Intellectual Property Rights and Indemnification for Third Party IP Claims


1. General Concepts

  • Intellectual property owned by a party remains that party’s property unless expressly transferred under the contract.
  • A party’s use of and rights to another party’s intellectual property must be expressly specified in the contract.
  • Where services are provided by a supplier, the focus of the contract with the customer should be on the services and not on the intellectual property of the underlying components that are used in the provision of the services.
  • The supplier should stand behind all intellectual property incorporated into the services and indemnify the customer against third party claims that relate to the services and any elements thereof, subject to appropriate limitations (see below).

2.  IACCM Contracting Principles

2.1. Intellectual Property Rights

  • Each party owns the intellectual property it creates before, during and after the contract term, except as may be specifically provided in a contract or an attachment thereto.
  • As between the parties to a contract, the party furnishing information or materials to the other retains its intellectual property rights in such information or materials, subject to any license rights that are granted by the furnishing party (or by a third-party licensor).  Generally, where services do not contemplate software development, “work-for-hire” and similar provisions allocating ownership rights are not applicable.
  • The customer should have the right to use the supplier’s intellectual property as necessary to use the services for the customer’s business needs throughout the duration of the contract.
  • In circumstances where broader (or longer duration) license terms (e.g., to software or customer-specific deliverables) are appropriate, those rights should be specifically provided in the contract.
  • As to customized unique content (such as a custom software application) that is developed for a customer's sole use in accordance with the customer's specifications, a provision granting the customer ownership or exclusive use of such content may be appropriate if the supplier is not retaining the right to re-use the content for other customers.
  • Third-party software, services, and equipment are provided subject to the third party’s license terms.

2.2. Intellectual Property Infringement

  • The supplier should be responsible for defending and paying/settling any third-party claim against the customer alleging that the supplier’s services or products infringe the third party’s intellectual property rights in any country in which the service or product is provided or where the services/deliverables are intended to be used. The supplier should not be responsible to the extent an infringement claim arises from the following ("Excluded Claims"):
    • combination of the supplier’s service or product with items provided by the customer or others not under the supplier’s control;
    • modification to the supplier’s service or product by someone other than the supplier or others not under the supplier’s control;
    • the supplier’s adherence to the customer’s requirements;
    • the customer’s content; or
    • use of the service by the customer in breach of contract restrictions or in violation of law.
  • The customer should be responsible to defend and pay/settle any third-party claim against the supplier for Excluded Claims.
  • The obligation to indemnify for third party infringement claims should not be subject to any limitation of liability cap.  
  • The indemnified party should have the obligation to promptly notify the indemnifying party of any such claims, and the indemnified party will not be responsible for any losses attributable to a notification delay.
  • The indemnification of third-party claims is sufficient to protect the customer, and therefore, the supplier should not be expected to provide a warranty or representation that its services or products do not infringe third party intellectual property rights.
  • If the supplier’s service or product infringes a third party’s IP (or is subject to a claim of infringement), the supplier may:
    • obtain from the third party the right for the customer to continue its use of the service or product;
    • modify the service or product so it is not infringing without materially reducing the functionality or performance of the service; o
    • substitute another service or product having substantially the same functionality and performance criteria.
  • If the supplier is unable to implement any of these measures through commercially reasonable efforts, the supplier may cease providing the service or accept a return of the product that is subject to the third party claim and refund any prepaid charges or refund the current market value of the product, as the case may be.