Canada: Obligations To Defend And Indemnify In A Licence Agreement

A software licence, alleged patent infringement, obligations to defend and indemnify, arbitration and an appeal to a court were all dealt with by a Canadian court in Coastal Contacts Inc. v. Elastic Path Software Inc.

On a motion for leave to appeal an arbitration decision, the British Columbia Supreme Court (the Court) addressed the claim of a software licensee against its licensor for breach of the licensor's duty to defend and indemnify the licensee in a suit by a third party alleging patent infringement by the licensee's use of the software.

The decision discusses the requirements to appeal an arbitration award and teaches several lessons to both licensors and licensees.

Licence Agreement

Coastal Contacts Inc. (Coastal) is an online retailer of eyewear. Elastic Path Software Inc. (Elastic) is a software developer that licenses software for the operation of e-commerce websites. Elastic and Coastal entered a licence agreement (the Agreement) that permitted Coastal to use Elastic's software.

The Agreement required Elastic to "defend or settle any claim made or any suit or proceeding brought against [Coastal] insofar as such claim, suit or proceeding is based on an allegation that any of the software...infringes (directly or indirectly) any patent...of any third party, provided that [Coastal] shall notify [Elastic] in writing promptly after the claim, suit or proceeding is known to [Coastal] and shall give [Elastic] information and such assistance as is reasonable in the circumstances, at [Elastic's] expense. [Elastic] shall have sole authority to defend or settle the same at [Elastic's] expense."

The Agreement also obliged Elastic to "indemnify and hold [Coastal] harmless from and against any and all such claims and...pay all damages and costs finally awarded...to be paid in the settlement of such claim, suit or proceeding...".

The Agreement further provided that "all disputes under, arising from, in relation to, or connected with [the] Agreement, [if not resolved]...will be [referred to and finally] resolved by arbitration...".

Background

In 2009, Coastal was among several parties sued in the U.S. for patent infringement (the Patent Action) on the basis of its use of the licensed software. Three months later, Coastal filed a defence and counterclaim in the Patent Action and, several days after, requested Elastic to defend Coastal in the Patent Action. When Elastic refused, Coastal sued Elastic as a third party in the Patent Action.

Elastic then submitted a notice to arbitrate, denying any obligation to defend or indemnify Coastal on the basis that: (1) there was no liability for any intellectual property claim that would trigger either obligation; (2) Coastal breached the Agreement and prejudiced Elastic's rights by failing to give prompt notice of the Patent Action; and (3) Coastal breached the arbitration provision by suing Elastic in the Patent Action.

Coastal settled the Patent Action with a payment and the parties arbitrated Coastal's claim against Elastic.

Arbitration Award

The arbitrator's award (the Award) found that it was unlikely that the use of the software infringed any of the patents in the Patent Action. The Award concluded that Coastal failed to give prompt notice of the Patent Action to Elastic and breached the duty to defend provision because Elastic was deprived of the sole right to defend the Patent Action. The Award also held that Coastal breached the arbitration provision by suing Elastic in the Patent Action.

Therefore, the Award held that Elastic was not liable to Coastal for the settlement amount or any of its costs, and that Elastic was entitled to its costs of defending Coastal's suit and the costs of the arbitration.

Leave to Appeal

Coastal sought leave of the Court to appeal the Award. The British Columbia Commercial Arbitration Act (the Act) permits an appeal of an award only with leave on a question of law and in limited circumstances.

If a question of law is established, an applicant for leave must also qualify under one of the enumerated circumstances set out in the Act: (1) the importance of the result of the arbitration to the parties must justify the intervention of the court and the determination of the point of law may prevent a miscarriage of justice, (2) the point of law must be of importance to some class or body of persons of which the applicant is a member; or (3) the point of law must be of general or public importance.

Similar, but not identical, requirements apply in other provinces. For example, the Ontario Arbitration Act, 1991 provides that, if the arbitration agreement does not deal with appeals on questions of law, a party may appeal an award to a court on a question of law with leave only if the court is satisfied that: (1) the importance to the parties of the matters at stake in the arbitration justifies an appeal; and (2) determination of the question of law at issue will significantly affect the rights of the parties.

