Structuring Patent Indemnification Provisions Allocating Infringement Risk While Accounting for AIA Changes to PTAB Estoppel and Statutory Bar Requirements
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THURSDAY, FEBRUARY 19, 2015
Presenting a live 90-minute webinar with interactive Q&A
C. Andrew Keisner, Esq., Davis & Gilbert, New York
Robert E. Krebs, Partner, Nixon Peabody, Palo Alto, Calif.
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[Presentation Title Goes Here – Type it in the Master Slide] 5
Strafford Webinar
STRUCTURING PATENT
INDEMNIFICATION PROVISIONS
February 19, 2015
C. Andrew Keisner
Attorney Intellectual Property 212.468.4845 [email protected] © 2015 Davis & Gilbert LLP
Structuring Patent Indemnification Provisions 6
OUTLINE
»Two Types of Indemnification Structures
»Substantive Qualifiers
»Procedural Requirements
»Impact of the AIA
»Demand Letters and Responses
»Patent Litigator’s Perspective
Structuring Patent Indemnification Provisions 7
WHAT IS INDEMNIFICATION?
»Definition of “Indemnify” (Merriam-Webster)
- To protect someone by promising to pay for the
cost of possible future damage, loss, or injury
»Underlying Fairness Arguments
- Everyone should “stand behind” the products,
services, etc. that they provide
- The company selling a product is in the best
position to know whether its product infringes
upon its competitors intellectual property
Structuring Patent Indemnification Provisions 8
GENERALLY, THE TWO STRUCTURES
OF AN INDEMNIFICATION PROVISION
»Standalone Indemnification
- i.e., defining the type of third party claims within
the indemnification provision itself
»Referring Back to Representations & Warranties
- i.e., representing that the deliverables to not
violate any laws, or infringe upon any third
parties intellectual property rights AND defining
the scope of the indemnification to cover third
party claims arising from the breach of a
representation & warranty
Structuring Patent Indemnification Provisions 9
GENERALLY, THE TWO STRUCTURES
OF AN INDEMNIFICATION PROVISION
»Referring Back to Representations & Warranties
- Example Clause:
• Indemnitor agrees to indemnify, defend and
hold Indemnitee harmless against any claims*
arising from* a breach of the representations
and warranties contained herein…
• Reps:
- Indemnitor reps that the product does not
infringe upon any third parties’ IP;
- Indemnitor reps that the product complies
with all laws and regulations
Structuring Patent Indemnification Provisions 10
GENERALLY, THE TWO STRUCTURES
OF AN INDEMNIFICATION PROVISION
»Standalone Indemnification
- Example Clause:
• Indemnitor agrees to indemnify, defend and
hold Indemnitee harmless against any claims*
arising from* the infringement of a third
parties’ IP
»Same scope? Maybe, but limitations highlighted
Structuring Patent Indemnification Provisions 11
WHEN IS THE INDEMNIFICATION
OBLIGATION TRIGGERED?
»Critically Important!
»Three Primary Options:
(i) Upon A Final, Adverse Judgment
(ii) Upon A Complaint Being Filed
(iii) Upon The Threat Of A Complaint Being Filed
»*Claims, Allegations, Threat of a Claim?
»*Arising From? Relating To?
Structuring Patent Indemnification Provisions 12
WHEN IS THE INDEMNIFICATION
OBLIGATION TRIGGERED?
»Three Primary Options:
(i) Upon A Final, Adverse Judgment
(ii) Upon A Complaint Being Filed
(iii) Upon The Threat Of A Complaint Being Filed
»Most negotiated agreements opt for (ii) or (iii)
»With 95% of cases settling pre-judgment, the first
option makes it unlikely the indemnification
obligation will ever be triggered
»Critically Important!
