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The importance of intellectual property(IP) indemnification clauses

Disclaimer: The information provided in this factsheet is meant as an educational resource only and should not be construed as legal advice.

  1. When building a system (hardware or software), it is often prudent to include third-party modules or systems that are already available. Including components that are already proven and tested often saves time and reduces costs.
  2. The third-party components may be covered by intellectual property (IP) (e.g., patents or trade secrets) and could be subject to infringement claims.
  3. IP litigation can be extremely expensive. An IP indemnification agreement or clause can provide significant protection and can limit risk of liability if infringement issues arise.
  4. Often, someone seeking a license for IP infringement will attack at the top of the chain in order to get more damages and ongoing royalties, reaching out to the end-system provider as opposed to the component provider.
  5. Generally, infringement damages and royalties can only be awarded once for a given component. Therefore, if the supplier of the component is already covered by a license, the system developer would not be subject to infringement claims (for the same patents and claims).
  6. “Battle of the forms” refers to a known issue where two parties will each attempt to impose their own terms and conditions on the relationship/transaction by incorporating them into the contract language (e.g., purchase orders vs. invoices). For example, the system developer uses a purchase order to buy components and the components are delivered with an invoice. The purchase order may have an IP indemnification clause, but the supplier’s invoice has a clause negating it. In many cases, since there is no signed purchase agreement or supply contract, the last form prevails and the inclusion of the component in the system based on the invoice is considered acceptance of the terms in the invoice, i.e., no indemnification.

Example: Company A builds an innovative system that includes an MPEG CODEC. They buy the CODEC from Company B using a purchase order with an IP indemnification. Company B sends the CODEC with an invoice negating the IP indemnification. By including the CODEC in the product, Company A implicitly accepts the terms of the last form exchanged (the invoice). If Company A is approached for infringement of MPEG patents executed by the CODEC it may not be able to ask Company B to deal with the issue or make Company B accept any liability.

Example: Company A builds an innovative system that includes an MPEG CODEC. They sign a purchase agreement with Company B to supply the CODEC. The purchase agreement includes an IP indemnification clause requiring Company B to handle, and be liable for, any infringement claims against its product. If Company A is approached for infringement of MPEG patents related to the CODEC, it will be able to turn to Company B to handle the issue at Company B’s expense.

Key considerations for Canadian companies:

Additional information:

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