Within procurement, intellectual property (IP) breaches are important to manage and reduce risk. These breaches can result in significant financial losses for businesses, which is why it is essential to include an indemnification clause in procurement contracts that protects the buyer from any IP breaches that may occur during the course of a transaction.
Memo sent to a procurement department:
Purpose:
This memo aims to explain why a third party can file a lawsuit against our company for damages if a supplier provides us with a product that infringes on the third party’s intellectual property (IP). Understanding this risk is crucial for safeguarding our company from potential legal and financial liabilities.
Background:
When we purchase products from suppliers, it’s essential that these products do not infringe on any third-party intellectual property rights. Intellectual Property (IP) refers to creations of the mind, such as inventions, designs, or trademarks, that are legally protected. If a supplier delivers a product that unlawfully uses another company’s IP, we could face serious consequences, including legal action from the rightful IP owner.
Why Can a Third Party Sue Us?
- IP Infringement Liability:
- If the supplier does not own the IP rights to the technology, design, or other elements incorporated in the product they provide to us, and if they have not obtained proper licenses or permissions, this constitutes an infringement of the third party’s IP rights.
- The rightful IP owner can file a lawsuit against our company, even though we are not the originator of the infringement. This is because by purchasing, using, or reselling the infringing product, we are indirectly involved in the violation of their IP rights.
- Strict Liability in IP Law:
- Intellectual property law often imposes strict liability on parties that use or distribute infringing products, regardless of whether they were aware of the infringement. This means that our company could be held liable simply because we purchased and used the product, regardless of our knowledge or intent.
- Damages and Legal Costs:
- If the third-party lawsuit is successful, our company could be required to pay significant damages to the IP owner. This could include compensation for lost profits, statutory damages, and possibly even punitive damages.
- Additionally, we may be responsible for covering legal costs, both ours and the third party’s, which can be substantial.
- Reputational Risk:
- Beyond financial damages, being involved in an IP infringement lawsuit can harm our company’s reputation. Clients, partners, and stakeholders may view our involvement in such cases negatively, which could impact our business relationships and market position.
Preventive Measures:
- Supplier Due Diligence:
- We must ensure that our suppliers have clear ownership of the IP related to the products they provide or have secured the necessary licenses or permissions from the IP owners.
- This can be done by including warranties and representations in our contracts that explicitly state the supplier’s responsibility to provide non-infringing products.
- Contractual Protections:
- We should include indemnity clauses in our contracts with suppliers. These clauses should state that the supplier agrees to defend, indemnify, and hold our company harmless from any claims or damages arising from IP infringement related to the products they supply.
- IP Verification:
- For critical or high-value products, we should consider conducting an IP audit or requiring suppliers to provide proof of IP ownership or licensing before finalizing the purchase.
Conclusion
The risk of third-party lawsuits due to IP infringement by a supplier is a serious concern. By taking proactive measures—such as conducting thorough supplier due diligence, securing strong contractual protections, and verifying IP rights—we can significantly reduce our exposure to these risks. It is crucial for all members of the procurement team to remain vigilant in ensuring that the products we acquire are free from potential IP conflicts.
Indemnification clause in procurement contracts
What is an Indemnification Clause?
An indemnification clause is a provision in a contract that requires one party to compensate the other party for any losses, damages, or expenses that may arise from the contract. In procurement contracts, indemnification clauses are typically included to protect the buyer from any legal liability that may result from the seller’s actions or omissions.
Indemnification clauses can be either unilateral or mutual. In a unilateral indemnification clause, only one party is required to indemnify the other party. In a mutual indemnification clause, both parties agree to indemnify each other. Typically in a purchasing contract, the clause is unilateral protecting the buyer.
How Indemnification Clause Protects the Buyer from IP Breaches
IP breaches can occur in a variety of ways, including infringement of trademarks, copyrights, and patents. When a buyer enters into a procurement contract with a seller, there is always the risk that the seller may infringe upon the buyer’s IP rights or the IP rights of a third party. In such cases, the buyer may be held liable for the infringement and may have to pay damages.