Structuring Patent Indemnification Provisions 13
INDEMNIFY ONLY? DUTIES TO
DEFEND AND HOLD HARMLESS
»Negotiated Contracts:
- Indemnify, defend, and hold harmless (typical)
- Indemnify Alone = Damages (upon judgment)
»Typically…including reasonable attorneys’ fees…
Structuring Patent Indemnification Provisions 14
INDEMNIFY ONLY? DUTIES TO
DEFEND AND HOLD HARMLESS
»Negotiated Contracts:
- Indemnify, defend, and hold harmless…
including reasonable attorneys’ fees…(typical)
- What is “reasonable”
- Attorneys’ Fees Incurred From:
(i) defending against the third party claim
(ii) pursuing right to indemnification under the
contract
»Most states: Option (ii) not covered (frustrating,
yes, we agree)
Structuring Patent Indemnification Provisions 15
INDEMNIFY ONLY? DUTIES TO
DEFEND AND HOLD HARMLESS
»Attorneys’ Fees Incurred:
(i) defending against the third party claim
(ii) pursuing right to indemnification under the
contract
»Spend $500K on defense counsel, but need to
spend another $300K to enforce indemnification
provision against the refusing-to-pay indemnitor
»If you are successful, do you get $500K or $800K?
»What if you have 10 indemnitors for the $500K?
Structuring Patent Indemnification Provisions 16
INDEMNIFY ONLY? DUTIES TO
DEFEND AND HOLD HARMLESS
»Bonus Practice Tip:
- If you want to be entitled to recoup the attorneys’
fees incurred from pursuing the Company’s right to
indemnification, expressly saying so in the contract.
Most states will recognize it
- Example: “…defend, indemnify and hold [Company]
harmless…from and against any liabilities, losses,
costs, fees (including attorneys’ fees), and expenses
whatsoever, including those costs and fees incurred
in enforcing this provision, …”
Structuring Patent Indemnification Provisions 17
QUALIFIERS:
KNOWLEDGE & CAPS
»Knowledge Qualifier*
- Indemnification for only patent infringement lawsuits
based on the patents that the indemnitor was
already aware of
»Caps on Liability
- Indemnification for patent infringement claims up to
a certain amount. Fixed caps are easy to determine,
but some prefer caps based on a percentage paid to
the indemnitor over a period of time…
- Note: Consider former vendors…
Structuring Patent Indemnification Provisions 18
QUALIFIERS:
SPLITS & DEDUCTIBLES
»Splits
- Instead of a cap, indemnitor and indemnitee agree
to split the costs and expenses of any amounts
that might otherwise be attributable to only the
indemnitor. Splits can be whatever is agreed upon,
but gives both sides “skin in the game”
»Deductibles
- Indemnitee pays the first X amount, and
Indemnitor only pays amounts incurred above and
beyond the first X amount
Structuring Patent Indemnification Provisions 19
PROCEDURAL QUALIFIERS:
PROMPT NOTICE
»Obligation of the indemnitee to promptly notify the
indemnitor when the indemnification provision has
been triggered
»The most misunderstood part of an indemnification
clause is typically the obligation to provide prompt
notice
»What is prompt? Not typically the starting point
»Failure to give prompt notice?
Structuring Patent Indemnification Provisions 20
PROCEDURAL QUALIFIERS:
PROMPT NOTICE
»Failure to give prompt notice?
- Insurance Company: Prompt means prompt
- Everyone Else: Prompt means prompt…IF the
indemnitor is prejudiced by the failure to give
prompt notice
• Most states require “prejudice”
• Some statutory, some common law
- Most states inject the “prejudice” requirement
even if the contract states, for example, notice
must be provided within 30 days
Structuring Patent Indemnification Provisions 21
PROCEDURAL QUALIFIERS:
CONTROL OF DEFENSE
»Control of Defense
- Sounds Fair in Negotiations, right?
- If the indemnitor is going to pay, why shouldn’t it
have the choice of its counsel?
Structuring Patent Indemnification Provisions 22
PROCEDURAL QUALIFIERS:
CONTROL OF DEFENSE
»First Practical Problem: Diverging Interests
»Example:
- Indemnitee – a large multi-national billion dollar
company
- Indemnitor – a small six/seven figure company
»Potential damages exceed indemnitor’s pockets
»Attorneys fees alone will impact indemnitor’s P&L
- Incentive to get cheap counsel
»Indemnitee has deep pockets. It simply wants the
best counsel
Structuring Patent Indemnification Provisions 23
PROCEDURAL QUALIFIERS:
CONTROL OF DEFENSE
»Second Practical Problem: Game of Chicken
- Example: Same large co./small co. dynamics
»Large-Indemnitee may not want to tender control
of the defense
- In many states, failure to tender control of
defense can waive right to indemnification
- Should Large-Indemnitee bluff?
