In the context of a licensing agreement, an indemnification clause generally indemnifies a licensee against costs arising out of the licensee’s use of a licensor’s software. However, in some instances an agreement will call for the licensee to indemnify the licensor. The identity of the indemnifying party will typically be determined by the terms of the agreement (whether the license is free or paid, etc.) and the bargaining power of the parties involved.
While state contract law generally protects the licensee in most jurisdictions, the parties will want to expand or modify these provisions to define explicitly the protections and obligations for each party.
A license agreement’s indemnification clause can be separated into four key elements:
Other matters that should be considered:
In most instances, parties choose to draft indemnity clauses modifying or supplementing the governing state’s version of the UCC to clarify and preserve issues unique to intellectual property transactions and to minimize future disputes. Each party must consider the possible ramifications of indemnification when drafting indemnity clauses. The scope of indemnification is a primary concern for all parties. Two main issues arise in considering the scope of indemnification: (1) what is the desired extent of the indemnification, and (2) what limitations should be included.
The extent of the indemnification includes whether the licensor warrants against direct infringement, contributory infringement, or inducement. The extent also includes what types of damages and fees will be covered by the indemnity clause. For example, whether a licensor must assume the risk of liability when the licensee is later accused of contributory infringement in supplying a licensed technology to a third party will depend on the express language of the indemnity clause. In determining the correct extent of indemnification, a party’s concerns may vary depending on whether the party is the licensee or licensor.
Limitations that parties tend to focus on when drafting indemnity clauses include territorial limitations and limitations on the amount of liability assumed by the licensor. In terms of territory, parties should consider whether the licensor will warrant only against the rights of third parties held in the United States and not in foreign jurisdictions. Parties may also wish to limit the amount a licensor indemnifies to the amount supplied by the licensing agreement or, alternatively, may choose a cap based on state law or apportion liabilities based on a party’s benefit from the agreement. (The Basics of Indemnification, Ross Allen)
Written by Eric Quinn (10-09-2012)