Over the many years of my career, I’ve witnessed firsthand how the business world has been transformed by technology. Time and again, I’ve seen that a company’s most valuable assets aren’t always tangible. What sets an innovation company apart are their ideas, innovations, and unique processes – their IP. Perhaps most importantly, it’s these intangible assets that define and drive their market value.

Unfortunately, I’ve also seen many businesses make the mistake of viewing IP protection merely as a defensive strategy, a necessary expense to ward off infringement or legal challenges. This perspective leads to money left on the table. 

In my experience, a well-managed IP portfolio isn’t just about legal protection – it’s a powerful tool that can significantly boost a company’s monetary value.

Take, for example, the often misunderstood, or outright ignored, intellectual property indemnity. Many see it as just another legal safeguard, but I’ve helped numerous clients leverage these agreements to not only protect their innovations but also to open doors for lucrative partnerships and investments.

Throughout my career, I’ve sought to shift the conversation around IP. IP protections are not just about safeguarding your creations. They’re about strategically positioning your company for growth and success. 

In this article, I’ll share my insights on how to transform your IP from a cost center into a value driver by effectively leveraging indemnity clauses. When done right, your IP strategy can become one of your most potent competitive advantages.

What Is An Indemnity?

Before addressing the specifics of IP indemnities, it might be helpful to review the general concept of indemnity. In legal terms, an indemnity is a contractual obligation where one party (the indemnitor) agrees to compensate another party (the indemnitee) for losses or damages incurred under specific circumstances. 

In a business context, indemnities are commonly used to allocate risk between parties in a transaction. They provide a mechanism for one party to assume financial responsibility for certain events or occurrences, thereby offering peace of mind to the other party.

IP Indemnity vs Patent Indemnity

When it comes to intellectual property law, there are two types of indemnity to consider: IP indemnity and patent indemnity. Understanding the distinction between them is important for businesses seeking comprehensive IP protection.

Patent Indemnity

Patent indemnity has a more narrow scope and coverage. It specifically pertains to protection against claims of patent infringement. This type of indemnity typically applies in scenarios where a company is using or selling a product that may potentially infringe on another party’s patented technology.

Patent indemnities are particularly common in technology-related contracts where the risk of patent infringement is higher due to the complex and constantly shifting nature of technology.

  • Example: If Company A sells a software product to Company B, a patent indemnity would protect Company B if a third party claims that the software infringes on their patent. In this case, Company A would be responsible for defending against the claim and covering any resulting damages or settlement costs.

IP Infringement Indemnity

IP infringement indemnity has a broader scope than a patent indemnity. It can encompass all forms of intellectual property infringement, including but not limited to patents, trademarks, copyrights, and trade secrets. This comprehensive coverage makes it a more robust form of protection for businesses dealing with various types of intellectual property.

An IP infringement indemnity could cover scenarios such as:

  • Trademark infringement claims related to product branding or logos.
  • Copyright infringement allegations concerning software code, literary works, or artistic creations.
  • Trade secret misappropriation claims.

By offering this wider range of protection, IP infringement indemnities provide a more comprehensive safety net for businesses engaged in IP-intensive activities or transactions.

  • Example: Company X, a marketing firm, creates a comprehensive branding package for Company Y, including a logo, website design, and advertising jingles. If a third party later claims that any part of this package infringes on their intellectual property (e.g., the logo design is too similar to their trademarked logo, or the jingle closely resembles their copyrighted music), an IP infringement indemnity would protect Company Y. In this case, Company X would be responsible for defending against all such claims, regardless of the type of IP involved, and would cover any resulting damages or settlement costs.

Why Is IP Indemnification Important?

Financial Protection

IP litigation often becomes extremely costly. An IP indemnification clause can shield the buyer or licensee from these potentially crippling litigation expenses. This financial protection allows companies to operate with greater confidence, knowing they have a safeguard against unexpected legal challenges.

Risk Mitigation

By clearly defining who bears the responsibility in case of an IP infringement claim, companies can better manage their risk exposure. This clarity helps in making informed decisions about product development, partnerships, and market entry strategies.

Trust Building

Strong IP indemnification clauses help to build trust between parties in business transactions, particularly in technology-driven industries. When a supplier or partner is willing to stand behind their product or service with a robust indemnity, it demonstrates confidence in their offerings and commitment to their business relationships.

Deal Facilitation

The presence of well-crafted IP indemnity provisions can often be a deciding factor in securing important business deals or partnerships. Many companies, especially larger corporations, require these clauses as a condition of doing business, making them essential for smaller companies or startups looking to grow and expand their market presence.

Innovation Encouragement

With the protection offered by IP indemnities, companies may feel more comfortable pushing the boundaries of innovation. This can lead to more groundbreaking products and services, ultimately benefiting both the business and its customers.

The Importance of Conducting a Freedom to Operate Search Before Granting IP Indemnity

When entering into a contract, particularly where intellectual property (IP) is concerned, it is essential for a company to conduct a Freedom to Operate (FTO) search before granting an IP indemnity to its customers. This search plays a critical role in identifying potential patent or other IP infringement risks and ensuring that the company is not exposed to unnecessary legal and financial liabilities.

At the heart of an FTO search is the need to mitigate risk. By identifying potential patent infringement issues associated with a product, the company can take proactive steps to avoid costly legal disputes. These disputes can arise if a third party claims that the product infringes on their patent. 

