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 read up, either. But with companies out there 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. Because no one has a perfect solution to the problem for every deal. 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.
- 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.
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.
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.
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.
- 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.
- 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.
- connection between representations/warranties and indemnities
- explicit about whether limitation of liability applies to representations/warranties and indemnities
- timely notice of infringement claims from vendor to customer and customer to vendor
- proscribed indemnification procedure
- control of defense and related offensive measures like declaratory judgment actions and inter partes reviews
- no authority to settle admitting fault
- customer and third-party combinations
- customer and third-party modifications
- use in breach
- illegal use
- customer instructions
Infringement Mitigations Checklist
- procure licenses (commercially reasonable)
- replace with noninfringing (commercially reasonable)
- engineer around the patent (commercially reasonable)
- terminate and refund
|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.|
- Sean Hogle’s Strict Liability IP Rights: Be Very Afraid (January 8, 2022)
- Heather Meeker’s Stand up for Your Product!: Negotiating IP Indemnities for Open Source Software (July 11, 2020)
- Heather Meeker’s Musings on the Eternal Question of Patent Indemnities (June 26, 2019)
- D.C. Toedt’s Providing a warranty of no patent infringement is like giving a hurricane-insurance policy (September 30, 2018)
- ABA Model Software License Procisions with Commentary and Ancillary Agreements, latest draft, especially comments to section 701
Patent Risk Mitigation Organizations
- Allied Security Trust (acquisition)
- License on Transfer Network (licensing pool)
- Open Invention Network (Linux-specific)
- Rational Patent eXchange Corporation (insurance, acquisition)
- Unified Patents (invalidation)
Send an e-mail. We’re always on the lookout for new approaches, quality reading, corrections, and more general thoughts.