Every product you sell as a manufacturer is subject to the Uniform Commercial Code. This law requires you to guarantee to your customers that your products are free of infringement claims made by other manufacturers.
You may already have customer contracts in place with even more stringent conditions, such as providing legal defenses to customers or reimbursing them for any costs that could be imposed on them as a result of a lawsuit. These costs may quickly mount to staggering figures, so businesses need a way to mitigate the risk. The best means of accomplishing this is negotiating an indemnity clause with your customers.
Indemnity is kind of like an insurance policy — as it protects the “indemnitee” from certain covered losses. A typical agreement involves an “indemnitor” promising to protect the indemnitee from certain losses sustained as a result of a specific act or omission. Practically speaking, this would involve a manufacturer or seller of a product agreeing to cover the buyer for specific losses sustained in third-party patent or trademark infringement claims.
Considerations as you begin the process
Your first step in creating such a clause is to clearly define the parties and the scope of claims your agreement will cover. Typically, the agreement will be between a seller or licensor and a buyer or licensee. You should also consider whether you will cover officers, affiliates, subsidiaries and other parties in the agreement. If your transaction also allows resale or sublicensing, you will need to consider whether those third parties will also be protected (or “indemnified”).
Once you have set all of the ground rules, you should clearly identify each party’s obligations. In most situations, an indemnity provision would indicate that the seller will indemnify, defend and hold the buyer harmless from any losses associated with the covered claims.
There’s a variety of other considerations that could also impact the scope of your coverage and your liability. These include limitations of use, limitations on liability, geographic limitations, multiple indemnitors, pre-existing threats and remedial measures. Your corporate planning attorney can work with you to pinpoint any such factors that could have an impact on your indemnity agreement with your buyer or licensee.
Finally, you should be sure to clearly identify the procedures that must be followed to initiate and resolve any claims that occur. These procedures include the amount of notice time required to file a claim, who is the controlling party, the parties that will have authority to settle, the obligations each party has to cooperate and the amount of time the seller has to provide reimbursement.
Attorney Steven K. Hardy is an Associate in the Corporate, Tax and Estate Planning Practice Group at BoltNagi, PC, a well-established and respected intellectual property law firm serving individuals, businesses and organizations throughout the U.S. Virgin Islands.