»Small-Indemnitor often does not want to take over
control of the defense. Admits indemnity obligation
Structuring Patent Indemnification Provisions 24
NO INDEMNIFICATION PROVISION:
WHAT ABOUT THE U.C.C.?
»Does the U.C.C. govern?
- To invoke indemnification under the U.C.C.,
indemnitee must prove
(1) the seller was a merchant regularly dealing in
goods of that kind;
(2) the goods are subject to a “rightful claim” of
infringement of a third party upon delivery;
(3) the buyer did not furnish specifications to the
seller; and
(4) the parties did not form another agreement.
Structuring Patent Indemnification Provisions 25
NO INDEMNIFICATION PROVISION:
WHAT ABOUT THE U.C.C.?
»Does the U.C.C. govern?
- Will not apply to customized parts/goods
- Will not apply if your indemnification provision
states when/what indemnification applies
»Only a right to “indemnification” (i.e., damages)
- Does not include attorneys’ fees
»An often forgotten right (but limited anyway)
Structuring Patent Indemnification Provisions 26
PRACTICAL CONSIDERATION #1
»What is the financial situation of the potential
indemnitor?
- Does the potential indemnitor have money?
- Is it possible the indemnitor’s financial situation
will change during the course of its obligation?
PATENT INFRINGEMENT INDEMNIFICATION ISSUES: A LITIGATION PERSPECTIVE
ROBERT E. KREBS [email protected]
TOPICS: INDEMNIFICATION FROM A LITIGATION PERPSECTIVE
— UCC implied warranties and their disclaimer.
— Control of defense issues.
— Litigation may give rise to issues that were not
contemplated at the time of negotiating an
indemnification clause.
— “Divided” or “joint” infringement issues and the Supreme
Court’s Limelight decision.
— Indemnification and IPR’s under the AIA.
28
INTRODUCTION: UCC, DISCLAIMER AND CONTRACT
— Uniform Commercial Code (UCC) § 2-312: Implied
Warranty Against Infringement.
• Protects both buyers and sellers.
• Implied warranty can be disclaimed by general contractual
language:
Landis & Staefa v. Flair Int’l Corp. 60 F. Supp 2d 14 (E.D.N.Y.
1999) (rejecting buyer’s indemnification claim against
manufacturer based simply on standard disclaimers in the sales
forms.)
— Usually UCC is disclaimed and the non-infrigement
warranty is replaced with contractual provisions defining
rights between an up-stream vendor(s) and a buyer.
29
UCC PHILOSOPHY GENERALLY
When the goods are part of the seller's normal stock and are
sold in his normal course of business, it is his duty to see that no
claim of infringement of a patent or trademark by a third party will
mar the buyer's title.
A sale by a person other than a dealer, however, raises no
implication in its circumstances of such a warranty. Nor is there
such an implication when the buyer orders goods to be
assembled, prepared or manufactured on his own specifications.
If, in such a case, the resulting product infringes a patent or
trademark, the liability will run from seller to buyer. There is,
under such circumstances, a tacit representation on the part of
the buyer that the seller will be safe in manufacturing according
to the specifications, and the buyer is under an obligation in good
faith to indemnify him for any loss suffered.
30
UCC PHILOSOPHY
If the claim is one for infringement or the like (subdivision
(3) of UCC § 2-312) the original seller may demand in
writing that the buyer turn over to the seller control of the
litigation, including settlement, or else be barred from any
remedy over
and if the seller also agrees to bear all expense and to
satisfy any adverse judgment,
— then unless the buyer after seasonable receipt of the
demand does turn over control, the buyer is so barred.
31
BUYER-SPECIFIED GOODS
— California: Unless otherwise agreed a seller who is a
merchant regularly dealing in goods of the kind warrants
that the goods shall be delivered free of the rightful
claim of any third person by way of infringement or the
like,
— but a buyer who furnishes specifications to the seller
must hold the seller harmless against any such claim
which arises out of compliance with the specifications.
32
CONTRACTUAL PATENT INDEMNIFICATION PROVISIONS
— My perspective: Obligations of suppliers (up-steam
vendors) to their customers.
