Making promises — warranties and indemnities in intellectual property agreements

The old adage "buyer beware" reminds us that, when we're making a purchase, it is important to make sure that we're actually getting what we think we're getting. This applies to intellectual property rights such as patents, trademarks and copyrights and is equally applicable to situations where the IP right is purchased outright or licensed for use. By the same token, a seller or licensor of an IP right should be careful that the IP is sold or licensed with assurances that do not extend beyond what can reasonably be guaranteed or promised.

In contractual agreements, the assurances or guarantees relating to what is being bought or sold are called the "warranties" and promises to cover or pay for any deficiency that is later discovered and any damage resulting from a deficiency is called an "indemnity." As a purchaser, vendor, licensor or licensee, there are certain basic warranties and indemnities that should be considered.

Purchasing an IP right is not like buying, for example, a chair. It cannot be picked up and examined for scratches or tears in the fabric. It is not always easy to determine whether a seller actually owns and has the right to sell the chair, but it is even more difficult for the average purchaser to be certain of whether a seller or licensor of IP is the current owner of an IP right. Not all details of the status of IP assets can be searched by a purchaser or licensee by way of due diligence, and there is also often much more at stake when purchasing a patent than when purchasing a chair. Thus, it is particularly important that warranties and indemnities covering the fundamental aspects of the IP be included in a purchase, sale or license agreement. When purchasing or licensing IP rights, the following are some provisions that might be included:

1. a warranty that the vendor or licensee is the legal and beneficial owner of the IP asset(s)
2. a warranty that the IP is registered and that the registration(s) is/are current and up-to-date
3. a warranty that the IP is unencumbered or encumbered only to the extent disclosed by the agreement
4. a warranty that the IP asset, particularly in the case of a patent, is valid and enforceable
5. a warranty that the IP asset does not infringe the rights of any other party, at least to the knowledge of the vendor or licensor
6. a warranty that there are no outstanding claims against the IP, whether by way of written notice or legal proceedings
7. in the case of copyright, a warranty that the vendor has the authority to waive moral rights
8. an agreement to indemnify and hold the purchaser or licensor harmless against any claims relating to any activities of the vendor or licensor, whether before or after the agreement commences.

For an IP owner who is selling or licensing a right such as a patent, trademark or copyright, it is important that the representations and warranties included in the agreement do not go beyond what is reasonable and within the owner's knowledge and also that any limitations on the owner's responsibility for the activities of a licensee are clearly defined. In this case, qualified language along the following lines may be appropriate:

1. all registrations for the IP assets are current and up-to-date to the best of the vendor's knowledge
2. the patent is valid to the best of the vendor's knowledge
3. there has been no judicial decision rendered that has limited the validity or enforceability of the IP
4. the vendor is not aware of any claims against the IP asset
5. the vendor has not received any written notice of any claim against the IP asset.

It is important to note that the representations and warranties are only part of the many details that should be covered in a transaction where IP is purchased or licensed and that the specific representations and warranties that are appropriate will vary from case to case. Legal advice should be sought to ensure that the provisions of the agreement are adequate and appropriate for the particular circumstances.

Our articles and newsletters are informational only, and do not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.