Software license agreements often include a provision — known as an “IP infringement indemnity” — that requires the software vendor to provide the customer with limited protection and special remedies if a third party claims that the customer’s use of licensed software infringes third party intellectual property rights. Customers should understand the protections and restrictions provided by the provision and consider whether to procure insurance for residual risk.
IP Infringement Indemnity
An IP infringement indemnity provides the customer with limited protection against claims, by persons who are not parties to the contract (known as “third parties”), based on allegations that the customer’s use of the licensed software infringes the third party’s intellectual property rights (e.g. copyright, patents and trade secrets). An IP infringement indemnity usually imposes two distinct obligations on the software vendor: (1) an obligation to defend the customer against IP infringement claims; and (2) an obligation to indemnify (reimburse) and hold harmless (protect) the customer against obligations and liabilities (including court awards and settlement payments) resulting from IP infringement claims.
The scope of an IP infringement indemnity can be adjusted using the same variables – beneficiaries, covered claims, time restrictions and financial limitations – as apply to a general indemnity. An IP infringement indemnity usually requires the customer to comply with the same kinds of procedural obligations – prompt notice of a covered claim, conduct and control of defence/settlement of a covered claim and cooperation regarding a covered claim – as apply to a general indemnity. For a discussion of general indemnities, see A Practical Guide to Software License Agreements: General Indemnities.
IP infringement indemnities are often subject to exceptions for certain kinds of infringement claims (e.g. certain patent infringement claims), exclusions for infringement claims caused by certain circumstances (e.g. the customer’s modification of the licensed software or unauthorized use of the licensed software), and limitations on the software vendor’s total financial liability.
Software license agreements often require the software vendor to provide the customer with additional remedies if an IP infringement claim affects the customer’s continuing use of the licensed software. Those remedies usually include: (1) obtaining rights for the customer to continue to use the licensed software without a risk of infringement liability; (2) replacing or modifying the licensed software so that it is no longer infringing but provides the same functionality or other benefit to the customer (in which case the customer must use the replacement/modified software); or (3) terminating the software license (in which case the customer must stop using the licensed software) and providing the customer with a partial refund of previously paid software license fees.
Software license agreements often provide that an IP infringement indemnity and additional remedies are the customer’s only remedies against the software vendor if there is an IP infringement claim against the customer. This means that if an IP infringement claim prevents the customer from using the licensed software or causes the customer to suffer additional loss or damage, the customer will not be entitled to compensation from the software vendor.
When negotiating a software license agreement, a customer should understand the protections and restrictions of the IP infringement indemnity and related remedies and consider whether to procure insurance to cover residual risk.