The need for an FTO search becomes even more acute when the company grants IP indemnities to its customers. Conducting an FTO search allows the company to assess these risks before granting the indemnity to its customers and take appropriate measures to protect itself from potential liabilities.

Granting an IP indemnity without conducting an FTO search can expose the company to significant legal and financial repercussions. If a third party claims patent infringement, the company may face litigation costs, damages, and even the possibility of withdrawing the product from the market. By conducting an FTO search, the company can avoid these costly outcomes and ensure that they are not caught off guard by unexpected legal challenges.

Moreover, an FTO search provides valuable insights that can greatly aid in the negotiation of a properly crafted indemnity. For example, the company can condition an IP indemnity on its customers using the company’s product in specific ways that will avoid infringing third party patent rights identified in the FTO search.

Conducting a Freedom to Operate search is a critical step for any company before granting an IP indemnity to a customer. By taking this proactive approach, companies can safeguard their interests and pave the way for successful business operations.

IP Infringement Indemnity Sample Clause

Indemnification provisions in contracts often exhibit complexity and nuance. Nonetheless, they serve as a vital mechanism for companies to strategically leverage their intellectual property in practical applications.

Consider the following examples of clauses that can be used in an IP infringement indemnity contractual provision. Note that an indemnity clause can favor the indemnitor (Seller, in the examples below) or the indemnitee (Buyer, in the examples below), depending on the specific wording.

  • A broad and unrestricted example of an IP indemnity clause could read as follows:
    • Seller agrees to indemnify, defend and hold harmless Buyer from and against any and all Losses, to the extent based upon a third party claim that the Product purchased by Buyer pursuant to this Agreement infringes or violates any U.S. copyright, trademark, trade secret, or patent.
  • Seller can use language to restrict the scope of the indemnity, as follows:
    • Seller will have no indemnification obligation if (a) the Product is modified or reconfigured by Buyer, (b) the Product is used in combination with any other products or services and, but for Buyer’s modification, reconfiguration or use in such combination, the Product would not otherwise infringe; and/or (c) Buyer uses the Product in violation of the terms of this Agreement.
  • Seller can use language to require Buyer to provide notice to Seller of any potential infringement claims, as follows:
    • Buyer shall promptly notify Seller of any known or threatened infringement of the Intellectual Property by any third party.  Seller shall have the sole right to defend and settle any claims by third parties that the use of the Product infringes or otherwise violates the rights of a third party. Buyer shall cooperate with all reasonable requests for assistance by Seller in connection with any such actions. 
  • Buyer can use language to obligate Seller to undertake steps to resolve an actual infringement claim, as follows:
    • Without limiting Seller’s indemnification obligations hereunder, in the event of any credible claim of infringement of third party Intellectual Property rights relating to the Product, Seller shall make commercially reasonable efforts, in its reasonable business judgment, at no cost to Buyer, to, at Seller’s option: (i) obtain a license under any such third party Intellectual Property so as to make the Product noninfringing; or (ii) arrange for alternative production or importation of the Product so as to make the same noninfringing; provided that the foregoing shall not limit Seller’s indemnification obligations for any infringement prior to the applicable action being taken or if any Product continues to infringe.

When To Seek Professional Legal Counsel

As seen in the examples above, small nuances in language can significantly impact the level of protection afforded by an indemnity clause. Professional legal counsel can help navigate these intricacies in a variety of scenarios and assist in negotiating favorable terms. 

Complex Transactions

When negotiating complex business deals, mergers, or acquisitions involving the transfer of intellectual property rights, an experienced attorney can determine if a certain IP indemnity clause adequately protects your interests. They can identify potential pitfalls and advocate for terms that align with your risk tolerance.

Unconventional Use Cases

If you plan to use a product or service in a way that deviates from the manufacturer or provider’s intended use, seeking legal counsel is advisable. An IP attorney can assess whether the indemnity coverage extends to these non-standard applications and recommend strategies to mitigate potential liability.

Ambiguous Indemnity Language

Indemnity clauses can sometimes be vague or open to interpretation. A lawyer can scrutinize the language, identify loopholes or ambiguities, and work to modify the provisions to make them clear and comprehensive.

Indemnity Disputes

In the event of an IP infringement claim, having an attorney who is familiar with your indemnity agreements can be crucial. They can navigate the dispute resolution process, negotiate settlements, and defend your interests if the case goes to court.

Specialized Industries

Certain industries, such as technology, pharmaceuticals, or media, may have unique IP considerations. An attorney with deep experience in your sector can provide tailored advice on indemnity clauses that address the specific risks and regulations you face.

Final Thoughts

In my years of practice, I’ve come to see IP indemnification as a powerful tool that, when wielded correctly, can boost your company’s value and market position.

I hate seeing innovation companies underestimate the strategic importance of indemnification in their overall IP portfolio. I’ve witnessed companies leverage strong indemnification clauses to win contracts, build trust with partners, and even guide their R&D efforts. 

IP indemnification, however, isn’t a one-size-fits-all solution. It should be tailored to your specific business strategy and goals. This is where working with an experienced IP attorney becomes invaluable. Rather than just copy-pasting contract clauses, an IP legal team can help you see the bigger picture, anticipate challenges, and identify opportunities you might have missed.

Michael Dilworth

1 These examples are solely for educational and illustrative purposes. They do not constitute legal advice and should not be construed as recommendations for specific actions. For personalized legal guidance, please consult a qualified attorney.

This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. The opinions expressed in this article are those of the author only and are not necessarily shared by Dilworth IP, its other attorneys, agents, or staff, or its clients.