Significance of clause for patent indemnification

Patent indemnification is a contractual indemnification where one party to the transaction agrees to protect the other party against claims arising from use of the patented technology or the goods purchased. The protection embodied in a patent indemnification clause often relates to the defence of claims for direct infringement, contributory infringement, and inducement of infringement, including the payment of associated legal fees and costs.

Patent infringement litigation has been rising in recent years. Patent infringement suits frequently target large corporations in the telecom, software, and financial service sectors selling or using an allegedly infringing product. Often, the suit is related to use of a product, component or technology supplied by a third party. To shift the financial risk of such suits, the corporation as a purchaser usually seeks indemnification against claims of patent infringement from the seller/original equipment manufacturer. Litigation may involve a patent holder asserting its patent rights against an entity selling the allegedly infringing product or an entity combining several components into a single product.

Purchasers of goods or services should be concerned if there is a risk that the goods or services may bring allegations of patent infringement from a third party patent owner. Although the seller assumes liability for such an eventuality with a patent indemnification provision (such as warranty), whether the purchaser will be fully indemnified is open to question. If a patent infringement suit arises, such warranties may provide only cosmetic relief. To recover damages from the seller, based on a warranty claim, it would first need to be proved that the seller’s products or services infringed the third party’s patent. Then, a subsequent suit may take place between the purchaser and seller where the purchaser would have to prove that the infringement fell within the scope of the warranty.

Chandrasekhar Raju is a managing associate at LexOrbis.