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
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.
A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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