Monthly Archives: October 2006

IP Indemnity

Intellectual Property Indemnification (aka IP Indemnity) clauses are common in software licenses. The specific language usually plainly states that the software vendor will indemnify, protect and/or defend the buyer from any claim made that the software violates the intellectual property rights of a third party.

Fundamentally, this type of protection makes sense. In first-world countries (and most second-world countries, too), intellectual property rights are pretty clearly delineated and it’s relatively easy to understand the scope of your property compared to that of another. So it’s not a stretch to be able to say that if you know what you own, you can offer assurance to a buyer/licensor that someone else claiming ownership of that property will receive swift action from you rather than the buyer.

Overall, though, it’s economic. If you pay for a software license once, you do not want to have to pay someone else for that same license. You want to know that the person receiving your money is the rightful licensor of the product. Pretty simple.

What makes it complex is that IP rights vary from country to country. So the surety you feel within, say, the United States regarding the ownership of your IP is not carried into some third-world countries (and even a first-world country or two, such as China) where a blind eye is turned towards piracy, copying and stealing. Some of these countries even have laws that protect the thief better than they protect the actual owner, depending upon the situation(s). As a result, IP indemnification is based on WHICH IP laws are being upheld by the parties to a software license.

The net result is that most software licenses, even on a global scale, offer IP indemnity based on one of a few country’s IP laws (the US or UK, primarily) because these two countries not only have established IP laws, but they also have a relatively fair system of legal enforcement of rights.

What you find in some global deals, however, is that the buyer wants IP indemnification under the laws of each country in which a product will be used or reside. This, beyond being potentially impossible to manage, is also fairly unreasonable. The inventor of the product, while desiring to sell as much of that product as possible, has to be able to manage the potential for damage in the event that someone claims IP infringement. By offering IP indemnification under the laws of all countries (and not just those with established IP rights and enforcement abilities), the seller opens themselves to a large amount of risk and, again from an economic perspective, it becomes an untenable deal.

This however, doesn’t mean that the buyer receives no protection in those countries. Rather, they still receive indemnification under claims made under the laws of the country offered in the IP Indemnification section. So, if IP indemnification is offered “for claims made that a product or software violates the copyright, trademark, trade secret or patent laws of the United States”, then even claims for products used in China or Niger are covered … so long as the claim is made that the product violates a US IP law.

The key is to remember that at the end of the day, the deal has to be economically feasible from both sides of the purchasing equation.

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