negotiating licensing agreements: ri krisk mi i imitigation...

64
Presenting a live 90minute webinar with interactive Q&A Negotiating Licensing Agreements: Ri k Mi i i P ii Risk Mitigation Provisions Crafting Representations and Warranties, Indemnification, Remedies and Limitation of Liability Clauses T d ’ f l f 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, MAY 10, 2011 T odays faculty features: Rebecca G. Bradley, Shareholder, Whyte Hirschboeck Dudek, Milwaukee Howard Wettan, Counsel, White & Case, Palo Alto, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Upload: others

Post on 13-Oct-2020

1 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

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

Negotiating Licensing Agreements: Ri k Mi i i  P i iRisk Mitigation ProvisionsCrafting Representations and Warranties, Indemnification, Remedies and Limitation of Liability Clauses

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, MAY 10, 2011

Today’s faculty features:

Rebecca G. Bradley, Shareholder, Whyte Hirschboeck Dudek, Milwaukee

Howard Wettan, Counsel, White & Case, Palo Alto, Calif.

The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Page 2: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Conference Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-hand column on your screen hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program.

• Double click on the PDF and a separate page will open. Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Page 3: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Continuing Education Credits FOR LIVE EVENT ONLY

For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps:

• Close the notification box

• In the chat box, type (1) your company name and (2) the number of attendees at your location

• Click the blue icon beside the box to send

Page 4: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Tips for Optimal Quality

S d Q litSound QualityIf you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial 1-866-869-6667 and enter your PIN when prompted Otherwise please send us a chat or e mail when prompted. Otherwise, please send us a chat or e-mail [email protected] immediately so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key againpress the F11 key again.

Page 5: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

5

Page 6: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

N ti ti S ft Li Negotiating Software License Agreements: g

Risk Mitigation Strategies in Representations, Warranties & Remedies

Rebecca Grassl BradleyRebecca Grassl BradleyMay 10, 2011

6

Page 7: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

About Me

• Commercial litigator and transactional attorney, with a focus on technology industries and issues

• Former VP of Legal Operations for g pinternational software company

• AAA arbitrator• AAA arbitrator

7

Page 8: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Topics

• Representations

• Warranties

• Remedies

• Damages• Damages

• Negotiation Strategies

8

Page 9: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Representation vs. Warranty• What difference does it make?

– A misrepresentation can undo the contract

• On certain issues, licensor will make neither:– Infringement (offer indemnification instead). Because licensor

cannot know for certain whether any piece of code might infringe, it should not represent or warrant that software does not infringeit should not represent or warrant that software does not infringe

– Knowledge or satisfaction of licensee’s business requirements– Software compliance with laws and regulations

• Software cannot “comply;” it can only perform functionsSoftware cannot comply; it can only perform functions

9

Page 10: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Representations by Licensor

• At time of delivery software will not include (or licensor will not activate) disabling code (No “self-help”)

• As of date of Agreement, not a party to litigation that would adversely affect ability to perform

• As of date of Agreement, not a defendant in IP ginfringement litigation

• Software does not include open source software– If you are the licensor, are you certain?y , y– Licensees generally don’t need this rep (or warranty)

10

Page 11: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Representations by Licensor

• Representations made in RFP response are true and correct

based upon licensor’s understanding of licensee’s requirements – based upon licensor s understanding of licensee s requirements at the time response was made

– May be inaccurate based on information subsequently obtainedLicensor should attach as an exhibit only the technical “guts” of – Licensor should attach as an exhibit only the technical guts of the RFP response (if at all)

• Authority to enter into Agreement and right to license software

11

Page 12: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Often Overlooked Considerations Often Overlooked Considerations For Licensor

• If you make a contractual representation, state the exclusive remedy if it proves false– Example: if the software contains disabling code, the Example: if the software contains disabling code, the

exclusive remedy is removal at no charge to licensee• If you make a contractual warranty, state the

exclusive remedy if it is breachedexclusive remedy if it is breached– Example: if the software contains a virus, the

exclusive remedy is removal at no charge to licensee

12

Page 13: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Performance Warranties

• Understand what the licensor is providing– Just a software program?– A system (software, hardware, integration services)A system (software, hardware, integration services)

• Duration/Timing– At time of execution/delivery

D i ifi d i d – During a specified period or term• Length of warranty period may impact licensor’s ability to

recognize revenue• From date of delivery or first live use• From date of delivery or first live use

13

Page 14: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Software Performance Warranties

• Software will perform substantially in accordance with documentation/ specifications– Who determines whether software has an “error”?

