What to Know About the ‘Combination Exception’ to Infringement Indemnities.
As a software licensing attorney I run into the issue of infringement indemnities all the time. These risk shifting contractual clauses can be very confusing for clients, so I thought I would explain (with a real live case and a graphic) what is called the ‘combination claim exception.’
Contractual indemnities are in essence insurance policies, and the customer is asking for insurance if your software infringes (violates someone else’s IP rights). They expect that you will defend them (sometimes they even want to hire their own attorneys and send you the bill) in an infringement suit and pay any resulting judgment. This is a very common request from large customers.
However, there are typical exceptions to a software company’s indemnity obligation (i.e. risks that software companies should not be on the hook for). One of the most important exceptions is known as the ‘combination claim’ exception. The theory behind this exception is that your indemnity should only cover your software, and not your software + some other technology (either customer or third party). Look at it this way: Are you being compensated sufficiently in the transaction to pay for infringement insurance on how your customer uses your software or only on your software? Let’s take a look at a real world case from 2014.
The Facts: Intervoice’s software was deployed on premises at AFLAC and then AFLAC was sued for patent infringement. However, supposedly the Intervoice software alone did not infringe the patent, but when AFLAC combined the Intervoice software with certain technology at AFLAC (see below), there was allegedly an infringement issue.
Said another way: an indemnity typically covers 1 (see above), but not for 1 + 2, 1+ 3, or 1+4. The court held in the AFLAC case that Intervoice did not have to indemnify AFLAC as the infringement claim was as a result of the vendor’s software + the connectors (which claims were excluded under the combination claim exception wording). Here is the actual wording from the contract.
Ok, so as a software licensing attorney that only represents software and SaaS companies I suggest you review your indemnities in your form agreements, as this is important. If you want to give a broader indemnity, then ok with me, but you need to at least understand this combination claim issue and how far your indemnity will go. Keep in mind that you will not be out of step with the software industry, as, for example, Oracle and Microsoft have the combination claim exception in their license agreements.
Keep in mind that I have overly simplified a very complex issue, but if you can get a basic understanding of what is at stake here, then I think you got the point of this blog post. So remember, that not knowing a thing or two about infringement indemnities in software license agreements can cost (or save you) real $.
Appellate Court’s Decision in AFLAC vs. Intervoice.
Disclaimer: This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.