Want to learn more about drafting, negotiating, and understanding intellectual property and technology contracts and have 10 minutes to spare? Grab your morning coffee or afternoon tea and dig into our Tech Contract Quick Bytes—small servings of technical contract insights expertly prepared by our seasoned attorneys. This month we are talking about intellectual property indemnification clauses.
Intellectual property (IP) indemnification provisions can be one of the most heavily negotiated clauses in commercial contracts. An IP infringement claim can expose a company to material financial liability, disrupt operations, and undermine critical customer or partner relationships. The challenge is not simply allocating risk but doing so in a way that aligns with a company's role in the transaction, its risk tolerance, and its broader IP strategy.
This article highlights key considerations for reviewing and drafting IP indemnification clauses, with distinct perspectives for IP owners (including licensors and vendors) and IP users (including licensees and customers).
What is an IP Indemnification Clause?
Before turning to role-specific issues, it is helpful to focus on the baseline elements of an IP indemnification provision:
- Covered Indemnification Claims: Typically limited to third-party claims alleging infringement or misappropriation of patents, copyrights, trademarks, or trade secrets
- Scope of IP: Whether the indemnity applies to all IP used in the deliverables or only specified components
- Defense and Control: Who controls the defense, settlement authority, and selection of counsel
- Remedies: Often including replacement, modification, licensing, or refund/termination rights
- Exclusions and Carve-outs: Commonly addressing customer misuse, unauthorized modifications, or combination with non-vendor products
Each of these elements should be evaluated through the lens of whether your organization is primarily assuming or shifting IP risk.
IP Indemnification Considerations for the IP Owner or Licensor
When your company owns IP or licenses IP to others, the IP indemnity represents a significant risk assumption—which is often disproportionate to the contract's economic value if not carefully limited.
1. Define the IP and Use Case Precisely
Overly broad language covering "any use" of the IP can inadvertently extend indemnity obligations beyond the intended commercial scope. IP owners should tie coverage to authorized uses under the agreement and exclude downstream or derivative applications not contemplated by the deal.
2. Limit the Types of Claims Covered
Patent infringement claims, in particular, can be costly and unpredictable. Many licensors limit patent coverage to issued patents (excluding applications) or to jurisdictions where they actively do business. Others exclude claims based on standards-essential patents or open-source components.
3. Include Meaningful Exclusions
Standard exclusions should cover infringement arising from:
- Customer specifications or instructions
- Modifications not authorized by the IP owner
- Combination with third-party products or data
- Use outside the agreed scope or in violation of the law
Without these exclusions, IP owners may find themselves ensuring risks they do not control.
4. Align Liability Caps Thoughtfully
IP indemnities are frequently carved out of general liability caps. If that is unavoidable, licensors should consider alternative caps (e.g., multiple fees paid) or separate IP-specific limits. Unlimited IP indemnity exposure should be the exception, not the default.
IP Indemnification Considerations for the IP Licensee or User
From the licensee or customer perspective, the IP indemnity is often viewed as a core value proposition—particularly when the IP is mission-critical.
1. Ensure the Indemnity Is Not Illusory
Licensees should confirm that the indemnity meaningfully covers the IP they are using. Clauses that exclude key components (such as software libraries or AI models) or that hinge on narrow definitions may provide little real protection.
2. Pay Attention to Control of Defense and Settlements
While it is reasonable for the indemnifying party to control the defense, licensees should retain approval rights over settlements that impose non-monetary obligations, admissions of liability, or restrictions on continued use of the IP.
3. Demand Clear Remedial Obligations
A well-drafted IP indemnity should specify remedies if infringement is found or likely. Common remedies include the right to continue use, replacement with non-infringing alternatives, or a refund with termination rights. These remedies should be practical, timely, and commercially realistic.
4. Assess Interaction with Limitation of Liability Clauses
Licensees should confirm that the IP indemnity is either excluded from liability caps or subject to a sufficiently high cap to cover realistic exposure. An indemnity capped at fees paid under a low-value contract may be inadequate for enterprise-wide IP risk.
Conclusion
IP indemnification clauses are not merely legal backstops—they are strategic tools for allocating innovation risk. By approaching these provisions with a clear understanding of their company's role as an IP owner or user, one can better draft and negotiate clauses that protect core assets without unduly constraining commercial objectives.
If you or your company would like to discuss drafting strategies regarding IP indemnification terms, please contact A.J. Zottola.
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