• “Licensor determines”

• “Licensee determines/notifies”ce see dete es/ ot es

• Objective vs. subjective standard

• Compromise: silence

14

Page 15: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Software Performance Warranties

• Software is free of errors that would have material adverse impact on software/system performance

• Response timesResponse times– Licensor will not warrant unless selling complete

system (including all hardware) or hosting the application or under SaaS modelapplication or under SaaS model

• Compatibility and interoperability of modifications and third party software with base softwaresoftware

15

Page 16: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Remedies for Software Remedies for Software Performance Warranty Breach

• Repair: Correct the error vs. use reasonable/best efforts to correctR l ith f i ft• Replace: with conforming software

• Provide workaround• Refund: license fees paid • Refund: license fees paid

(in total or for affected application)• Certain specified “direct damages”• Certain specified direct damages• Termination

16

Page 17: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Other Considerations Regarding Other Considerations Regarding Remedies

• Licensor may offer different remedies for different categories of errors

• Most remedies available only during warranty and Most remedies available only during warranty and maintenance periods

• Who elects remedy?Licensor may prefer refund over repair where licensee reports error – Licensor may prefer refund over repair where licensee reports error that cannot be reproduced or that other customers have not experienced

• Cure periods• Cure periods• Exclusivity

17

Page 18: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Other Remedies for Licensee to Other Remedies for Licensee to Consider

• Extend cure period where a refund is unacceptable remedyA t ti l f d h d ’t • Accept partial refund where error doesn’t materially impact use of software

• Engage third party (at licensor’s expense) to fix Engage third party (at licensor s expense) to fix error where licensor cannot

• Post-termination right to use software during transition period

18

Page 19: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

#1 Warranty Ambiguity

• Software is warranted for 90 days after delivery• Licensor delivers modification one year later• Definition of “Software” includes “Modifications”• Definition of Software includes Modifications• Does a new warranty period start for that modification? Is

modification covered under maintenance/support t? I difi ti d d i agreement? Is modification covered under services

warranty/remedy scheme of repair or replace?

19

Page 20: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Remedies: Warranty Period vs Remedies: Warranty Period vs. Maintenance & Support Period

• Usually the opportunity to receive full refund of license fees expires with the warranty period

• During maintenance and support period, g pp p ,remedies restricted to no-charge error correction and possible partial refund of p pservices fees

20

Page 21: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

What Does “Best Efforts” Really What Does Best Efforts Really Mean?

• Some courts interpret it to be the onerous standard licensors fear– Kroboth v. Brent, 215 A.D.2d 813, 814 (N.Y. App. Div. , , ( pp

1995) (“‘[B]est efforts’ requires more than ‘good faith,’ which is an implied covenant in all contracts…”)

• Other courts interpret it to be a reasonable/good Other courts interpret it to be a reasonable/good faith efforts standardB i D fi i• Best practice: Define it

21

Page 22: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Exclusions From Software Exclusions From Software Performance Warranty

• Errors caused by:– Unauthorized use of software– Use of software other than as specified in or contemplated by

documentation– Licensee-modified code (unless authorized by licensor or “reasonably

contemplated” by SLA/documentation)– Hardware/third party software defects (unless

recommended/authorized/provided by licensor)p y )– User error– Use of non-current versions

• Third party softwareLi h ld th h ti t li b t f ilit t – Licensor should pass through warranties to licensee but may facilitate claims

22

Page 23: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Services Warranties/Remedies

• Conformance with service level agreement– Fee credits

• Conformance with prevailing industry standards and practices

f i f d– Re-perform services or refund

• Adoption of security protocols to protect data held or hosted by licensoror hosted by licensor– Direct damages

