Structuring Patent Indemnification...

Structuring Patent Indemnification Provisions Allocating Infringement Risk While Accounting for AIA Changes to PTAB Estoppel and Statutory Bar Requirements

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THURSDAY, FEBRUARY 19, 2015

Presenting a live 90-minute webinar with interactive Q&A

C. Andrew Keisner, Esq., Davis & Gilbert, New York

Robert E. Krebs, Partner, Nixon Peabody, Palo Alto, Calif.

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[Presentation Title Goes Here – Type it in the Master Slide] 5

Strafford Webinar

STRUCTURING PATENT

INDEMNIFICATION PROVISIONS

February 19, 2015

C. Andrew Keisner

Attorney Intellectual Property 212.468.4845 [email protected] © 2015 Davis & Gilbert LLP

Structuring Patent Indemnification Provisions 6

OUTLINE

»Two Types of Indemnification Structures

»Substantive Qualifiers

»Procedural Requirements

»Impact of the AIA

»Demand Letters and Responses

»Patent Litigator’s Perspective


WHAT IS INDEMNIFICATION?

»Definition of “Indemnify” (Merriam-Webster)

- To protect someone by promising to pay for the

cost of possible future damage, loss, or injury

»Underlying Fairness Arguments

- Everyone should “stand behind” the products,

services, etc. that they provide

- The company selling a product is in the best

position to know whether its product infringes

upon its competitors intellectual property


GENERALLY, THE TWO STRUCTURES

OF AN INDEMNIFICATION PROVISION

»Standalone Indemnification

- i.e., defining the type of third party claims within

the indemnification provision itself

»Referring Back to Representations & Warranties

- i.e., representing that the deliverables to not

violate any laws, or infringe upon any third

parties intellectual property rights AND defining

the scope of the indemnification to cover third

party claims arising from the breach of a

representation & warranty




»Referring Back to Representations & Warranties

- Example Clause:

• Indemnitor agrees to indemnify, defend and

hold Indemnitee harmless against any claims*

arising from* a breach of the representations

and warranties contained herein…

• Reps:

- Indemnitor reps that the product does not

infringe upon any third parties’ IP;

- Indemnitor reps that the product complies

with all laws and regulations




»Standalone Indemnification

- Example Clause:

• Indemnitor agrees to indemnify, defend and

hold Indemnitee harmless against any claims*

arising from* the infringement of a third

parties’ IP

»Same scope? Maybe, but limitations highlighted


WHEN IS THE INDEMNIFICATION

OBLIGATION TRIGGERED?

»Critically Important!

»Three Primary Options:

(i) Upon A Final, Adverse Judgment

(ii) Upon A Complaint Being Filed

(iii) Upon The Threat Of A Complaint Being Filed

»*Claims, Allegations, Threat of a Claim?

»*Arising From? Relating To?


WHEN IS THE INDEMNIFICATION

OBLIGATION TRIGGERED?

»Three Primary Options:

(i) Upon A Final, Adverse Judgment

(ii) Upon A Complaint Being Filed

(iii) Upon The Threat Of A Complaint Being Filed

»Most negotiated agreements opt for (ii) or (iii)

»With 95% of cases settling pre-judgment, the first

option makes it unlikely the indemnification

obligation will ever be triggered

»Critically Important!


INDEMNIFY ONLY? DUTIES TO

DEFEND AND HOLD HARMLESS

»Negotiated Contracts:

- Indemnify, defend, and hold harmless (typical)

- Indemnify Alone = Damages (upon judgment)

»Typically…including reasonable attorneys’ fees…




»Negotiated Contracts:

- Indemnify, defend, and hold harmless…

including reasonable attorneys’ fees…(typical)

- What is “reasonable”

- Attorneys’ Fees Incurred From:

(i) defending against the third party claim

(ii) pursuing right to indemnification under the

contract

»Most states: Option (ii) not covered (frustrating,

yes, we agree)




»Attorneys’ Fees Incurred:

(i) defending against the third party claim

(ii) pursuing right to indemnification under the

contract

»Spend $500K on defense counsel, but need to

spend another $300K to enforce indemnification

provision against the refusing-to-pay indemnitor

»If you are successful, do you get $500K or $800K?

»What if you have 10 indemnitors for the $500K?




»Bonus Practice Tip:

- If you want to be entitled to recoup the attorneys’

fees incurred from pursuing the Company’s right to

indemnification, expressly saying so in the contract.

