Use Your Vendor Agreements For Protection from Patent Trolls

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Use Your Vendor Agreements For Protection from Patent Trolls


The phenomenon of patent litigation brought by non-practicing entities (patent trolls) is among the most challenging legal issues facing our multichannel merchant clients these days.  The last 10 years have seen a sharp spike in the number of patent cases filed against all variety of business.  The cost of defending these cases-in money and in lost executive time and attention-can be staggering.

There are steps that merchants can and should take to shrink the window of risk at least slightly.  One important opportunity for doing so is in the course of your contract negotiations with new vendors.  The range of technologies that may be covered by patent troll claims is as broad as the range of technical products or services that any merchant might acquire-which means that every agreement into which you enter is an opportunity to limit risk.

With the assistance of your counsel, you should try to be sure that your agreements with your vendors contain two critical provisions to help address this issue.  The first such provision is a representation or warranty from the vendor that the technology that is the object of the agreement does not violate the intellectual property rights of any third party.  In effect, this type of provision shifts the risk of any unknown or as-yet unasserted patent infringement claim to the vendor, creating a potential breach of contract by the vendor in the event of an infringement claim.  A typical provision of this sort would look something like this:

Vendor represents and warrants that the products and services that it provides pursuant to this agreement do not infringe the intellectual property rights of any third party, including any patent, trademark, trade dress, copyright or trade secret rights.

In addition to the representation with regard to intellectual property, it is important to have a proper indemnification provision.  In general, an indemnification provision requires the vendor to bear the cost, including legal fees, of defending the customer from any claim that the products or services of the vendor infringe the intellectual property rights of any third party.  We have noticed in the last year or so that some vendors now seek to exclude from the indemnification obligation claims by “non-practicing entities.” Be sure to identify and reject this proposed carve-out.

Finally, in addition to the warranty and indemnification provision, make sure that a vendor does not include claims for indemnification under any applicable damages cap.  It is quite common for products and services agreements of all types to contain a provision limiting damages to a particular arbitrary sum, often no more than the purchase price paid for the goods or services.  Unless the indemnification provision is expressly excluded from the damage cap, the vendor may avoid the lion’s share of the responsibility for an infringement claims.

The world will likely continue to be a dangerous place, but with a few modest bits of forethought in your procurement process, you may be able to make it a little less so for your business.

Posted by David Bertoni

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