Written by Rooney Nimmo Partner, Sean Hogle
Professional services vendors that develop custom software or technology to the specifications of their customers often face demands to indemnify and defend their customers from infringement claims of any and all IP rights. “If I’m sued because of your deliverable,” the argument goes, “then you should step up and take responsibility for your failure to respect third-party IP rights.”
This stance, though common, fails to appreciate the unique danger posed by “strict liability” IP rights for such vendors, in which liability for infringement attaches regardless of whether the accused infringer knew of the existence of the protected subject matter, and regardless of any intention or knowledge. Utility patents, design patents, trademarks, trade dress, and, in the EU, design registrations, represent strict liability IP rights.
On the other hand, copyrights, EU design rights, and trade secrets, where copying or misappropriation is an integral element of proof of infringement, are for this reason not strict liability IP rights. Buyers of custom deliverables are justified in holding their vendors to account if they failed to exhibit the necessary professionalism to prevent copyright infringement or trade secret theft. Plagiarists and thieves should have no place in product development.
Strict liability IP rights are quite different. Studies have demonstrated that it’s impossible to write software that doesn’t infringe a utility patent somewhere in the world. Design patents (which can apply to user interfaces) are particularly hazardous: they are granted automatically without review, and in the US, require disgorgement of all profits attributable to an infringing product or component.
Demanding that custom-development service vendors indemnify for strict liability rights infringements is problematic. The customer typically controls the specification, and the work is often iterative, driven by customer feedback that takes no account of potential infringements. Generally, there’s no time or budget, during the crunch of the project, for strict liability IPR clearance searches or freedom-to-operate opinions. The customer says, “please add this, and do it this way,” and the vendor complies, without asking questions about patents or trademarks. Such searches are not within the vendors’ core competency in any case.
In the custom development context, knowledge qualifiers connected to a non-infringement warranty, or a shared liability allocation, might be more appropriate with respect to strict liability IP rights. Strategies for drafting and negotiating relevant work product in this regard can be found here at Redline.