Most states will recognize it

- Example: “…defend, indemnify and hold [Company]

harmless…from and against any liabilities, losses,

costs, fees (including attorneys’ fees), and expenses

whatsoever, including those costs and fees incurred

in enforcing this provision, …”


QUALIFIERS:

KNOWLEDGE & CAPS

»Knowledge Qualifier*

- Indemnification for only patent infringement lawsuits

based on the patents that the indemnitor was

already aware of

»Caps on Liability

- Indemnification for patent infringement claims up to

a certain amount. Fixed caps are easy to determine,

but some prefer caps based on a percentage paid to

the indemnitor over a period of time…

- Note: Consider former vendors…


QUALIFIERS:

SPLITS & DEDUCTIBLES

»Splits

- Instead of a cap, indemnitor and indemnitee agree

to split the costs and expenses of any amounts

that might otherwise be attributable to only the

indemnitor. Splits can be whatever is agreed upon,

but gives both sides “skin in the game”

»Deductibles

- Indemnitee pays the first X amount, and

Indemnitor only pays amounts incurred above and

beyond the first X amount


PROCEDURAL QUALIFIERS:

PROMPT NOTICE

»Obligation of the indemnitee to promptly notify the

indemnitor when the indemnification provision has

been triggered

»The most misunderstood part of an indemnification

clause is typically the obligation to provide prompt

notice

»What is prompt? Not typically the starting point

»Failure to give prompt notice?



PROMPT NOTICE

»Failure to give prompt notice?

- Insurance Company: Prompt means prompt

- Everyone Else: Prompt means prompt…IF the

indemnitor is prejudiced by the failure to give

prompt notice

• Most states require “prejudice”

• Some statutory, some common law

- Most states inject the “prejudice” requirement

even if the contract states, for example, notice

must be provided within 30 days



CONTROL OF DEFENSE

»Control of Defense

- Sounds Fair in Negotiations, right?

- If the indemnitor is going to pay, why shouldn’t it

have the choice of its counsel?



CONTROL OF DEFENSE

»First Practical Problem: Diverging Interests

»Example:

- Indemnitee – a large multi-national billion dollar

company

- Indemnitor – a small six/seven figure company

»Potential damages exceed indemnitor’s pockets

»Attorneys fees alone will impact indemnitor’s P&L

- Incentive to get cheap counsel

»Indemnitee has deep pockets. It simply wants the

best counsel



CONTROL OF DEFENSE

»Second Practical Problem: Game of Chicken

- Example: Same large co./small co. dynamics

»Large-Indemnitee may not want to tender control

of the defense

- In many states, failure to tender control of

defense can waive right to indemnification

- Should Large-Indemnitee bluff?

»Small-Indemnitor often does not want to take over

control of the defense. Admits indemnity obligation


NO INDEMNIFICATION PROVISION:

WHAT ABOUT THE U.C.C.?

»Does the U.C.C. govern?

- To invoke indemnification under the U.C.C.,

indemnitee must prove

(1) the seller was a merchant regularly dealing in

goods of that kind;

(2) the goods are subject to a “rightful claim” of

infringement of a third party upon delivery;

(3) the buyer did not furnish specifications to the

seller; and

(4) the parties did not form another agreement.


NO INDEMNIFICATION PROVISION:

WHAT ABOUT THE U.C.C.?

»Does the U.C.C. govern?

- Will not apply to customized parts/goods

- Will not apply if your indemnification provision

states when/what indemnification applies

»Only a right to “indemnification” (i.e., damages)

- Does not include attorneys’ fees

»An often forgotten right (but limited anyway)


PRACTICAL CONSIDERATION #1

»What is the financial situation of the potential

indemnitor?

- Does the potential indemnitor have money?

- Is it possible the indemnitor’s financial situation

will change during the course of its obligation?

PATENT INFRINGEMENT INDEMNIFICATION ISSUES: A LITIGATION PERSPECTIVE

ROBERT E. KREBS [email protected]

TOPICS: INDEMNIFICATION FROM A LITIGATION PERPSECTIVE

— UCC implied warranties and their disclaimer.

— Control of defense issues.

— Litigation may give rise to issues that were not

contemplated at the time of negotiating an

indemnification clause.

— “Divided” or “joint” infringement issues and the Supreme

Court’s Limelight decision.

— Indemnification and IPR’s under the AIA.

28

INTRODUCTION: UCC, DISCLAIMER AND CONTRACT

— Uniform Commercial Code (UCC) § 2-312: Implied

Warranty Against Infringement.

• Protects both buyers and sellers.

• Implied warranty can be disclaimed by general contractual

language:

Landis & Staefa v. Flair Int’l Corp. 60 F. Supp 2d 14 (E.D.N.Y.

1999) (rejecting buyer’s indemnification claim against

manufacturer based simply on standard disclaimers in the sales

forms.)

— Usually UCC is disclaimed and the non-infrigement

warranty is replaced with contractual provisions defining

rights between an up-stream vendor(s) and a buyer.

29

UCC PHILOSOPHY GENERALLY

When the goods are part of the seller's normal stock and are

sold in his normal course of business, it is his duty to see that no

claim of infringement of a patent or trademark by a third party will

mar the buyer's title.

A sale by a person other than a dealer, however, raises no

implication in its circumstances of such a warranty. Nor is there

such an implication when the buyer orders goods to be

assembled, prepared or manufactured on his own specifications.

If, in such a case, the resulting product infringes a patent or

trademark, the liability will run from seller to buyer. There is,

under such circumstances, a tacit representation on the part of

the buyer that the seller will be safe in manufacturing according

to the specifications, and the buyer is under an obligation in good

faith to indemnify him for any loss suffered.

