United States: Protect Against Patent Suits Before You Buy

Last Updated: April 21 2017
Article by Wasif Qureshi

Defending against a patent infringement lawsuit can be an expensive and frustrating experience. Patent litigation is complex and often requires attorneys who are not only well-versed in the intricacies of patent law but who also have science or engineering backgrounds, thereby enabling patent litigators to seek premium rates. Although patent cases rarely go to trial, damages in the cases that do reach infringement verdicts routinely extend into the millions of dollars. These costs and risks, coupled with attendant business disruption, can be particularly surprising for companies hit with a patent suit for the first time. Adding to the headache, customers and investors familiar with the consequences of patent litigation often demand expeditious resolution of the suit or risk chilled business or investment activity.

The aggravation becomes exasperation when one realizes that despite weak allegations (e.g., the U.S. Patent Office should not have issued the patent because it covers what was known before the patent, a company clearly does not infringe, or there are no profits from the accused product or service), litigating to a favorable judgment would take far more time and money than just paying off the plaintiff. And patent plaintiffs know and prey on that. Indeed, non-practicing entity plaintiffs, whose sole business is to license and sue on patents, likely want nothing more than to scoop up a quick settlement check – avoiding legal work and risk to its patent in litigation – and move on to the next target.

While a company may not consider a patent suit to be a threat due to the nature of  its business, many of the new patent cases filed every day are actually brought against non-tech companies such as banks, retail entities, media, and even real estate companies. This is because patent infringement is not limited to those who develop or sell technology – rather, the law additionally provides that anyone who uses patented technology can be an infringer. That "use" can result in liability even when only a part of the claimed invention is actually practiced – or in some situations not practiced at all – by the accused infringer. For example, a regional bank client was recently sued on a patented method alleged to cover EMV "chip card" transactions. But the bank only solicited its account holders to sign up for credit cards printed with the bank's insignia. The bank had nothing to do with, nor did it have knowledge of or desire to know about, how transactions using the chip cards were processed. Yet, the plaintiff claimed the bank was liable because it benefitted from decreased fraud claims associated with the more secure chip cards. Patent plaintiffs rely on such broad views of what constitutes patent infringement, however legally or factually deficient, to target unsuspecting small-to-medium sized companies in the hope to scare up settlements.

Because the vast majority of companies rely on some form of technology (e.g., having a website, depending on a server, using software to generate web pages, or depending on intricate protocols to facilitate secure communication over the Internet), the threat of a patent suit should not be ignored. And when sued, an assessment of the allegations can be particularly difficult for a company that has no visibility into or had no reason to know the inner workings of a "black box" technology product or service procured from a third party. Even with access to the inner workings, companies may lack or not wish to expend the significant time and money required to analyze third party supplied technology to assess the strength of the case.

Against the threat of patent suits, thought-out patent infringement indemnification terms in technology supply agreements can be an important and effective safeguard. Plainly, it is imperative that businesses pay close attention to IP indemnity provisions in agreements with their suppliers of products and services that could serve as a basis for alleged patent infringement. Unfortunately, in the eagerness to confirm a purchase order and begin receiving supply, customers often overlook or devalue the importance of having strong indemnification protections. As a result, companies frequently fail to include or even propose patent infringement indemnification language in their agreements with suppliers. A company hit with a patent suit may regret not having scrutinized a relevant supply agreement to inoculate against that suit by basically insisting on built-in insurance in the form of patent infringement indemnification.

Even when a supplier provides a "form" agreement, it is advisable to carefully review the terms and insist that patent suit indemnification safeguards be included. Too often companies do not anticipate or appreciate the potential of a patent infringement lawsuit and sign agreements with inadequate protection against patent suits or with no protection at all. Such agreements may expressly disclaim or significantly limit indemnification, contain supplier friendly "at supplier's sole option" indemnification language, or be silent on indemnification altogether (in which case there may be common law relief).  To avoid having to finance or solely defend expensive litigation, companies should insist on patent suit indemnification coverage before moving forward. It makes practical sense for a customer to have contractual recourse with a supplier should the customer's use of that product or service be subject to patent litigation. Better still, where possible, companies should include indemnification requirements up front on their own terms in RFPs to potential suppliers. Moreover, the indemnification language should leave at least some discretion or control to the customer (the potential named defendant), so the customer can ensure the supplier does not conduct the litigation in a manner that is damaging or undesirable to the customer's business or reputation.

The mere inclusion of a patent infringement indemnification provision in a supply agreement does not automatically confer reliable recourse. The supplier might include fine print limiting the scope of coverage in situations where the customer, for example, orders a product or service to certain specifications, modifies the procured product or service, uses the product in a manner not intended by the supplier, or buys a product for use in compliance with an industry standard (e.g., USB, Bluetooth). In these instances, a customer may be surprised to learn that it waived indemnification when it provided the supplier with specifications necessary to ensure a working interface between the supplier's product and the customer's business. Moreover, what counts as unintended or modified use should not be left unclear. A supplier might rely on ambiguous language to refuse indemnification based on use of the product that the customer believed to be customary and had no reason to foresee would void coverage. The customer should also seek language that current and future purchase orders are covered for indemnification under the master supply agreement (rather than legacy or conflicting indemnification terms in follow-on orders that may not be reviewed by the legal team). In many cases, the indemnification language is carried over from older or unrelated agreements and has not been revised to reflect sale and use of the specific product or service being purchased. Thus, it is crucial to dissect any proposed indemnification language and ensure that it is crafted to the circumstance at hand.

Record-keeping is also of particular import here because a patent plaintiff can seek damages accrued for up to six years before the date of the lawsuit. A centralized system for storing supply agreements for extended rolling periods of time is prudent. Employees responsible for relationships with suppliers should be instructed to ensure addendums and specifications pertaining to the master agreement are saved in a manner easily accessible to the company. While one could ask a supplier for a copy of an agreement or related document that otherwise is difficult to locate, many suppliers have a tendency to become defensive, distant, or unhelpful when they sense a patent suit close. Moreover, it is common for a company to change product or service providers over the years. And when that happens, relationships with past suppliers are often lost, making it critical to preserve written records of those prior relationships.

Of course there are suppliers who meaningfully step up when their customers are sued for patent infringement. But there are also suppliers who want nothing to do with patent litigation, even at the risk of losing a customer. The supplier may be unfamiliar with or too intimidated by patent litigation. Or the supplier might stay away because it knows the risks of getting embroiled in patent litigation. It may also avoid involvement due to concern about its identity being disclosed, leaving the supplier vulnerable to a lawsuit by the patent plaintiff, especially when the supplier would be a bigger target than the customer. Furthermore, a supplier may not want to set precedent by offering nuisance-value dollars to settle for just one customer in one case because a plaintiff may later seek to multiply that amount for a license to cover all the supplier's customers.

Despite the importance of having strong infringement indemnification protections, a company should not give up when it finds no contractual recourse against its supplier. Even absent written obligation, some suppliers agree to assist with patent litigation, obtain a license for the customer, and/or take over defense of the lawsuit. Those suppliers are typically large corporations who are no stranger to patent lawsuits. They have budgets to afford protracted litigation and validity challenges at the U.S. Patent Office, have access to patent acquisition networks that can take patents off the lawsuit market, and/or have leverage to license or outright purchase an asserted patent at a cost not attainable by smaller companies. Such good will, however, even if the dollars associated with the business relationship are significant, should not be assumed.

These suggestions are particularly important for small to medium-sized and non-tech companies who do not anticipate patent suits because of the size or nature of their business, who may have little or no experience with patent lawsuits, or where a patent suit could severely impact the company's finances. Nonetheless, even established tech companies overlook patent infringement indemnification terms (or lack thereof) in their supply agreements. Among other reasons, supply agreements often get consummated at the business level, bypassing scrutiny by in-house counsel or any review at all.

To reduce uncertainty in the face of a potential patent suit, customers should have a clear written agreement on a framework that requires the supplier to relieve the customer when use of the supplier's product or service precipitates the infringement suit against the customer. Clear indemnification terms also lessen the likelihood of a dispute arising between supplier and customer, which could otherwise lead to its own litigation or at minimum damage the business relationship.  

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.

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