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Allocating Risk in Patent License Agreements
Practical Law Legal Update 5-605-9628 (Approx. 4 pages)
Allocating Risk in Patent License Agreements
by Practical Law Intellectual Property & Technology
| Published on 12 May 2015 • USA (National/Federal) |
A Legal Update concerning risk allocation in a patent license agreement. This Update discusses common issues concerning representations and warranties and indemnification provisions in a patent license agreement.
The parties to a patent license agreement typically try to limit their risk by seeking the broadest representations, warranties and indemnification from the other party while limiting their own obligations. However, when negotiating these provisions, the parties should consider that there is typically risk on both sides of the transaction. Therefore, the parties may consider agreeing to some risk sharing and requiring the party that is better positioned to mitigate a particular risk to bear that risk. Taking this perspective may:
- Facilitate the licensing negotiations and allow the parties to reach an agreement.
- Provide an incentive to the party bearing the risk to take steps to minimize that risk.
- Provide each party with an improved opportunity to obtain the benefit of the bargain it seeks under the agreement.
Representations and Warranties
Patent license agreements typically include basic representations and warranties concerning:
- Each party's corporate authority to enter and be bound by the agreement.
- The licensor's:
- ownership interest in or other basis for its control of the licensed patent; and
- right and ability to grant the license set out in the agreement.
These representations and warranties are not typically controversial. However, the parties may spend significant time drafting and negotiating representations and warranties concerning the licensed patent and other intellectual property issues. Because of the uncertainty and expense of patent litigation, licensors are typically unwilling to provide, and also may seek an express disclaimer of, representations and warranties concerning the following aspects of the licensed patent:
- Enforceability.
- Validity.
- Scope of the claims.
In certain situations, the licensor may agree to include one or more of these representations and warranties with knowledge or materiality qualifiers.
The licensor is also typically unwilling to provide a representation and warranty of non-infringement by the licensee's activities under a patent license agreement. The addition of knowledge or materiality qualifiers is unlikely to make a non-infringement representation and warranty acceptable to the licensor because:
- A patent only provides the right to exclude, not the right to commercialize the claimed product.
- The licensor typically:
- has no input to or control over the licensed product's final design; and
- does not know all of the issued patents that potentially could be infringed by the licensee's activities under the licensed patent and is unwilling to expend resources to obtain information and conduct a non-infringement analysis for the licensee.
Instead, the licensor will more likely seek to specifically disclaim any non-infringement representation and warranty. As a compromise, the parties may instead share the licensee's patent infringement risk through an indemnification provision in the patent license agreement.
Indemnification
A patent license agreement typically includes an indemnity provision that requires each party to be liable and indemnify the other party for certain claims, for example, third-party claims resulting from the other party's breach of the agreement.
In certain situations, the licensor may be willing to indemnify the licensee for certain intellectual property infringement claims while a licensee may be willing to indemnify the licensor for third-party product liability claims relating to the licensee's commercialization of the licensed patent. In these situations, each party as an indemnifying party should avoid a broad indemnification provision and instead include certain limitations on their obligations. For example, each party should seek to limit the scope of its obligation:
- To a specified dollar amount or benchmark, for example:
- for the licensor, the total amount paid by the licensee to the licensor; or
- some cap relevant to the indemnified risk.
- To awards of damages resulting from final, non-appealable judgments only.
- By requiring the indemnified party to mitigate any continuing damages.
- By requiring both parties to share the costs of defending an indemnified third-party lawsuit.
In addition, the parties should limit their indemnification obligations to claims for which the indemnified party has complied with the procedures set out in the agreement. For example, these indemnification procedures may require the parties to agree to any of the following:
- Giving the indemnifying party control over the defense of the indemnified third-party claim.
- Requiring the indemnified party to give the indemnifying party prompt written notice of the indemnified third-party claim.
- Requiring reasonable cooperation between the parties concerning the defense of the indemnified third-party claim.
The parties should also consider:
- Who should be indemnified and whether certain indemnified entities should be specifically identified.
- What costs or damages are indemnified.
- Who has control over settlement of the indemnified third-party claim.
For sample clauses in a patent license agreement allocating risk, see Standard Documents, Patent License Agreement (Pro-licensee) and Patent and Know-how License Agreement (Pro-licensor).