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Should I be worried that a potential client wants us to guarantee that we will cover the litigation costs if they are sued for using our software?

Hi, We are a small sofware company and we have product for internal use. In the contract we license the software "As is" and provide no warranties. A major company wants to purchase several licenses for internal use, but they want us to warranty that if someone sue them for the use of our software, we have to pay for the litigation costs (which can be 500K). It is very unlikely that someone sue this company for the use of this software internally, but signing this clause makes me very nervous. Any ideas of what I can do in this case? I was reading and other programs like Adobe, word, they do not provide any guarantees on patent infringement…

Filed under: Licensing: Patents, Patent Litigation

4 answers • 10 years ago

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Amy Pearson answered:

I am a patent attorney generally on the patent owner's side.

Signing such a clause should make you nervous. You don't want to be responsible for the major company's infringement. The major company is likely getting more benefit out of using your software than your company is making by selling licenses.

The previous gentleman's answer is incorrect. Anyone can be sued for patent infringement if they make, sell, or *use* the claimed invention. It depends on the claims in the asserted patent. Based on experience, it's much more likely that the larger entity would be sued for infringement.

A patent infringement case could cost anywhere between $350k-$5M+ USD.
http://www.cnet.com/news/how-much-is-that-patent-lawsuit-going-to-cost-you/

In order to properly answer your question, I would need to know why you feel it's "very unlikely" that someone would sue the major company for using your software.

If the major company won't back down on this provision, the best thing you can do is determine if you need IP (defense) insurance. If a patent attorney determines that it is necessary, raise the price of your license and get IP insurance.

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Ronan Levy, Co-Founder at MayfairSeven.com answered:

This kind of provision is quite common in software license agreements. Usually, it is not so broad as to cover "if they get sued" for using your software. Rather, the indemnity (the legal term for this kind of provision) typically arises if they get sued because your software infringes the intellectual property rights of a third party.

Here is some sample language that one of my clients uses:

LICENSOR hereby agrees to indemnify and hold Client harmless from and against any and all damages resulting from, relating to or arising out of any claim that the Software infringes a patent, copyright, trademark or other intellectual property right of a third party.

(b) Notwithstanding Section 10(a), LICENSOR shall have no liability hereunder and will be indemnified by Client for any claim of infringement based on: (a) the combination, operation or use of the Software with any software, hardware, Client materials or other materials or networks not furnished or certified in writing by LICENSOR, if such infringement would have been avoided without the presence of such software, hardware, materials or networks; or (b) any content or any services, materials or other work product fulfilled by LICENSOR according to the specifications, instructions or requirements supplied by Client.

(c) If all or a part of the Software is, in LICENSOR’s opinion, likely to or does become the subject of a claim of infringement of the rights of a third party, LICENSOR, at its option, may: (i) modify or replace it to make it non-infringing; (ii) use its best endeavors to procure the right to permit Client’s continued usage of the Software; or (iii) if neither of the foregoing options are commercially reasonable, terminate this Agreement upon notice to Client, with a pro rata refund of any prepaid but unearned/unamortized Fees.

Looking at Adobe won't necessarily give you a sense of what is the commercial norm in these circumstances, as Adobe has a lot more bargaining power than most software developers. However, most software providers who supply to enterprise level clients usually offer some warranty or indemnity around infringement.

Happy to discuss further if helpful!

Ronan

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