When companies negotiate to buy or sell software, they often get hung up playing patent potato. Who will pay—“represent”, “warrant”, and “indemnify”—if it turns out somebody has a patent on the software and threatens to sue?

No one knows all the patents out there. Thanks to rules that put you on the hook for more money if you know about the patent you’re caught infringing, no one’s in a big rush to find out, either. But with companies doing nothing but buying patents and sending demand letters, no one can ignore the risk.

Negotiators spend hours on the phone repeating the same old arguments. They delay their deals for days and weeks trading the same old markups. With no creative solutions to offer, it comes down to who’s getting stuck with it, and by how much.

Here’s a list of approaches I’ve seen in the wild, checklists of other points to keep in mind, plus some good reading from old hands in the game and a list of organizations offering risk-mitigation services. They can help you break through and get a good deal done.

Feedback is most welcome.

Approaches

Hardline

Vendor Takes It

The vendor takes all the risk. In essence, they write their customer a private insurance policy to cover patent risk. Often involves a price hike.

Customer Takes It

The customer takes all the risk. Often involves a pretty inexpensive product or service. Occasionally results from a customer having access to mitigations like patent pools or insurance-like products.

Words

Known

Put the vendor on the hook for issues with patents they knew about on delivery, or learned about without notifying the customer.

Should Have Known

Put the vendor on the hook for patents they knew about, and also patents they should have known about. Entitles both parties to have a big fight about “should have” or “reasonably should have” during settlement negotiations.

Issued Only

Put the vendor on the hook for patents issued as of the date of the agreement only, or issued patents and published patent applications.

Dollars

Cap

Put the vendor on the hook, but limit their liability. Sometimes the same limit applies to patent problems as to other problems under the contract. Sometimes it’s distinct. Often set at the fees the vendor earned in the last twelve months before the claim.

Insurance

Vendor agrees to carry insurance-like protection from a specialist carrier. Often passed through in whole or in part via pricing. The indemnity in the contract between vendor and customer may be rewritten to match the scope and limits of the policy.

Creative

FTO
If the customer has a freedom-to-operate analysis process, have the vendor promise to provide them the input they need before delivery. Give the customer the ability to back out if they spot an issue.
Offense
Both sides agree to make coordinated donations to a political or industry group pursuing patent reform legislation, compiling prior art in the field, or actively opposing patents and applications.

Checklists

Indemnity Checklist

Infringement Mitigations Checklist

Arguments

Customer Vendor
You’re in the best position to control risk of a patent suit. The risk has more to do with your notoriety and deep pockets.
Full patent protection is standard. Dollar thresholds for coverage, knowledge qualifiers, liability caps, and exclusions are all common, too.
Knowledge qualifier? You should know about patents that affect what you offer. Preemptively seeking out patents does nothing but put us at risk of treble damages.
You need to stand fully behind your offering. Even if we guarantee full coverage, costs can be so high we may not be good for it.
You can get insurance if you can’t or won't bear the risk yourself. Even specialized patent policies cap liability and exclude many kinds of claims. And they cost a lot.
We shouldn’t pay the full cost of an insurance policy that also covers other customers. If we price a policy just for you, you might as well buy your policy for yourself.
You’ll get sued whether you owe us indemnity or not. That's a big difference. And we may get sued because you're big, notable, or use our work in unexpected ways.
We wouldn’t be exposed to this risk if we didn't use your product. You’re currently using a competive offering that could infringe / soliciting bids from our competitors, who might also infringe / considering developing this in-house, which would put you at the same risk.
The risk here is low, and you should be able to take it. Most patent suits are nuisance suits, anyway. Even nuisance suits can be massively expensive. If that risk seems negligible to you, take it and save the cost of us pricing it in.

Reading

Patent Risk Mitigation Organizations

Feedback

Send an e-mail. We’re always on the lookout for new approaches, quality reading, corrections, and more general thoughts.