This Wisdom of the Crowd, compiled from questions and responses posted on the Intellectual Property Committee and the IT, Privacy & eCommerce Committee eGroups, addresses whether "indemnify" has the same legal implication as "defend and pay" in EULA negotiations with software providers.
In EULA negotiations, software provider will not agree to include the word "indemnify" in connection with how provider will handle any claims of copyright infringement against us (customer/licensee) by a third-party. Instead, software provider wants to agree that it will "defend" any claim or cause of action and will "pay damages finally awarded or agreed to in settlement." Software provider is claiming that "defend and pay" is the same as "indemnify." I'd appreciate any suggestions.
Wisdom of the Crowd:
I do not believe that the software provider's position is correct. While in private practice I litigated defense and indemnity clauses, and while this is a matter of each state's law, it is my view that "indemnify" is broader than an obligation to pay 'damages" finally awarded. For example, what if the case settles, and there are no "damages finally awarded"? Indemnity clauses, in some respects, are like insurance policies, and courts generally view them the same way, so special care is needed.1
If "defend and pay" means the same thing as "indemnify," then there shouldn't be a problem. But, of course, the software vendor does perceive a difference. And different courts may view these concepts differently too. You can consult online articles [e.g., http://www.law.gonzaga.edu/files/Transactional-Lawyer-Oct2011.pdf] that examine the differences between the concepts of "defend," "indemnify," and "hold harmless."
If your expectation is that the vendor will, at its cost, take care of the entire 3rd party claim, then you want the vendor to defend, indemnify, and hold you harmless. And you want to make sure that any costs associated with any of these activities (and not just the cost of a settlement or judgment) are the responsibility of the vendor. And you want to make sure that these obligations are excluded from the vendor's limitation of liability.2
Not knowing the governing law (common law or civil law) I can only give you a general answer. "Indemnify" could mean "to save harmless" a very broad benefit that licensors try to avoid by accepting only obligations to defend and pay damages awarded by a court or through a settlement. A very common practice. What is of concern for you is the term "finally awarded" because "finally" could mean that you may have to wait for an appellate decision to obtain any financial coverage. My advice is to strike out "finally". Also with respect to the obligation to defend the licensee, make sure it includes all legal costs, included the experts and such costs are outside the liability cap.3
The key is to be covered for all your costs. I wouldn't be hung up on the word "indemnify" as long as the provider is obligated to cover all your costs (don't forget any cost of replacement). Incidentally, "defend" is not included in "indemnify". Indemnify is, in essence, "insure you for" and a duty to insure does not include a duty to defend (unless, of course included by agreement).4
"Defend and pay" has been increasingly popular among software providers for a number of years. Software licensors perceive "indemnify" as broader, potentially covering ANY costs related to a third party IP infringement claim against a licensee, while "defend and pay" covers the cost of the defense and any final judgment or settlement. For perspective, remember that although the EULA is between only you and the licensor, any third party infringement claim will be against the licensor and all its licensees. Therefore, licensors will typically have a much greater incentive to mount a strong defense than any individual licensee, and do not want their costs escalated by licensees seeking reimbursement for their own legal fees, which licensors perceive as duplicative (and generally unnecessary). A licensee's legal fees might be reimbursable under "indemnify" but would not be covered under "defend and pay". In my opinion, defend and pay should provide all the protection that a licensee should need. If I have a deal where a licensee insists on "indemnify, defend, and hold harmless" rather than "defend and pay", I always add an exclusion that says "where the a party has an obligation to defend in this agreement, the other party may retain its own counsel at its own expense to participate in its defense, but that expense shall not be included in the licensor's payment obligation. With that exclusion, indemnify is virtually identical to defend and pay.5