Accepting unlimited liability for copyright and patent infringement for enterprise software?

Brian Reale CEO / Founder ProcessMaker

July 13th, 2016

Our company sells enterprise software. Our standard indemnification clause states that we will cover patent and copyright infringement issues up to an amount equal to the last 12 months of fees paid. All of our "bigger fish" type prospects insist on unlimited protection. I find that most customers will agree (after a lot of complaining!) to settle on a 2x or 3x liability cap (against yearly revenues paid).

However, I have one particular client currently insisting that we need to provide them a non-capped indemnity.

How many of you CEOs that run enterprise software companies regularly accept the request for unlimited liability for indemnifying against copyright and patent infringement?

thanks,

Gordon Troy Trademark Attorney - United States and International, Copyrights, Unfair Competition, Internet and Computer law.

July 13th, 2016

When representing the software developer we try and limit the indemnification much like you have indicated. When representing the software customer we like to have unlimited indemnification for patent and copyright (actually all IP) infringements because in reality the software company is in the best position to defend such a situation and is in the best position to know and control. That said, looking beyond just the indemnification there are a number of "tricks" that can be employed around the risk to minimize the risk for the software company, including having the opportunity to substitute non-infringing code and/or terminate the license, among other things. Looking at the indemnification provision only is not sufficient in trying to come up with an appropriate balance of risks that is acceptable to both parties.

Additional considerations need to be made as to what the software does, is capable of modification, etc. as that can also lead to infringement of third party IP rights, particularly if the software is being used in an unintended way.

I would be more than happy to look at the particular situation that you have, as well as delving into the full EULA to see what else could be done to make this less of a negotiation in future transactions.

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

July 18th, 2016

It's pretty common and oddly enough they are using you as a sacrificial lamb, which may not be a bad thing.

There are companies and lawyers that make huge amounts of money suing big companies for patent infringement (copyright infringement tends to be hard to sue for). Since the patent trolls know that the company has a large amount of money, they do this with the expectation that the company will settle, and they get their huge paycheck.

One weird thing is that they don't like to sue small companies, because they realize that small companies don't have deep pockets, so if the small company gets sued then they small company would go out of business, and the patent troll gets nothing. So one strategy is to have a small company accept unlimited liability which then means that no one wants to sue the small company because it means that the small company will go out of business and the patent troll gets nothing.

One thing that you have to consider is how large your liabilities against patent trolls are. You are at increased risk if you have deep pockets or are in certain patent heavy areas (video codecs). Also consider how likely it is that a patent lawsuit that is directed at you will be directed at other similar businesses.

If it turns out that this is a really big issue, you can talk to a lawyer by setting up a corporate structure with firewalls. Essentially the way that this works is to have a subsidiary that accepts liability for the software, but if they get sued, they go out of business, but the rest of the company survives.

Copyright and trademark infringement are less of a worry, because you can control that. It's rather hard to infringe on a copyright or trademark without someone in the company knowing that they are infringing. Patent infringement is hard, because any non-trivial piece of software will almost certainly infringe on some piece of software somewhere.

Joe Valof Independent General Counsel [IGC]

July 25th, 2016

Brian, I'm a littler late, but let me try to put this critical issue in perspective. I deal with this issue daily as an in house counsel working on both sides of the table, either for the licensor or for the licensee. First, there should be 2 separate indemnification clauses, 1 is a general clause between the 2 contracting parties, and that one is subject to the limitation of liability clause which is generally equal to the amount paid to the licensor over a 12 month [or more] period The other indemnification clause generally relates to infringement, which is a third party lawsuit. This one is unlimited as the party who's IP has been infringed is not a party to the agreement and not subject to any dollar limitation clauses. If that party is successful in the lawsuit and the judge/jury says you owe 3 M you must pay the third party for their damages caused by you, assuming your client was not the cause of the infringement. Your customer should be held completely harmless. Hope this is clear and helpful.

Joe Valof Independent General Counsel [IGC]

July 28th, 2016

Always happy to share my experience with the group. Brian, thought you might be interested in a compliance/ethics guide I prepared for officers and directors. Feel free to share it with your staff and colleagues. Although its somewhat directed to Ma law, it does have a general application for just about every state. Hope its helpful. I assume you have an in house legal staff, if not, I work as a virtual with many tech companies throughout the US. If you can use a virtual be more than happy to work with you and your staff. My specialty areas are business contracts and software/IP licensing. Joe 508-366-8825 www.igcatty.com ____________________________________________________________________________________

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

July 13th, 2016

There is this pesky notion that customers have, which is that they shouldn't be responsible for damages caused by a vendor under conditions and circumstances that they can't control. Consider your own risk management policies, and especially whether you sufficiently manage your risks such that you can simply accept the risk.* You'd be a lot more customer friendly that way.

*I do though agree with the previous comment about unintended or improper use.

Sami Ahvenniemi Member of the Board, Business Developer at Kontena

July 14th, 2016

If you have truly taken the negotiation to its limit, the last frontier typically is to propose a very high cap, which is still better than no cap at all. Oftentimes 12 month trailing x2 or x3 is still fairly low in subscription based businesses and putting in an explicit f ex $3m cap resonates better w the prospect. I've couple times managed to get a cap in in such situation by literally walking away after which the prospect came back and agreed to our last proposed cap. As Gordon indicated lot of the other mechanisms naturally help you limit the exposure and one thing you really need in there is your right to force them to upgrade to a non-infringing latest version immediately when you have it available. Happy closings!

Paul Garcia marketing exec & business advisor

July 14th, 2016

The only person you should listen to is your own attorney. This is a legal question, and no one (not even the attorney in this discussion) can give you legal advice. The attorney in this discussion can only give you information on the questions to ask and where to look for information around your question. Or he can tell you what other people have done. Regardless, you need your own attorney to answer the question, because that's the only opinion that will matter when it comes to a potential future lawsuit.

Jim Zucker Co-Founder & CTO at FundPaaS

July 14th, 2016

It is a standard practice to give these protections to a client, usually there are some restrictions they client must also follow such as not re-distributing and other obligation you are required to pass on to them based on the license you received the software under.

Brian Reale CEO / Founder ProcessMaker

July 14th, 2016

Thanks to everyone for the comments! Very helpful.

Brian Reale CEO / Founder ProcessMaker

July 19th, 2016

Joseph,

Really thoughtful answer - I really appreciate it. I agree with your thoughts (unfortunately - I have had very first hand experiences!).

I haven't thought about the firewall issue in a while - interesting...

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