23

Page 24: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Services Warranties/Remedies

• Use of qualified personnel with technical competence and experience– Replace unqualified personnel without charging for replacement

personnel learning curvepersonnel learning curve• Compliance with all applicable laws

– What if employee jaywalks? Licensor already obligated to comply with the law; should it be a contractual obligation too? Consider with the law; should it be a contractual obligation too? Consider indemnification if licensee adversely affected by licensor’s non-compliance

– Export lawsS l f ft /t h i l i b l f ll d t • Supply of software/technical services may be lawfully made to licensee in specified countries

24

Page 25: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Licensee’s Other Remedies For Licensee s Other Remedies For Licensor’s Breach

• Licensee’s right to withhold payments in the event performance is delayed or deficient

• Liquidated damagesq g– Service level agreement (fee credits)

– Breach of response time commitments (fee Breach of response time commitments (fee credits)

25

Page 26: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Remedies: Pre-Litigation Dispute Remedies: Pre Litigation Dispute Resolution

• Escalation provisions

• Meeting between each party’s senior g p yexecutives

26

Page 27: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Remedies: Direct Damages

• Every party seeks to eliminate exposure to consequential and incidental damages

• Consider defining recoverable “direct damages” to include what some courts may otherwise classify

l d d “i di t d ”as excluded “indirect damages”– reasonably foreseeable

arise naturally or ordinarily from a breach– arise naturally or ordinarily from a breach

27

Page 28: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Types of “Direct” Damages

• Internal employee time spent addressing errors or implementing workarounds

• Damage to property• Restoration of lost data• Costs of cover• Costs to operate prior software/systemp p y

28

Page 29: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Types of “Direct” Damages

• Costs in transitioning to new provider• Government penalties incurred as a result of

ft th b hsoftware error or other breach• Out of pocket expenses incurred as a result of

software not performing in accordance with software not performing in accordance with documentation/specifications

• Expenses incurred to mitigate or prevent damages

29

Page 30: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Licensor’s Remedies for Licensee’s Licensor s Remedies for Licensee s Breach

• Termination

• Damagesg

• Withholding services

• Security interest in software/hardware• Security interest in software/hardware

• Replevin

• Injunctive Relief

30

Page 31: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Licensor’s Remedies: Termination

• Breach of confidentiality/IP rights – If determined by court or arbitrator(s) to be an y

appropriate remedy

• Non-compliance with use restrictionsp

• Non-payment

• Should not be exclusive• Should not be exclusive

31

Page 32: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Licensor’s Remedies: Damages

• Lost profit– Is entire license fee profit?

• R&D fully depreciated• Sales commissions

• Liquidated damages– For breach of non-hire provisionp– For premature termination of services contract where licensor

dedicated personnel to licensee’s project

• Recovery of attorneys fees for actions to collect unpaid Recovery of attorneys fees for actions to collect unpaid fees

32

Page 33: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Licensor’s Other Remedies for Licensor s Other Remedies for Licensee’s Breach

• Withholding services for non-payment of maintenance/support or professional services for

f d lsoftware development

• Injunctive relief for breach of confidentiality

• UCC remedies may fill gaps where parties are silent--if court deems software a “good”

33

Page 34: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Warranty/Remedy Scheme

• The issue is balancing risk and reward--fundamentally a business decision

• Be specific: parties need to know their rights and obligationsg g

34

Page 35: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Negotiation Strategies

• Ask why a party needs a particular provision– “help me understand your concern so that we can address it”– Sometimes a party believes certain language will address its

concern but you may have a more palatable means of addressing itconcern but you may have a more palatable means of addressing it• Be able to explain why you cannot agree to a demand/request• Always maintain your composure (let your opponent look

unreasonable)unreasonable)• Let the other side walk away (they may return)

– “Necessity never made a good bargain”• Benjamin Franklin• Benjamin Franklin

35

Page 36: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

QUESTIONS?QUESTIONS?

