Introduction

In technology licensing, the alignment between the scope of licensed rights and the scope of IP indemnification is essential to managing risk effectively. Misalignment can expose licensees to infringement claims without adequate protection, especially in global or multi-jurisdictional contexts. This practice note outlines key considerations and practical approaches to harmonise these elements, and to avoid unintended outcomes when indemnities are read together with limitation of liability provisions.

Alignment Between Licensed Rights and IP Indemnifications

1. Scope of Licensed Rights

• Definition: The licence typically grants rights to manufacture, use, and sell products in specified territories.
• Commercial Expectation: The licensee assumes it can exploit those rights without undue risk of infringement claims in those territories.

2. Scope of IP Indemnification

• Definition: The licensor agrees to defend and indemnify the licensee against third-party IP infringement claims.
• Limitation: Licensors often restrict indemnification to certain jurisdictions (e.g., only where they hold patents or have conducted FTO analysis).

Claims Handling Essentials (Notice, Defence, Settlement)

• Notice: Require prompt written notice of any claim, with enough detail to assess exposure. Avoid automatic forfeiture for late notice unless the indemnifying party is materially prejudiced.
• Control of defence: State who controls the defence and appoints counsel, and preserve the indemnitee’s right to participate (especially where injunctive relief or reputational risk is in play).
• Settlement: Make settlement consent express, and prohibit settlements that impose admission of liability, ongoing obligations, or non-monetary remedies on the indemnitee without consent.
• Cooperation and mitigation: Set reasonable cooperation duties (information access, witnesses) and ensure mitigation steps do not compromise plant operations or safety obligations.

3. Potential Misalignment

If Licensed Rights cover global territories but Indemnification is limited to, say, the US and EU, the licensee bears the infringement risk in other countries. This creates a gap: the licensee has rights to operate but no protection against third-party claims in those regions.

Interplay with Limitation of Liability (Caps, Carve-outs, Excluded Damages)

Indemnities and limitation of liability clauses must be drafted to work together. A broad IP indemnity can be unintentionally diluted by a liability cap or excluded-damages language, and conversely a liability limitation can be unintentionally overridden if the agreement is unclear on whether indemnity payments are inside or outside the cap.

• State the cap treatment: Specify whether amounts payable under the IP indemnity are (i) outside the general cap, (ii) inside the cap, and/or (iii) subject to a separate cap.
• Erosion and structure: Confirm whether the cap is per claim or aggregate, whether it is mutual or one-way, and whether payments (including indemnity payments, if intended) erode the remaining cap.
• Excluded damages vs third-party claims: Check that any exclusion of “indirect” or “consequential” loss does not inadvertently exclude heads of loss commonly claimed by third parties (for example, a third party’s loss of profit) if those are intended to be covered by the indemnity.
• Carve-outs: If the deal includes carve-outs (for example, for fraud, wilful misconduct, confidentiality, or IP infringement), test them against the indemnity regime so that the contract does not create accidental unlimited exposure.

Practical Approaches to Align Them

Drafting Strategies

Territorial Consistency Clause

Ensure the territory of Licensed Rights matches the territory of indemnification.

Example: “Licensed Rights shall extend only to those countries where Licensor provides indemnification under Clause X.”

Risk Allocation Clause

If indemnification is narrower, explicitly state that the licensee assumes risk outside indemnified territories. Consider reduced royalty rates in those territories.

Optional Insurance/Shared Responsibility

Licensee may obtain IP insurance for noncovered territories. Alternatively, parties can agree to share defence costs outside indemnified regions.

Disclosure Obligation

Licensor should disclose where it owns or has applied for IP rights, so the licensee can assess risk.

Key Takeaway

The golden rule is: the scope of Licensed Rights should not exceed the scope of indemnification without explicit risk allocation. If the licensee is granted rights in countries where the licensor will not indemnify, that gap must be addressed commercially — either by narrowing the licence, adjusting royalties, or shifting responsibility to the licensee.

Conclusion

Aligning licensed rights with IP indemnification is a cornerstone of effective technology licensing agreements. By carefully matching territorial scopes and clearly allocating risks, licensors and licensees can avoid costly disputes and foster smoother commercial relationships.

Disclaimer: This practice note is for informational purposes only and does not constitute legal advice. Parties should consult qualified legal counsel to address specific circumstances.