IP Agreements: Structuring Indemnification and Limitation...

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Presenting a live 90-minute webinar with interactive Q&A

IP Agreements: Structuring Indemnification

and Limitation of Liability Provisions

to Allocate Infringement Risk

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, OCTOBER 4, 2016

Kenneth A. Sprang, Managing Member, Washington International Business Counsel,

Washington, D.C.

Jeremy Younkin, Partner, Foley Hoag, Boston

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-570-7602 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can

address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

» A Presentation of

»Strafford Webinars »and

»Kenneth A. Sprang

Copyright 2016 Kenneth A. Sprang

Indemnity means an acknowledgement and

promise by one party to cover the potential liability

suffered by the other.

English law defines indemnity as a promise to save

a person harmless from the consequences of an act;

the promise may be express or implied from the

circumstances of the case

In short, an indemnity enables the "indemnified" to

seek reimbursement ("indemnity") for money

forced to pay to a third party as a result of an

injury, caused by the indemnifier.

6

Some agreements will have representations and warranties made by one party or the other.

Statements of fact about a party's business, assets and financial condition.

Allocate economic risk between the parties— indemnification provisions must provide a remedy if reps and warranties are breached

For example, a seller or licensor might represent and warrant that the licensed product does not infringe upon the intellectual property of any other entity.

7

Purpose of indemnification provisions is for Indemnitor to hold Indemnitee harmless, and secure Indemnitee against losses or damages;

Losses or damages usually from third party

Indemnitee seeks to include indemnification provisions in its legal agreements to maximize the protection it can receive from its business partners, and allocate some of the inherent risk in the deal to its business partner.

8

Indemnification seeks to protect Indemnitee from the unknown.

Cannot control the actions or omissions of Indemnitor

In sale must rely on representations and warranties of seller

Indemnification clause provides remedy for

Errors and omissions of indemnitor

Criminal conduct of indemnitor

Breach of warranties and representations of indemnitor

Failure of indemnitor to exercise due diligence

Could be unknown risks of infringement on intellectual property of third parties

Think of indemnification like insurance

9

Contractual Indemnity

Contractual indemnity is different from common law indemnity.

Indemnity provisions in a contract allocate the risk of a business transaction between the two parties by obligating one party to pay the expenses incurred by the other party under certain circumstances.

10

Expansion of class of protected parties

Expansion of recoverable losses

Mechanics

Completeness

Customized protection. Indemnity should expressly identify the parties

and scope of claims covered by the provision. Ordinarily, seller or licensor

will indemnify buyer or licensee.

Consider whether parents, subsidiaries, affiliates, officers, directors,

employees and agents—as well as successors, heirs, and assigns—should

be covered.

11

What is the purpose of the indemnification provision in your agreement?

Supplier of goods/services

Supplier of goods/services using component parts/services

Supplier of component parts/services

Buyer/user of goods/services

Buyer/user of goods/services using component parts/services

Retailer

13

Buyer only.

Buyer plus directors, officers, employees, stockholders and affiliates (parent, subsidiary, etc.).

Buyer plus directors, officers, employees, stockholders and affiliates plus funding sources or other assignees.

Seller.

Look carefully at state legislation with regard to directors and officers.

Avoid piercing of the veil.

14

What products must be accused in order to trigger indemnification obligation? Consider:

Products made to buyer’s specifications.

Products altered by buyer.

Buyer’s combination of seller’s product with 3rd party products.

Will meritless claims trigger indemnification obligation?

Will assertion of patents issued after agreement was signed trigger obligation?

Consider each potential IP infringement claim that could arise.

15

Indemnification In IP Agreements

Strafford Webinar

October 4, 2016

© 2015 Foley Hoag LLP. All Rights Reserved. 17 © 2015 Foley Hoag LLP. All Rights Reserved. 17

Some Questions to Consider When Negotiating

Indemnification for Claims of IP Infringement


How Will Indemnification Affect You?

What is the purpose of the indemnification provision in your

agreement?

- Supplier of goods/services

•Supplier of goods/services using component parts/services

- Supplier of component parts/services

- Buyer/user of goods/services

•Buyer of goods/services using component parts/services

- Retailer


What Claims Are Covered?

What products must be accused in order to trigger

indemnification obligation?

- Consider:

•Products made to buyer’s specifications.

•Products altered by buyer.

•Buyer’s combination of seller’s product with 3rd party products.

Will meritless claims trigger indemnification obligations?

Will assertion of patents issued after agreement was

signed trigger obligations?


Control and Management of Defense

Does indemnitee have right to separate counsel?

Who selects counsel?

How are decisions about litigation strategy made?

What are the rights of the indemnitee to approve

settlement?


Financial Considerations

Should amount of indemnification be capped?

- What is the relationship between revenue from sale or

indemnitor’s goods/services and revenue from sale of accused

product?

Does indemnitor have the funds to cover litigation costs?

An adverse judgment?

What happens if the indemnitee is enjoined?


U.C.C. § 2-312(3)


U.C.C. § 2-312(3)

“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.”


U.C.C. § 2-312(3)

Do you want to “otherwise agree”?

What constitutes a “rightful claim” may vary from

jurisdiction to jurisdiction.

- Pac. Sunwear of Calif. v. Olaes Enters. 167 Cal. App. 4th 466 (2008)

- EZ Tag Corp. v Casio Am., Inc., 861 F.Supp.2d 181 (S.D.N.Y. 2012)

Consider who should pay for the defense of baseless infringement

claims.


U.C.C. § 2-312(3)

Damages for breach may also vary from jurisdiction to

jurisdiction.