Rebecca Grassl BradleyTechnology Attorney

Whyte Hirschboeck Dudek, S.C.414 978 5785414.978.5785

[email protected]

36

Page 37: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Howard WettanWhite & Case LLP

WE’VE GOT YOU COVERED: AVOIDING COMMON PITFALLS AVOIDING COMMON PITFALLS IN INDEMNITY DRAFTING

Page 38: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHAT MATTERS IN AN INDEMNITY PROVISION?

Who?

What?

When?

How?

WHITE & CASE May 2011 38

Page 39: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHO?

E l “E h P t ill f th ti iti d th P j t t Example: “Each Party will perform the activities under the Project at its own risk and responsibility and will indemnify and hold the other Party harmless from and against any third party claims in this respect.”1

This language has two major problems:

Who is covered? Who is indemnifying who?

1 The examples in this presentation are generally used to illustrate what not to do, not as a model or recommended form.

WHITE & CASE May 2011 39

Page 40: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHO?

Example: “Each Party will perform the activities under theExample: Each Party will perform the activities under theProject at its own risk and responsibility and will indemnify and hold the other Party harmless from and against any third party claims in this respect.”

Wh i b i i d ifi d?Who is being indemnified?

Affiliates? Directors?Officers? Employees?Agents? Customers?Successors? Assigns?

WHITE & CASE May 2011 40

Page 41: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHO?

An indemnified party should draft the provision to include all potential persons or An indemnified party should draft the provision to include all potential persons or entities who may seek an indemnity provision, including possible successors or assigns. One way to do this is to define “related parties” to include these categories.

Example: “’Related Parties’ with respect to either Party, shall mean all Affiliates,employees, officers, directors, agents, contractors, successors orassigns.”

“Vendor shall indemnify, defend, and hold Customer and its Related Parties harmless . . .”

An indemnifying party may want to keep this list more narrow. In particular, an indemnifying party may want to avoid indemnifying an indemnified party’scustomers.

WHITE & CASE May 2011 41

Page 42: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHO?

Example: “Each Party will perform the activities under the Project at its own Example: Each Party will perform the activities under the Project at its own risk and responsibility and will indemnify and hold the other Party harmless from and against any third party claims in this respect.”

Who is indemnifying who in any given situation?

An event that involves both parties may occur but the provision An event that involves both parties may occur, but the provision provides no guidance as to which party should take on responsibilities and obligations on behalf of the other.

WHITE & CASE May 2011 42

Page 43: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHO?

M k it l h i i d if i b ithMake it clear who is indemnifying by either:

Drafting separate indemnity provisions for each party; or Including language that sets clear conditions for when one party

and not the other shall have to indemnify.

Example: “A Party (the ‘Indemnifying Party’) shall indemnify, defend and hold the other Party and its Related Parties (the ‘Indemnified Party’) harmless from all Losses resulting from third party claims arising out of the Indemnifying Party’s gross negligence or willful misconduct except to the extent such Losses arise from the Indemnified or willful misconduct, except to the extent such Losses arise from the Indemnified Party’s own gross negligence or willful misconduct.”

WHITE & CASE May 2011 43

Page 44: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHAT?

What types of harm are to be reimbursed?What types of harm are to be reimbursed?Example: “Licensee shall indemnify, defend, and hold harmless Licensor, Licensor, Affiliates and its officers, directors, or employees, for any and all claims, damages, liabilities reasonable costs and expenses including attorneys fees and costs of liabilities, reasonable costs and expenses, including attorneys fees and costs of litigation, resulting from Proceedings brought by third parties . . .” (emphasis added)

Note that all attorneys fees are lumped in as “reasonable costs and expenses,”making it harder not easier to challenge an unreasonable attorney bill making it harder, not easier, to challenge an unreasonable attorney bill.

Make sure attorneys’ fees and costs of litigation are always directly modified as “reasonable” or “reasonable and customary.”y

WHITE & CASE May 2011 44

Page 45: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHAT?

Is the language limited to third party claims?Is the language limited to third party claims?

