability in your contract, as illustrated by the clause below.
THE FOREGOING LIMITATION SHALL NOT APPLY TO VENDOR’S OBLIGATIONS OF INDEMNIFICATION, AS FURTHER DESCRIBED IN THIS AGREEMENT.
If you don't exclude the obligation of indemnification from the limitation of liability, that obligation will be limited to the dollar amount specified in the provision, which is likely to be significantly less than the cost of defending against an infringement claim. That means you, at your expense, will end up defending against, or settling with, the third party. By including the above clause, the limitation of liability won't apply to indemnification and the vendor’s corresponding obligation will be unlimited. In short, your vendor will be required to pay for the entire defense, no matter how costly it gets. Surprisingly, this type of clause is rarely contested by reputable vendors. If your vendor contests this clause, it should immediately raise a red flag in your mind, and you'll need to assess whether it really makes sense for you to do business with that particular vendor.
When all of the preceding provisions are included in your contract, the contract will contain a representation and warranty, indemnification, indemnification procedures, and an exclusion from the limitation of liability—all of which are crafted to protect you against patent trolls.
When negotiating with a vendor, make sure all of these provisions are contained in your contract. Better yet, you should have your own contract template containing these provisions that you can hand to vendors when you are considering buying their product or service. That way, before you go too far down the road with your vendor, they'll understand your requirements and have an opportunity to provide you with their perspective far in advance of “the last minute” of negotiations—when your negotiation leverage is near its lowest.
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