This week, we will be covering how indemnification clauses can impact liability in software and licensing agreements. A major portion of the time spent in contract negotiations involves the degree and scope of the indemnification obligations of each party. With this in mind, the question becomes:
How should a founder think of indemnification with respect to a software and license agreement?
As mentioned in our previous post, it is helpful to start by considering market standard indemnification obligations for the specific type of agreement and the particular vertical of the company.
For software and license agreements, the licensee may indemnify, defend and hold the licensor harmless from losses, costs, expenses, and other liability incurred by the licensee arising from the licensee’s use of the licensed software, with the exception of claims alleging infringement of third-party IP rights by the licensed technology.
On the other hand, the licensor might indemnify, defend and hold the licensee harmless from losses, costs, expenses, and other liability incurred by the licensor arising from claims that the licensed technology breaches third-party IP rights (the licensee should be required to notify the licensor of any such third-party claims promptly and cede control of the defense and any settlement related negotiations).
If the court intervenes because of a finding of infringement, the licensor may be required to take certain actions, such as:
working out terms with the third party that are the same as the licensor/licensee agreement so that the licensee can use the infringing software;
modifying the licensed software to cure the infringement;
replacing the licensed software with a substantially equivalent product that does not infringe on a third party’s IP rights;
providing a full or partial refund to the licensee.
With a basic understanding of commonly present indemnification obligations, a founder should consider their bargaining position and leverage in the negotiation. Regardless of whether the founder is the licensor or the licensee, things to consider would include:
Is the licensor a market leader for this type of software?
How long has the software been on the market?
What is the volume of business considered in this deal?
After a founder considers his/her bargaining position, it is important to note potential problems and liabilities that might arise under a software and licensing agreement and how those problems and liabilities should be dealt with using indemnification. Some other indemnification considerations for this type of agreement might be:
Does the indemnification survive the termination of the agreement?
What if the IP rights that are the base of a third-party claim were issued or registered after the agreement’s effective date?
Does indemnification apply in all other countries?
Is it required that a final judgment be reached for indemnification obligations to kick or do those obligations arise upon a claim being made?
What is the potential infringement risk?
What liabilities may arise if there is a data breach or if the software goes down?
Be sure to check back next week when we will explore indemnification in manufacturing agreements.
*This blog provides general information for educational purposes only. It is not intended to constitute specific legal advice and does not create an attorney-client relationship.*