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Difference between an IPR indemnity and an IPR warranty

Please note the Law may have changed since the publication of article.

This distinction is not well understood. I will highlight some of the key differences:

  • Unlike the case with an IPR warranty, the party that is indemnified is not under the same obligation to prove that it has suffered loss. From a legal perspective this can be very significant as it can be difficult not only to be able to prove the loss that was suffered, but also that the loss was caused by a particular event;
  • the value of an indemnity is also in the avoidance of difficulties with remoteness of damage when recovering loss i.e. proving that there is a sufficiently close causal connection between the IPR infringement and the loss that it has suffered;
  • contractual indemnity provisions can allow for the indemnified party to recover losses relating to an IPR infringement even where its own negligence has contributed to the loss
  • in the case of indemnities, it is normal for the indemnifier to be given the exclusive right to conduct the defence of the proceedings in which the allegation of IPR infringement is made. The reason for this is that the indemnifier may think that the claim is bogus or can be defended whereas the indemnified party may simply wish to get itself out of the firing line by settling with the claimant.

Why are suppliers becoming more reluctant to give IPR indemnities and IPR warranties?

There are probably three main reasons.

The first is the impact that open source software has had on the software industry. Nowadays quite a number of products incorporate open source. Suppliers are therefore a lot less certain that they own all IPR in such products and therefore less confident about providing IPR warranties and indemnities to customers.

Second is the reality that the amount of IPR infringement litigation taking place is increasing dramatically and that correspondingly the risk of liability arising under the IPR warranty or IPR indemnity is also increasing.

Third, is the increasing number of software related patents that are being issued in the US with the result that much of the current IPR litigation is based on allegations of infringements of patent as opposed to copyright. A supplier can have much greater confidence that its software does not infringe someone else’s copyright (as this would have involved copying or adapting someone else’s software). Patents are a different kettle of fish. Patent infringement can occur without any “culpable” behaviour on the part of the infringer. Therefore, knowledge of the patent or an intention to infringe the patent is normally irrelevant. All the patent holder has to establish is that the product or service of the infringer falls within the claims of his patent. With so many software related patents being granted it is becoming increasingly more difficult for technology companies to establish that a proposed product or service does not come within any of the claims of any existing or pending patents.

What are the trends?

Current trends indicate that suppliers are either refusing to give IPR indemnities or warranties or are significantly qualifying or reducing their scope. Increasingly they are restricting them to their core product and specifically excluding any components that have been developed by third parties. Many are refusing to give any IPR indemnity or IPR warranty in respect of any software that they have been specifically commissioned by the customer to develop. In the past it was customary that the IPR indemnity would not be subject to the limitation and liability cap in the contract. There is growing evidence that suppliers are now insisting where they give an IPR indemnity that it is subject to a liability cap. However, the indemnifying party would need to make sure with its insurers that the policy does cover IPR infringement claims.

© This article is copyright Simon Halberstam LLP 2009 and should not be construed as legal advice or opinion in any specific facts or circumstances. the contents are intended for generic information purposes only. You are urged to contact a suitably qualified lawyer for specific advice.