How to Improve Your Company’s Forms Software License Agreement – Part 3: Compensation

Key points to remember:

A software license agreement must:

  • limit Licensor’s indemnification obligations to claims by third parties alleging that the Software infringes the intellectual property rights of third parties;
  • contain certain exceptions to Licensor’s indemnification obligations;
  • set out certain procedural requirements for compensation; and
  • contain language indicating that Customer’s remedies set forth in the Indemnification Section are Customer’s sole and exclusive remedies for third-party infringement claims.

Indemnification is one of the most difficult concepts to understand in software license agreements for sales teams and young lawyers. An indemnification obligation can also be a very costly obligation if triggered. Therefore, the indemnification clause is probably the most negotiated clause in software license agreements.

“Indemnification” generally refers to a set of related obligations that are triggered when a party is sued by a third party that is not a party to the software license agreement. It is important to remember that indemnification, if properly worded, is not about claims or lawsuits between the licensor and the customer, but rather the obligations that “come into play” when the licensor or customer is sued. by another party.

The terms of the “deal” dictate that licensors must include an indemnification obligation in their software license agreement which states that the licensor will defend (i.e. pay attorneys to defend) any legal action against the customer initiated by a third party to the extent that the legal action alleges that the software licensor infringes the intellectual property rights of the third party. In addition, the indemnification obligation will indicate that the licensor is responsible for the financial consequences of such a lawsuit. Although licensors are expected to provide such indemnification protection to the customer, there are many provisions that the licensor should include to narrow the scope of its indemnification obligations.

First, a software license agreement should not include any licensor indemnity, except indemnity for infringement of third party intellectual property. Indemnification for claims arising from licensor’s breach of the software license agreement and violation of law should not be included in a software license agreement because many customers will not require such indemnification.

As mentioned above, the provision should clearly only apply to third party lawsuits (not customer lawsuits) and damages “ultimately awarded by a court”. This language establishes clear parameters regarding the costs, expenses and damages that the licensor will have to pay. The licensor could potentially be liable for a much wider set of costs, expenses and damages if the indemnification is formulated more broadly.

It is also essential to have a set of exceptions that state that the licensor is not obligated to defend and indemnify the customer from a lawsuit if the lawsuit arises from certain events that are not within the control of the licensor. . Typical exceptions are: (1) customer’s violation of the software license agreement or use of the software other than as provided in the agreement, (2) modification of the software by any party other than the licensor, (3 ) software that is developed in accordance with specifications provided by Customer; and (4) the combination of Software with other software and technology not provided by Licensor.

The software license agreement should also include provisions for the indemnification procedure. Common issues to be addressed are: (1) required notice by Customer to Licensor, (2) licensor’s exclusive control of the defense of the indemnified claim, and (3) assistance required to be provided by Customer to assist Licensor to defend the indemnified claim. A standard software license agreement should expressly provide that Licensor is released from its indemnification obligations if Customer’s failure to timely notify Licensor of the claim or Customer’s failure to Reasonably cooperating with Licensor in defending the claim seriously impairs Licensor’s ability to defend the indemnified claim.

The licensor must also determine what happens to the software license agreement if the customer is sued by a third party alleging that the software infringes that third party’s intellectual property rights. The licensor will not want to continue to be obligated to provide infringing software (and possibly continue to suffer further damages), so he must reserve the right to license the infringing software, modify the software so that it will no longer violate, or terminate the Software License Agreement and refund only the prepaid amounts for the remaining portion of the Term. Licensor shall include “sole and exclusive remedy” language with such express remedies stating that all remedies set forth in the indemnification section (defense, indemnification and repair, replacement or refund) are the sole and exclusive responsibility of Licensor, and the sole remedy of the customer, for any third-party claim for infringement. This is because Licensor should not expect to be sued directly by Customer for additional damages if Licensor has defended a third party’s claim, paid resulting damages, and undertaken additional repairs, replacements, or refunds.

Finally, the licensor may include a provision that its indemnification obligations are subject to the limitation of liability provisions, meaning that the licensor would only be “liable” up to a certain amount for all of its indemnification obligations described above. Although some licensors include this position in their software license agreement, most customers expect the licensor’s indemnification obligations for claims of intellectual property infringement by third parties to be unlimited (subject to unlimited liability). Most licensors accept this position because, in practice, licensors want to control the defense of a lawsuit in which a third party claims that the licensor’s software infringes a third party’s intellectual property rights.