09/09/2009 09:49:35 AM EST
Westermeier on New Implied Indemnification Against Infringement for Software
The American Law Institute (ALI) recently published "The Principles of Law of Software Contracts." The Principles contain many "law-reform recommendations" applicable to software transactions. Parties in disputes over software transactions may seek to use the Principles in advocating their legal positions. However, there are arguably many concerns over the Principles. In this Analysis, Jay Westermeier examines one of these concerns: the "implied indemnification" against infringement. He writes:
Section 3.01 of the Principles provides for an "implied indemnification against infringement." This is a new legal right in software transactions. It is not likely to cause any large problems because most software licensors provide an express indemnification against infringement of intellectual property rights; however, the scope of this express indemnification by licensors is far from consistent. The implied indemnification against infringement is likely to be broader than the indemnification coverage offered by some software licensors.
Under Section 3.01(a) of the Principles a software licensor (referred to as a "transferor" in the Principles) must indemnify and hold the licensee (referred to as a "transferee") harmless against any claim of a third party based on infringement of an intellectual property or like right which right exists at the time of transfer (e.g. license) and is based on the laws of the United States or a state thereof. Section 3.01(a) further provides that the licensor must pay those costs and damages incurred by the licensee that are specifically attributable to such indemnification claim or those costs and damages agreed to in a monetary settlement of such claim.
Under Section 3.01(b) of the Principles in the event the licensee's use of the licensed software is enjoined or a court finds the licensed software to be infringing, the licensor has a choice of three remedies: (1) procuring for the licensee at no cost to the licensee the continued right to use the software under the terms of the applicable agreement; (2) replace or modify the software with noninfringing software of substantially equivalent functionality; or (3) cancel the applicable agreement and refund to the licensee the fees actually paid by the licensee for the infringing components of the software.