— Initial Observation: Liability under a contractual patent
infringement indemnification obligation may exceed the
liability that the indemnitor would have if sued directly.
• Example: Damages issues.
33
IN AN INFRINGEMENT LITIGATION BROUGHT ONLY AGAINST BUYER:
Q: When does obligation to defend arise?
A: Upon prompt Notice.
— Prior to suit?
— Promptly after suit filed?
— Promptly after infringement contentions made?
— Promptly after infringement suppliers product/services
mentioned in discovery?
34
OBLIGATION TO DEFEND AND CONTROL THE DEFENSE
Often supplier’s obligation to defend and to indemnify is
contractually conditioned upon its controlling the defense.
— Usually, supplier has choice of defense counsel.
— Usually, supplier has right to settle
— Sometimes, supplier has right to provide non-infringing
substitute.
35
CONTROL OF SETTLEMENT AND DAMAGES
— What if plaintiff measures damages by customers
sales?
• Entire Market Value or Convoyed Sales issues?
• Patent exhaustion issues.
— Supplier's liability for buyer’s willfulness damages?
36
ISSUES ARISING IN LITIGATION CONTEXT
Litigation may give rise to issues that
were not contemplated at the time of
negotiating an indemnification clause.
For instance, the Buyer may be
uncomfortable with up-stream
suppliers financial capability to
provide an adequate defense and/or
pay in the event of a verdict for the
plaintiff.
37
MULTIPLE VENDORS
An indemnification clause may be
negotiated with only the parties at the table
in mind.
But, in fact, there may be multiple vendors
of the same product to a buyer.
The vendors may sell sequentially in time
or concurrently.
38
LITIGATION CAPS
An indemnification clause may cap liability — either in time
and/or in amount.
But then, multiple litigations may be filed against the Buyer
by different plaintiffs suing on different patents.
39
ISSUES ARISING IN LITIGATION CONTEXT
An indemnification clause may be negotiated with
the implicit assumption that a patent-in-suit will
have “homogeneous” claims.
In fact, the patent may have “heterogeneous
claims” – some of the claims of the patent may call
for indemnification by Vendor A and some
implicate only the buyer and not the vendor.
40
ISSUES ARISING IN LITIGATION CONTEXT
An indemnification clause may exclude a vendors liability
except where it a “contributory” infringer under 35 USC 271(c).
But, in fact, contributory infringement may not be clear.
How does the defense proceed until the issue is sorted out?
41
DIVIDED INFRINGEMENT ISSUES
“Divided” or “joint” infringement occurs when:
— Not all elements of a claim are performed
by a single entity.(In other words, the claim
is infringed only by aggregating the conduct
of two or more actors.)
— In Limelight, US Supreme Court (2014)
held that there can be no inducement of
infringement of method-type where “divided
Infringement” exists.
42
DIVIDED INFRINGEMENT ISSUES
— The “single-entity” rule requires performance of all claim
elements by a single entity. BMC Resources, Inc. v.
Paymentech, L.P. (Fed. Cir. 2007); Muniauction, Inc. v.
Thomson (Fed. Cir. 2008).
— In Limelight the Court seemed to invite the CAFC to
reconsider Muniauction and the conclusion that direct
infringement of a method-type claim does not occur
where “… the performance of all of the patent’s steps is
not attributable to any one person.”
— Or, more broadly, if there is divided infringement, is
there no direct infringement?
43
INDEMNIFICATION AND IPR’S UNDER THE AIA
AIA enacted on September 16, 2011.
Provided:
— New definition of prior art; and
— Revised post-grant proceedings to
challenge patents -- called Inter Partes
Review Proceedings (IPR’s).
— Conducted by the Patent Trial and
Appeal Board in the USPTO.
44
INDEMNIFICATION AND IPR’S PER PATENT TRIAL & APPEAL BOARD UNDER AIA.
— IPR must be brought within 1 year by Petitioner (or its
privy) being sued for infringement.
• Is an indemnifying party barred?
Not unless it exercised control of the litigation. Arris
(PTAB 2014).
Review of a Covered Business Method Patent is limited
to persons sued or their privies. A party who admits that it
has an indemnification obligation is a “privy.” Clear with
Computers (2014). eBay (2014)
45