Example: “Supplier agrees to indemnify, defend, and hold Customer, and each of their respective affiliates, officers, directors, employees, agents, and successors and assigns (each, an Indemnified Entity), harmless fromand against any Loss that they suffer or incur . . .”

“Loss” defined as “any loss, liability, claim, penalties, fines, damage, death, injury, cost (including legaland other professional costs) or expense of whatever nature whether based in contract, tort, law, equity,or otherwise.”

Note that this language is not limited to third party claims. Attorneys will often argue that this has the effect of making direct damages recoverable under this provision. This makes it possible to avoid an agreed cap onmonetary liability where liability for indemnity is carved out.

On the other hand, some courts have held that it is implied that indemnity provisions only apply to third party claims.On the other hand, some courts have held that it is implied that indemnity provisions only apply to third party claims.See Travelers Indemnity Co. v. Dammann & Co., 592 F. Supp. 2d 752 (D.N.J. 2008); Michael v. Huffman Oil Co., Inc., 661

S.E.2d (N.C. Ct. App. 2008)

Consider language limiting recoveries to final judgment awards.

WHITE & CASE May 2011 45

g g g j g

Page 46: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHEN?

Wh l i d b th i d it ?When are claims covered by the indemnity?Beware of provisions that have broad grounds for indemnity claims.

E l “S li t i d if d f d d h ld C t d h Example: “Supplier agrees to indemnify, defend, and hold Customer and each Customer Affiliate (each, an Indemnified Entity), harmless from and against any Loss that they suffer or incur . . .that arises or may be attributable to (either directly or indirectly): (i) any act, error, omission or gross negligence of Supplier, its officers, d ect y) ( ) a y act, e o , o ss o o g oss eg ge ce o Supp e , ts o ce s,employees, agents, contractors, licensees, or servants; (ii) a breach of any obligation, representation, or warranty of Supplier.” (emphasis added)

Thi l t th S li th h k f thi th t t j t This language puts the Supplier on the hook for anything that goes wrong, not just any breach of the contract, but any other omission.

WHITE & CASE May 2011 46

Page 47: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHEN?

B h f i f i d b i d if i i Breach of contract is often viewed by indemnifying parties as grounds which are too broad to provide indemnity for third party claims.

It is too easy to construct a chain of causation from a minor breach of contract to a major problem that occurs in the indemnified party’s business.

Thi k f th “B tt fl Eff t” P l f L I l d R il d Think of the “Butterfly Effect” or Palsgraf v. Long Island Railroad.

Be wary of indemnities for “breach of representation or warranty.” warranty.

There may be representations in the contract for areas that parties are otherwise unwilling to indemnify, such as intellectual property infringement or regulatory compliance.

WHITE & CASE May 2011 47

Page 48: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHEN?

Some provisions state that a party owes an indemnity Some provisions state that a party owes an indemnity obligation, unless the other party owes an indemnity obligation for the same occurrence. Thi k b t it ill b i l if d f b th tiThis can work, but it will become circular if used for both parties.

Example: “Vendor shall indemnify, defend, and hold the Customer and its Related Parties harmless for any third party claim arising out of a breach of contract, unless theharmless for any third party claim arising out of a breach of contract, unless theCustomer owes the Vendor an indemnity obligation.”

“Customer shall indemnify, defend, and hold the Vendor and its Related Partiesharmless for any third party claim arising out of a breach of contract, unless the y p y gVendor owes the Customer an indemnity obligation.”

If a third party claim arises in a situation where neither party has fully performed under the contract, who indemnifies whom?

WHITE & CASE May 2011 48

Page 49: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHEN?

E l iExclusions

An indemnifying party may also carve certain scenarios out of theirAn indemnifying party may also carve certain scenarios out of theirobligation such as: the indemnified party has modified the product or specified a change; the indemnified party has rejected an upgrade; or the indemnified party has used the product in combination with other

products where no infringement would have otherwise occurred without such combination.

WHITE & CASE May 2011 49

Page 50: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

WHEN?