In Coastal, the Court said that courts are obligated to maintain the integrity of the arbitration system. Where parties have chosen arbitration to resolve disputes, public policy requires a court to give deference to an award. The requirement for leave to appeal an award safeguards the parties' choice to arbitrate.

An appeal is not available on a question of fact or of mixed fact and law. The onus is on the applicant for leave to establish that the question at issue is one of law that is apparent on the face of an award. An alleged error of law must be one that, if corrected, could result in a different outcome of the proceeding. The error must be part of the reasoning on which the award is based.

In exercising discretion to grant leave, a court considers: (1) the apparent merits of the appeal; (2) the significance of the issue to the parties, third parties and the community at large; (3) the circumstances surrounding the dispute and adjudication, including the urgency of a final answer; (4) other temporal considerations, including the opportunity for either party to address the result through other avenues; (5) the conduct of the parties; and (6) the stage of the process at which the decision at issue was made.

Errors of Law

The Court held that the Agreement required Elastic to defend Coastal where the pleadings raised a claim that would be covered by the defence provision. To trigger the duty to defend, it was not necessary that Coastal be held liable. The test is whether there was a mere possibility that the allegation of infringement might apply to the use of the software by Coastal.

The conclusion in the Award ought to have been confined to the question of whether there was a mere possibility that use of the software would attract liability in the Patent Action. The Award's finding that it was unlikely that use of the software infringed went beyond a review of the allegation in the Patent Action. The arbitrator's analysis constituted an error of law.

Coastal's failure to give timely notice of the Patent Action was a breach of the Agreement and denied Elastic any opportunity to defend the Patent Action. Coastal also breached the Agreement by filing the defence and counterclaim in the Patent Action and suing Elastic.

The Award did not assess the relative prejudice to the parties by their respective breaches. The Court found that the prejudice to Coastal outweighed any prejudice suffered by Elastic.

The Court held that there was not a sufficient nexus between Coastal's failure to give prompt notice and its suit against Elastic to deny relief to Coastal with respect to the breach by Elastic of its obligations to defend and indemnify. The arbitrator's treatment of this issue therefore constituted another error of law.

The Court concluded that Coastal satisfied the statutory criteria for leave. The amount was substantial and sufficiently important to warrant a review of the Award. The errors of law were important to the conclusions in the Award and may have resulted in a miscarriage of justice. The Court granted leave to appeal.

Appeal

The parties agreed that, if leave to appeal were granted, it would be appropriate for the Court to decide the merits, and the Court did so. For the reasons discussed in the leave analysis, the Court held that, applying the correct test to the findings of fact made by the arbitrator, it was appropriate to grant Coastal relief.

Coastal was entitled to recover the amount expended to achieve a reasonable settlement of the Patent Action plus its costs. However, the Court did not disturb the award of costs incurred by Elastic in defending the suit by Coastal because of Coastal's breach of the arbitration clause.

Lessons to be Learned

This case illustrates the importance of the negotiation of, and timely compliance with, the duty to defend, indemnification and arbitration provisions in licence agreements in the face of the potential for alleged infringement by the licensee of a third-party's intellectual property rights. A number of specific lessons may be learned from the decision:

  • It is advantageous for a licensee of intellectual property to negotiate strong and clear obligations of its licensor to both defend and indemnify the licensee from claims of infringement of third-party intellectual property rights resulting from use of the licensed intellectual property.
  • A licensee should seek to provide that the obligations to both defend and indemnify will be triggered by allegations made by a third party and not by the merits of the third-party's claim.
  • When a licensee becomes aware of such a third-party claim, it should promptly review the duty to defend and indemnification provisions to determine its own obligations, such as to give notice to the licensor to activate the licensor's obligations, and comply with them.
  • If properly requested by a licensee, a licensor should assess, and if required, comply with, any obligations it may have to defend and indemnify the licensee.
  • If the parties disagree on the obligations of defence or indemnification, and the agreement includes an arbitration provision, a party contesting the position of the other party should consider whether the arbitration provision precludes a court action against the other party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
23 Nov 2018, Other, Toronto, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

28 Nov 2018, Speaking Engagement, Toronto, Canada

Arbitration has a number of advantages and some disadvantages for the resolution of domestic and international commercial disputes.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions