When it comes to intellectual property transactions, I have a maxim — sometimes what you seek is not what you get. It’s true — I have drafted and negotiated enough transactions to know that the best intentions do not always translate into a good contractual construct. What is drafted is important, as it is the vehicle by which the expectations of the parties are fixed (and through which courts interpret such interests, should they unfortunately get involved at some point). That said, understanding the realities underlying the transaction is essential to shaping the appropriate provisions and creating a truly enforceable contract. When it comes to intellectual property indemnification, that is easier said than written, so to speak,
Every transaction is different, of course, but intellectual property transactions require a deft hand when it comes to indemnification. Think about it — intellectual property infringement is always an important element to consider in any license (whether limiting the licensor’s reasonable exposure or obtaining as much protection as reasonably necessary for a licensee) and equally important for an intellectual property asset transfer in an M&A deal. Unfortunately, I have seen these provisions be real problems for clients for a multitude of reasons, ranging from rote reliance on “standard” language that did to fit the relationship to heavy-handed, complicated provisions that simply missed the mark. In all of these cases, thought, the underlying problem boiled down to not fully comprehending the realities of the relationship.
Good corporate contractual relationships are like marriages — they require a certain level of trust, communication, and attention. Simply put, they take work. I have already harped on about the “template trap” and the dangers of relying on standard clauses, so the problems with the “one size fits all” approach should be self-evident. When approaching indemnification, however, an understanding of the parties involved, and the realities of the transaction, is essential to creating proper, functional contractual indemnification. It takes work to both understand the drivers involved and implement these considerations into the contract.
Let’s not avoid the obvious: always take the time to understand the parties’ positions and underlying risks. Needless to say, there are a multitude of other drivers that affect the nature of intellectual property indemnification provisions, and no way to cover all of them (let alone in one article). There are, however, any number of things that should always be considered when preparing indemnifications provisions in intellectual property deals (assuming you already took the time to understand positions and risks involved in the deal, per the above). Here are three of them are worthy of specific attention:
Don’t Overestimate Mutual Indemnities. The term “mutual” does not mean “equal.” Although mutuality seems like a good “compromise” in many deals, it is a dangerous trap for the unwary. Sometimes a party can be exposed to excessive risk (such as where a product integrator combines technologies from different sources at the direction of the other party). Worse, the party providing the indemnity may not be well-positioned to defend any action, let alone realistically indemnify against such risks. I am not saying to ignore it — just the opposite. Pay attention to exclusions, as well as other provisions (such as warranties and limitations clauses) and see how they can offset risk and otherwise address concerns. Remember: intellectual property indemnification is only as good as the entity providing it.
Don’t Underestimate Third-Party Infringement Claim Risk. Third-party infringement is a legitimate concern that cannot be discounted. Let’s face it — it’s simply not feasible to cover all potential third-party infringement probabilities in a given contract. That said, licensors (and transferors) should understand what they can realistically do to mitigate risk, while licensees (and transferees) should be candid in what they require to maintain the status quo should a third-party claim of infringement be brought against them. The indemnification provisions should account for actions to be taken in the event of such claims that can realistically be performed by (or on behalf of) the licensor (or transferor) and are necessary for the licensee (or transferee) to maintain operations.
Don’t Get Constrained by Limitations & Related Clauses. Indemnification provisions are only a part of the overall contractual constructs involving intellectual property, and must be read together with the remainder of the instrument and its schedules. It is not uncommon to see indemnification and confidentiality obligations excluded from limitations clauses, but such exclusion may (or may not) work for your client (or company) depending upon their footing in the deal. Take care to see the big picture and not get lost in the weeds. Remember: A contract must be read as a whole, and not in a vacuum.
I know, I know — you can’t anticipate every situation and, yes, shiitake happens (and you know I do not mean the mushroom). I get it, but the focus here is not to attempt to cover all possible contingencies, but rather, to address the realities that are present and can be reasonably anticipated in the creation of the contract so that the indemnification provisions are not only accurate, but meaningful. These realities are usually not covered in “standard” provisions, and should be considered so as to shape the necessary language protective of your client (or company). If you don’t do so, suffice it so say, you may end up on the receiving end of some language yourself, but I can assure you none of it will be pretty.
Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at tom.kulik@solidcounsel.com.
When What You Seek Is Not What You Get: Avoiding A Serious Case Of Mis-Indemnification curated from Above the Law
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