30

UCC PHILOSOPHY

If the claim is one for infringement or the like (subdivision

(3) of UCC § 2-312) the original seller may demand in

writing that the buyer turn over to the seller control of the

litigation, including settlement, or else be barred from any

remedy over

and if the seller also agrees to bear all expense and to

satisfy any adverse judgment,

— then unless the buyer after seasonable receipt of the

demand does turn over control, the buyer is so barred.

31

BUYER-SPECIFIED GOODS

— California: Unless otherwise agreed a seller who is a

merchant regularly dealing in goods of the kind warrants

that the goods shall be delivered free of the rightful

claim of any third person by way of infringement or the

like,

— but a buyer who furnishes specifications to the seller

must hold the seller harmless against any such claim

which arises out of compliance with the specifications.

32

CONTRACTUAL PATENT INDEMNIFICATION PROVISIONS

— My perspective: Obligations of suppliers (up-steam

vendors) to their customers.

— Initial Observation: Liability under a contractual patent

infringement indemnification obligation may exceed the

liability that the indemnitor would have if sued directly.

• Example: Damages issues.

33

IN AN INFRINGEMENT LITIGATION BROUGHT ONLY AGAINST BUYER:

Q: When does obligation to defend arise?

A: Upon prompt Notice.

— Prior to suit?

— Promptly after suit filed?

— Promptly after infringement contentions made?

— Promptly after infringement suppliers product/services

mentioned in discovery?

34

OBLIGATION TO DEFEND AND CONTROL THE DEFENSE

Often supplier’s obligation to defend and to indemnify is

contractually conditioned upon its controlling the defense.

— Usually, supplier has choice of defense counsel.

— Usually, supplier has right to settle

— Sometimes, supplier has right to provide non-infringing

substitute.

35

CONTROL OF SETTLEMENT AND DAMAGES

— What if plaintiff measures damages by customers

sales?

• Entire Market Value or Convoyed Sales issues?

• Patent exhaustion issues.

— Supplier's liability for buyer’s willfulness damages?

36

ISSUES ARISING IN LITIGATION CONTEXT

Litigation may give rise to issues that

were not contemplated at the time of

negotiating an indemnification clause.

For instance, the Buyer may be

uncomfortable with up-stream

suppliers financial capability to

provide an adequate defense and/or

pay in the event of a verdict for the

plaintiff.

37

MULTIPLE VENDORS

An indemnification clause may be

negotiated with only the parties at the table

in mind.

But, in fact, there may be multiple vendors

of the same product to a buyer.

The vendors may sell sequentially in time

or concurrently.

38

LITIGATION CAPS

An indemnification clause may cap liability — either in time

and/or in amount.

But then, multiple litigations may be filed against the Buyer

by different plaintiffs suing on different patents.

39


An indemnification clause may be negotiated with

the implicit assumption that a patent-in-suit will

have “homogeneous” claims.

In fact, the patent may have “heterogeneous

claims” – some of the claims of the patent may call

for indemnification by Vendor A and some

implicate only the buyer and not the vendor.

40


An indemnification clause may exclude a vendors liability

except where it a “contributory” infringer under 35 USC 271(c).

But, in fact, contributory infringement may not be clear.

How does the defense proceed until the issue is sorted out?

41

DIVIDED INFRINGEMENT ISSUES

“Divided” or “joint” infringement occurs when:

— Not all elements of a claim are performed

by a single entity.(In other words, the claim

is infringed only by aggregating the conduct

of two or more actors.)

— In Limelight, US Supreme Court (2014)

held that there can be no inducement of

infringement of method-type where “divided

Infringement” exists.

42

DIVIDED INFRINGEMENT ISSUES

— The “single-entity” rule requires performance of all claim

elements by a single entity. BMC Resources, Inc. v.

Paymentech, L.P. (Fed. Cir. 2007); Muniauction, Inc. v.

Thomson (Fed. Cir. 2008).

— In Limelight the Court seemed to invite the CAFC to

reconsider Muniauction and the conclusion that direct

infringement of a method-type claim does not occur

where “… the performance of all of the patent’s steps is

not attributable to any one person.”

— Or, more broadly, if there is divided infringement, is

there no direct infringement?

43

INDEMNIFICATION AND IPR’S UNDER THE AIA

AIA enacted on September 16, 2011.

Provided:

— New definition of prior art; and

— Revised post-grant proceedings to

challenge patents -- called Inter Partes

Review Proceedings (IPR’s).

— Conducted by the Patent Trial and

Appeal Board in the USPTO.

44

INDEMNIFICATION AND IPR’S PER PATENT TRIAL & APPEAL BOARD UNDER AIA.

— IPR must be brought within 1 year by Petitioner (or its

privy) being sued for infringement.

• Is an indemnifying party barred?

Not unless it exercised control of the litigation. Arris

(PTAB 2014).

Review of a Covered Business Method Patent is limited

to persons sued or their privies. A party who admits that it

has an indemnification obligation is a “privy.” Clear with

Computers (2014). eBay (2014)

45

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