By including an indemnification clause in the procurement contract, the buyer can protect themselves from any potential liability arising from IP breaches. The indemnification clause can require the seller to indemnify the buyer for any losses, damages, or expenses that may arise as a result of the seller’s IP breaches. This can include legal fees, damages to the buyer’s reputation, and lost profits.
In addition to protecting the buyer from potential liability, the indemnification clause can also serve as a deterrent to the seller. If the seller knows that they will be held responsible for any IP breaches that occur during the transaction, they are more likely to take steps to prevent such breaches from happening in the first place.
What Should be Included in an Indemnification Clause for IP Breaches?
When drafting an indemnification clause for IP breaches, it is important to be specific about the types of IP breaches that will be covered. This may include trademark infringement, copyright infringement, or patent infringement. The clause should also specify the circumstances under which indemnification will be required.
For example, if the seller is providing a product or service that includes the use of a trademark owned by third party, the indemnification clause may specify that the seller will indemnify the buyer for any damages that result from trademark infringement. Similarly, if the seller is providing software that includes copyrighted material, the indemnification clause may specify that the seller will indemnify the buyer for any damages that result from copyright infringement.
It might also be important to include limitations on the amount of indemnification. This may include a cap on the amount of damages that can be recovered or a time limit on when the indemnification can be sought. Seek legal advice when drafting your contract for your jurisdiction.
Example of an Infringement Clause
Infringement Clause
The Supplier warrants that the goods supplied and their use, resale, or importation do not infringe any patent, trademark, copyright, or other intellectual property rights of any third party. The Supplier shall indemnify, defend, and hold the Buyer harmless from and against any and all claims, liabilities, damages, losses, costs, and expenses, including legal fees and expenses, arising out of or in connection with any alleged or actual infringement of any intellectual property rights by the goods supplied under this Agreement. This indemnity shall survive the termination or expiration of this Agreement.
Examples of Infringements
- Trademark Infringement:
- Scenario: A buyer purchases branded clothing from a supplier who does not have the authorization to produce or sell the branded items.
- Infringement: The supplier illegally uses a brand’s trademark, causing the buyer to unknowingly purchase counterfeit goods.
- Consequence: The brand owner can sue both the supplier and potentially the buyer for trademark infringement, leading to legal and financial consequences.
- Patent Infringement:
- Scenario: A buyer sources a specific type of machinery from a supplier. The machinery is patented by another company, and the supplier does not have the rights to manufacture or sell it.
- Infringement: The buyer unknowingly infringes on the patent by purchasing and using the machinery.
- Consequence: The patent holder can take legal action against the buyer, resulting in potential damages and the necessity to cease use or purchase of the machinery.
- Copyright Infringement:
- Scenario: A buyer procures software from a supplier who has illegally copied it from another company.
- Infringement: The software includes copyrighted code that the supplier does not have the right to distribute.
- Consequence: The original software creator can file a lawsuit against the buyer for using unauthorized copies, leading to legal costs and the need to replace the software.
Summary indemnification clause in procurement contracts
Including indemnification clause in procurement contracts that protects the buyer from IP breaches is essential in today’s business environment. By including a well-crafted indemnification clause in the contract, the buyer can protect themselves from potential liability and ensure that they are fully compensated for any losses or damages that may result from IP breaches. When drafting the clause, it is important to be specific about the types of IP breaches that will be covered, the circumstances under which indemnification will be required, and any limitations on the amount of indemnification.
To avoid problems related to indemnification, on can emphasize the importance of ensuring that the supplier has legitimate rights to sell the goods. Here are some key points to cover:
- Due Diligence: Always perform thorough due diligence on suppliers to verify their legitimacy and the authenticity of their products.
- Legal Implications: Explain the potential legal implications and costs associated with intellectual property infringement, which can impact both the buyer and the supplier.
- Protective Measures: Discuss the importance of including strong infringement clauses in contracts to protect the company from liability and ensure suppliers are held accountable for any breaches of intellectual property rights.
By understanding and applying these principles, a professional buyer can minimize the risk of intellectual property infringements and safeguard the company’s interests.
See an example of Indemnification clause in procurement contracts in real life in the General Terms and Conditions course.
Note: Illustration to the blogpost “Indemnification clause in procurement contracts.” is created by Chat GPT on December 12, 2023.