Patent Law

The Other ADR: Insurance and Indemnity Agreements

By Les Weinstein, Michael Young, John Leo Wagner, Eric van Ginkel, and Victoria Pynchon

(right:  Blackberry design patent from Patently-O article on the RIM settlement)

Though the term "patent terrorist" is hyperbolic, the points made in How to fight against patent terrorism by Richard Wilder, a partner  with Sidley Austin and IP counsel for the Association for Competitive Technology provides valuable advice about ways to protect your company from the expense of patent infringement litigation when the process server knocks on your company door.

As Wilder explains:

Patent terrorists are companies whose business models are based on patent litigation as a threat and licensing as a revenue source. With no interest in selling a product or winning new customers, these companies are not bound by the norms of customer relationship building. They would not think twice about suing large software customers if it fit into their legal strategy.

The result is competitive jockeying between companies offering their own indemnification policies in response to the liability risks faced by corporations deploying IT solutions. When it comes to indemnification policies, companies that create open-source and proprietary software are continuously evolving their thinking. Novell, Hewlett-Packard and Red Hat offer varying levels of legal protection to customers for their Linux products. Rather than offering traditional patent infringement indemnification, however, Novell promises to countersue with its own patent portfolio--presumably with the intention of settling on the basis of a cross-license.

Patent terrorists are companies whose business models are based on patent litigation as a threat and licensing as a revenue source. If the litigant is a patent terrorist, however, the countersuit would have little deterrent effect. Microsoft has taken indemnification to a new level by protecting its customers against all patent and copyright claims, and promising to pay for any legal fees or damages resulting from those claims.

The burden is on CIOs to seriously consider the indemnification policies of their vendors before concluding big software purchases. Indemnification should not be the primary factor driving purchasing decisions but rather a key factor in calculating the total cost of ownership for any solution.

For those interested in purchasing open-source solutions but unhappy with the indemnification policy of their vendors, new companies are emerging to provide additional insurance against the threat of intellectual-property litigation. This is really the continuation of a trend of insurers providing coverage against intellectual-property infringement suits.

CIOs have traditionally viewed indemnification provisions as standard boilerplate portions of agreements--and often not as something that can even be negotiated. It's time to rethink that assumption. Indemnification policies and insurance can be important tools to reduce or eliminate long-term risk and maximize the present value of the products purchased.

CIOs may increasingly face the very real threat of patent terrorism. But they can only benefit from the growing competition among software providers to better protect customers from intellectual-property lawsuits.

Full post as published by IP ADR Blog on June 20, 2008 (boomark / email).