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This Wisdom of the Crowd, compiled from responses posted on the IT, Privacy & eCommerce Forum* addresses a carveout for Intellectual Property infringement within the limitation of liability. *(Permission was received from ACC members quoted below prior to publishing their Forum Comments in this Wisdom of the Crowd Resource)

Question:

In 2009, my company signed a master travel agreement with a Really Big Travel Agent ("RBTA"). In the master agreement, RBTA had a limitation of liability clause, but carved out from that limitation of liability where "(a) Party's indemnification obligations hereunder [for breach of contract and IP infringement] and (b) a Party's gross negligence or will misconduct in the performance of its obligations hereunder . . . ." Fast forward to June 2016. We're renewing the contract, I want the same carve out that I enjoy today--unlimited indemnification for Intellectual Property ("IP") infringement. It's what my company offers to all of our enterprise customers in our standard enterprise agreements. RBTA is insisting on a liability lid, arguing that "things are different now" and "we're not a software company." Are they allowed to do this?

Wisdom of the Crowd

Response #1: You're seeing ripples from a trend that's been in the offing for a while now among larger software/web-based services vendors. The premise is that the risk of software patent infringement claims and litigation in this day and age is one that, by its nature, should be shared among software vendor and customer, perhaps (perhaps) somewhat more like an "act of God" than a failure to fulfill an express covenant. There is typically some symmetry between (a) the likelihood that the software vendor will attract claims (directly and via its customers) on account of its size and ubiquity (and, for that matter, that the vendor will have the resources and inclination to defend the claims vigorously), and (b) the leverage the vendor possesses to make its customers agree to a cap or other limits on liability respecting third party infringement claims. The justification for the limits diminishes to the extent that the software in question is not the kind that is typically susceptible to trolling and/or the software is being licensed or commissioned for well-defined, proprietary purposes by the licensee. If you don't have the leverage simply to demand that the software vendor provide an uncapped indemnity, consider how effectively the vendor would have been able to live up to its indemnity obligations (to you and to all of its other customers), how motivated and capable the vendor would be in responding to infringement claims (with or without indemnity), how visible/vulnerable the potentially infringing software is generally, as well as in the context in which the software will actually be used, as a target for infringement claims and how you might be able to limit exposure by discontinuing use of the software if you're tagged with an infringement claim. I suspect your vendor has adopted this posture based upon its own claims experience, its negotiations with its own software vendors or its perception of the kinds of due diligence taking place around this issue in the current M&A market for companies similar to the vendor.1

Response #2: You are correct. We offer unlimited IP infringement protection to our customers also. It is still standard and completely fair from an allocation of risk perspective Probably time to look at other RBTAs and let them know you are doing so.2

Response #3: I agree with the previous responses - we also don't cap our indemnity obligations for Intellectual Property infringement on the idea that we stand behind the software we offer to our customers. However, we do limit the indemnity of course to "unmodified', not in combination with third party products, etc. I find caps are very hard and would rather have as many limitations as possible. So perhaps your vendor should simply limit circumstances for which it is not responsible rather than having a money cap.3

Response #4: Essentially, I think they're just trying to flex their bargaining power - the only thing that is changed is their attempt to shift the "excess" portion of their IP liability onto you, the customer - any other explanation/excuse is just trying to spin it in my honest opinion. The carve-out remains quite standard in my experience, except in some unique/unusual edge cases that aren't applicable here. While you do get this line from time to time, it's not common, and it really boils down to bargaining power. It also is irrelevant whether they are a software company, a bricks and mortar store, or anything else - they are offering a service (presumably a large portion of which is online) and if the patent troll or another IP claimant decides to apply pressure on them by going after their customer base (i.e. you), then you will want to ensure this is their problem, not yours. After all, you can't really measure this risk accurately, mitigate it, or get affordable insurance for it. Personally, I think this stance is rather short-sighted of them. If a patent troll or other IP claimant takes a run at their customer base, it will be a disaster for them if they do anything but tell their customers they have nothing to worry about - i.e. not only assure their customer that they will they deal with this problem completely, but they will make it go away and nothing will disrupt their service. If they instead say: "Well, sorry, we are only liable up to X, after that it's your problem", their customers are going to: 1. Dump them immediately to mitigate the risk and express their annoyance; and 2. Go after them for every last penny they can.4

Response #5: We do not offer uncapped liability in any of our enterprise agreements with customers, so I don't think it's unusual that you are seeing this request now and I would wager that the other RBTAs will take the same position. The cost of an uncapped IP infringement indemnity claim could exponentially exceed the benefit of selling you the services and that balance of risk doesn't make sense in the light of today's litigation landscape. Insurance companies are also focused on this now and are demanding higher premiums from companies that offer uncapped liability in their agreements.5