P i i i i d i h ld k Parties giving indemnity coverage should seek to enumerate specific grounds for claims.Other important items that may be covered or are commonly covered:Other important items that may be covered or are commonly covered:

Product liability, particularly for trademark licensors Infringement claimsg Employment claims, particularly in outsourcing and vendor contracts Government regulatory or enforcement actions Personal death, injury, and property damage

WHITE & CASE May 2011 50

Page 51: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

HOW?

What are the consequences of not having indemnification procedures?

An indemnified party could proceed to defend the suit, on its own, at great expense and force the indemnifying party to intervene or otherwise pay for legal fees that they cannot control; or

The indemnified party could pay a large settlement on the indemnifying party’s dime.

WHITE & CASE May 2011 51

Page 52: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

HOW?

Indemnification Procedures

Notice: What are the consequences if the indemnified party does not notice the indemnifying party of aparty does not notice the indemnifying party of aclaim in a timely manner?

Does the indemnifying party get damages? Are they freefrom the indemnity obligation?from the indemnity obligation?

Example: “To the extent the Indemnified Party fails to meet its notice obligations under this Section, the Indemnifying Party is only relieved of its obligations to the extent such failure actually prejudices the Indemnifying Party or prevents the Indemnifying Party from performing its obligations as set forth in this Section.”

WHITE & CASE May 2011 52

Page 53: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

HOW?

Indemnification Procedures

Taking Control: What if the indemnifying party fails to assume the d f i di t l ? defense immediately?

Can they assume it later? Is the indemnified party’s freedom to defend d ttl l i b l t i d if i t h f il d t and settle a claim absolute once an indemnifying party has failed to

assume a defense?

Example: “If the Indemnifying Party declines to or fails to take control of the Example: If the Indemnifying Party declines to or fails to take control of the defense against a third party claim . . . the Indemnifying Party shall forfeit the right to assume the defense if it declines to do so within one hundred eighty (180) days of receiving notice of the claim.”

WHITE & CASE May 2011 53

Page 54: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

HOW?

Indemnification Procedures

Typically, an indemnified party can participate in a lawsuit with separate counsel at their own expense and its obligated to provide cooperationcounsel at their own expense and its obligated to provide cooperation.

What should cooperation entail?

Example: “Upon the Indemnifying Party’s request and expense, the Indemnified Party shall, where necessary or otherwise useful, (i) provide documentation; (ii) make any current or former employees, officers, directors, or other agents or advisors with relevant knowledge or expertise reasonably other agents or advisors with relevant knowledge or expertise reasonably available to assist or to testify, orally or in writing, as required; and (iii) execute stipulations, motions, or other documents or instruments.”

WHITE & CASE May 2011 54

Page 55: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

HOW?

Indemnification ProceduresIndemnification Procedures

Settlement: Should the indemnified party have a right to consent to a p y gsettlement in its name?

What if they are left on the hook for a cost or an affirmative obligation? What if the indemnifying party forfeits an important right?

Example: “The Indemnified Party shall retain the right to give prior written p y g g pconsent, not to be unreasonably withheld, to any settlement that imposes any obligations, duties, or responsibility on the Indemnified Party.”

WHITE & CASE May 2011 55

Page 56: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

HOW?

Indemnification Procedures – Capped Indemnities

If an indemnifying party’s exposure is limited things get If an indemnifying party s exposure is limited, things get more complicated:

When can an indemnified party retain control of the lawsuit if the indemnified party retains some exposure to the claim? When can an indemnified party require a settlement? Can an indemnifying party’s attorney fees count toward a cap?Can an indemnifying party s attorney fees count toward a cap?

WHITE & CASE May 2011 56

Page 57: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

HOW?

T i i f All d I f iTermination for Alleged Infringement

Either party may require right to license termination in order to protect Either party may require right to license termination in order to protect itself from trebled damages for willful infringement. Licensor will want to limit the right to terminate license to when it

acknowledges there is infringement and it cannot repair or replaceacknowledges there is infringement and it cannot repair or replace.