- EZ Tag Corp. v. Casio Am., Inc., 861 F. Supp.2d 181 (S.D.N.Y. 2012)

- Insituform Techs., Inc. v. AMerik Supplies, Inc., 850 F. Supp.2d 1336

(N.D. Ga. 2012).


U.C.C. § 2-312(3)

The “hold harmless” clause of § 2-312(3) protects

sellers in some situations.

- “[S]hifts all costs, including attorneys’ fees to the buyer who

furnishes a seller with specifications that lead to a claim of patent

infringement.” RFR Indus. v. Rex-Hide Indus., 2005 U.S. Dist

LEXIS 44809, at *3 (N.D. Tx. 2005).


U.C.C. § 2-312(3)

The seller may also be protected if the infringement claim arises

from the buyer’s combination of the seller’s product with some other

products. See Chemtron, Inc. v. Aqua Prods., 830 F. Supp. 314,

316 (E.D. Va. 1993).

Consider who should pay when infringement claim is based on:

- a party’s alteration of the contracted-for product

- a party’s combination of the contracted-for product with third-party

products


U.C.C. § 2-312(3)

U.C.C. specifies procedures for invoking rights.

A seller that recognizes its duty to indemnify and defend

will often be entitled to control the defense and

settlement

- The U.C.C. allows the seller to demand that the buyer turn over

control of the litigation to the seller. U.C.C. § 2-607(5)(b).

Consider the parties rights in litigation, including rights to select

counsel and experts, make (or approve) strategic decisions, and

control settlement.


Questions?

Jeremy Younkin

Foley Hoag LLP

155 Seaport Blvd.

Boston, MA 02210

[email protected]

(617) 832-3077

Does indemnitee have right to separate counsel?

Who selects counsel?

How are decisions about litigation strategy made?

What are the rights of the indemnitee to approve settlement?

30

Consider all types of damages that could occur due to claims of infringement.

Should amount of indemnification be capped? What is the relationship between revenue from sale of

indemnitor’s goods/services and revenue from sale of accused product?

Does indemnitor have the funds to cover litigation costs? An adverse judgment?

What happens if the indemnitee is enjoined?

31

Indemnity provision should be integrated with other risk allocation provisions

Dispute resolution mechanism.

What law governs? Where will dispute resolution be held?

What will you include or exclude?

What about consequential damages?

33

Is funding of indemnity obligation necessary?

Use of escrow?

Is there a right to set off amounts owed to cover expenses related to indemnity?

34

In asset purchase agreement, Buyer could assume only specifically enumerated liabilities. For example, buyer might exclude any liability for patent infringement.

Purchase price may be contingent and tied to reps and warranties.

Deferred purchase price, with right of set off in event of breach.

Escrow portion of purchase price.

Use of a subsidiary to effect the acquisition in order to limit Buyer's risk to the amount invested in the subsidiary.

35

Absent agreement to the contrary, many provisions of the Agreement, including reps, warranties, will not survive closing.

Survival clause provides that reps and warranties survive the closing of the deal.

Indemnitor will likely want a clause which limits the time of survival of the reps and warranties.

Indemnification provisions, through which reps and warranties are enforced, should clearly survive as well.

36

Without a survival clause, a court might conclude that reps and warranties addressing pre-closing state of facts merge with the consummation of the transaction and do not form the basis of a remedy after the closing.

Most deals provide for survival of reps and warranties

ABA survey found that only 4% of M&A deals provide expressly for no survival while only 1% were silent on the issue.

Public targets: Reps and warranties generally do not survive.

Large private targets with significant leverage are often able to negotiate away the survival clause.

In one law firm survey of a random sample of deals with large private targets, 25% of the agreements provided for no survival.

37

A clause limiting the time of survival of reps and warranties, etc. works in conjunction with the survival clause.

Time limitation clause acts as a general limitation on the bringing of claims arising from reps and warranties and from obligations to be performed pre-closing.

Time limit is heavily negotiated provision. One of several elements to be negotiated in the context of indemnification and related issues.

Need enough time to reasonably discover inaccuracies in reps and warranties.

Need at least one post-closing audit

ABA survey found that 12 and 18 months are the most common time limits for reps and warranties

38

Agreements often provide for exceptions to the time limits on reps and warranties.

ABA Model Stock Purchase Agreement provides that claims arising from breach of reps and warranties relating to capitalization, ownership of shares, taxes, ERISA matters and environmental matters “may be made at any time”

For exceptions to the general time limitation, agreements often provide a different formulation:

“until [90] days following the end of the applicable statue of limitations” for breach of reps and warranties relating to statutory matters, such as taxes, ERISA matters and environmental matters;

“indefinitely” for breach of fundamental reps and warranties, such as capitalization and stock ownership reps and warranties

39

Indemnity provisions often have clauses reducing the statute of limitations that might otherwise govern claims.

Drafting point: Use clear, unequivocal language to reduce statutory limitations periods

40

Recognize interests of Indemnitor and Indemnitee are different.

Indemnitor may wish to settle as a strictly pragmatic, business decision.

Indemnities may prefer to fight a claim on principle or because of future implication.

If matter indemnified is covered by insurance, neither party may have much voice.

41

KENNETH A. SPRANG

Washington International

Business Counsel, LLP

Washington, DC/Philadelphia, PA

(202) 499-6941

FAX: (202) 905-0158

[email protected]

42

IP Agreements: Structuring Indemnification and Limitation...

Documents

Transcript of IP Agreements: Structuring Indemnification and Limitation...