Indemnification Clauses Critical to Fighting Patent Trolls

Much has been written about the rise of lawsuits, and threatened lawsuits by so-called patent trolls, also known as “patent assertion entities” or “PAEs.” If your business has not yet been the target of a patent troll, you can count yourself among the fortunate few. The proliferation of these types of claims is so widespread that the Federal Trade Commission has actually instituted an investigation into the business practices of patent assertion entities. According to a White House Report issued on June 4, 2013, PAE lawsuits have jumped 250% since 2011, now accounting for 62% of all infringement cases. As many as 100,000 companies have been threatened by patent trolls just in the last 12 months. Often these cases are based on highly questionable interpretations of highly questionable patents, applying them to technology not imagined at the time that the patent was granted. Rather than bear the cost and risk associated with litigation, businesses faced with these claims often agree to pay license fees to the PAE, further feeding the cycle.

As with many threats to business, the most effective technique for dealing with these claims is to anticipate them during your procurement process. In many instances, a well-negotiated agreement with a vendor can provide you with protection against patent trolls in the form of an indemnification clause requiring the supplier of the product or service that gives rise to the patent claim to defend you. A well-drafted indemnification provision properly allocates risk to the party in the best position to understand and assess the risk of a claim. In addition, the supplier of the product or technology actually has an economic incentive to do battle with a patent troll that its individual customer may lack. Intellectual property indemnification provisions accordingly are a critical component of any agreement.

In our commercial transactional practice, we have long been routinely advising clients on this issue and, by and large, vendors understand the need to stand behind the technology or product that they sell. In the last several months, however, a new development has arisen. A recent agreement reviewed for a client contained a carve-out from the indemnification provision in instances “where Client authorized the implementation of generally applicable and non-site specific technology, know-how, materials or information representing functionality already readily available on the internet to the public or used throughout the industry without a license.” This carve out seems to target the non-practicing entity issue and shift risk associated with patent troll claims back to the client. To the extent that this becomes a trend, you and your advisors will need to continue to be vigilant and to insist on adequate IP indemnifications in your commercial agreements.