Response #6: I think this ask of the RBTA is, as others mentioned, a sign of their perceived bargaining power or desire in light of the cost/benefit of the deal with your client. Having IP infringement as a carve-out from Limitation of Liability still is pretty standard in my experience and I can't say I have faced much efforts to pull out the exception, except again where the other side thinks they have bargaining power to push back or legally cannot agree to this type of clause (public sector customers will push this position). Perhaps they have some underlying problems with indemnity protections they received from others. Or perhaps you have a lawyer on the other side who thinks his client needs to change their views.6

Response #7: A possible compromise could be to exclude from the cap for IP infringement if it is due to your negligence, you violate the terms of the license, you use it in a manner not contemplated by the documentation, etc.7

Response #8: The suggested carve-out to the carve-out (doesn't apply for misuse, etc.) - is a good one I have used. Bottom line to the vendor is so long as my client uses the service within the scope of the license, as spelled out in XYZ, we should not have to be left exposed for an IP infringement suit based on what you supplied to us. As the supplier, you acquired whatever rights are needed to supply to us the service you are selling, and we should be able to rely upon the assumption you have what you need and will make us whole in the event our lawful use consistent with the contractual terms nevertheless sees us facing legal exposure.8Response #9: I agree with the response above. I would advise against putting a money cap as it's really hard to estimate especially when it comes to IP-related damages however there're carve-outs that should provide protection. I've used the following carve-outs in the past on IP infringement indemnity:

  •  [COMPANY] will indemnify, defend, and hold harmless Customer (including its officers, directors, employees, contractors and agents) from and against all liabilities, damages, and costs (including settlement costs and reasonable attorneys' fees) arising out of a third party claim that the Services infringe or misappropriate any patent, copyright, trade secret or trademark of such third party. Notwithstanding the foregoing, in no event shall [COMPANY] have any obligations or liability under this Section arising from: (i) use of the Software in a modified, unauthorized, or unintended form, or in combination with third party technology or materials if such claim of infringement would have been avoided had such combination not occurred; (ii) Customer's violation of this Agreement, (iii) use of non-current versions of the Software if such claim of infringement or misappropriation could have been avoided by Customer's use of such current version of the Software, [OPTIONAL: provided COMPANY delivered such superseding version to Customer and advised Customer of the need to use such version, and (iv) any [ADD ANY OTHER ACT OF CUSTOMER THAT COULD TRIGGER/AFFECT LIABILITY FOR WHICH COMPANY SHOULDN'T BE RESPONSIBLE].9

Response #10: While even a couple of years ago, the standard was for uncapped liability for IP infringement, I have seen a push recently for some sort of secondary liability cap on indemnification obligations related to such infringement. Indeed, the small Software as a Service company I work for successfully gets these caps in many of our contracts even with very large customers. A few years back (when I was with a larger software company), I was unable to get such caps at all. Essentially, if the customer asked for the carve-out, we gave it to them. In my experience, that has changed over the past year or so. While I agree with many of the other posters here that fairness/reasonableness would tend towards uncapped liability, I have certainly witnessed it moving away from that and more to the rationale imposed by a standard limitation of liability - namely, this is a cost of doing business and customers are having to accept some more risk than they have in the past. A couple of possibilities if you need this vendor and can't make headway on uncapped liability here. Obviously, the first is to secure as high of a cap as possible. The standard 12/24 months of fees is certainly not appropriate. If you can get this cap in the $2-5 million range, it should give you some comfort and allow RBTA to keep their cap in some form. You may also want to ensure that this is either on an annual or claims-basis rather than aggregate. Finally, for what it's worth, it may give you some comfort to have them rep that they have not had and there is not pending any Intellectual Property-related claims.10

1Response from: Matthew Huggins, General Counsel, PowerDMS, Inc. (6/28/2016) 2Response from: Paul Baskowsky, General Counsel, FreedomPay, Inc. (6/28/2016) 3Response from: Anonymous (July 2016) 4Response from: Michael Stewart, General Counsel & Corporate Secretary, Halogen Software, Inc. (6/28/2016) 5Response from: Anonymous (June 2016) 6Response from: Jeffrey Gilleran, Attorney (6/29/2016) 7Response from: Anonymous (June 2016) 8Response from: Jeffrey Gilleran, Attorney (6/30/2016) 9Response from: Anonymous (June 2016) 10Response from: Tron Ross, Corporate Counsel, Montage Talent, Inc, (7/13/2016)

Region: United States
The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
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