WHITE & CASE May 2011 57

Page 58: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

LIMITATIONS ON LIABILITY

S Thi K I Mi dSome Things to Keep In Mind

Exclusions Exclusions

CapsCaps

WHITE & CASE May 2011 58

Page 59: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

LIMITATIONS ON LIABILITY

EXCLUSIONS

Typical provisions exclude “ALL INDIRECT DAMAGES, INCLUDING CONSEQUENTIAL SPECIAL INCIDENTAL PUNITIVE OR EXEMPLARY CONSEQUENTIAL, SPECIAL, INCIDENTAL, PUNITIVE OR EXEMPLARY DAMAGES OR LOST PROFITS.”

It is good to exclude recovery for indemnity from this limitation; however, courts f ll th UK h hi h t t h i di t d may follow the UK approach which treats such recoveries as direct damages

rather than excluded of consequential damages.

Parties often also seek exclusions for gross negligence, fraud, willful misconduct, or breach of confidentiality.

WHITE & CASE May 2011 59

Page 60: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

LIMITATIONS ON LIABILITY

EXCLUSIONS

Many common law jurisdictions such as the United Kingdom, will not enforce an exclusion of all damages, including direct damages.

Such jurisdictions may also allow equitable remedies as well, including monetary equitable remedies, if they are not expressly disclaimed. Consider adding to an exclusion: “ALL OTHER MONETARY REMEDIES, INCLUDING THOSE IN EQUITY.”

Suppliers will often limit remedies to its repair and replacement obligations under the contract for defective goods or services.

Suppliers and licensors may disclaim liability for use of their technology in an unanticipated manner or not in accordance with user documentation.

WHITE & CASE May 2011 60

Page 61: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

LIMITATIONS OF LIABILITY

CAPS

Some provisions exclude certain types of claims from caps, most commonly third party indemnity claims, but also sometimes claims for death, physical injury or party indemnity claims, but also sometimes claims for death, physical injury or property damage or breaches of law or regulation.

Be careful with caps based on the amount of payments received under the contract during some set period during some set period.

Example: “IN NO EVENT SHALL THE LIABILITY OF THE VENDOR EXCEED THE AMOUNT RECEIVED IN FEES IN THE TWELVE (12) MONTHS PRECEDING AN EVENT GIVING RISE TO LIABILITY.”

In the first month of the Agreement, the cap may be very low.

Exclusion and cap should apply to remedies for “ALL CLAIMS, WHETHER IN LAW

WHITE & CASE May 2011 61

p pp y ,OR EQUITY, IN TORT, CONTRACT, STATUTE, OR OTHERWISE.”

Page 62: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

SOME NEGOTIATING STRATEGIES

Always ask “why” Always try to offer a rational baseline for your position that is

findependent of what your client simply wants If possible, establish that certain concessions cannot be made without

extensive internal review If possible, cite to prior deals or practices as authority for your position If your counterpart’s position is unreasonable, make them state it

explicitlyexplicitly

WHITE & CASE May 2011 62

Page 63: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

White & Case Around the World – Offices by Region

EuropeAlmatyAnkaraBerlinBratislavaBrussels

AsiaBeijingHong KongShanghaiSingapore

BrusselsBucharestBudapestDüsseldorf Frankfurt GenevaHamburg

Middle East/ Africa

Tokyo

North AmericaLos AngelesMiamiNew YorkPalo Alto

Helsinki Istanbul London MoscowMunichParisPragueMiddle East/ Africa

Abu DhabiDohaJohannesburgRiyadh

Palo AltoWashington, DC

Latin AmericaMexico CityMonterreySão Paulo

PragueStockholmWarsaw

WHITE & CASE May 2011 63

Page 64: Negotiating Licensing Agreements: Ri kRisk Mi i iMitigation …media.straffordpub.com/products/negotiating-licensing-agreements-r… · 10/05/2011  · • Software does not include

Howard WettanWhite & Case LLP5 Palo Alto Square5 Palo Alto Square3000 El Camino Real5 Palo Alto Square, 9th FloorPalo Alto, CA 94306Palo Alto, CA 94306Tel: (650) 213 0354Fax: (650) 213 8158hwettan@whitecase [email protected]

WHITE & CASE May 2011 64