Australian Corporate Lawyer - Autumn 2016

theAustraliancorporatelawyer
WARRANTIES & INDEMNITIES –
WHERE TO DRAW THE LINE?
Carla Degenhardt
Carla is Special Counsel, Lawyer at Watermark.
Carla’s experience includes leading the IP
group in Australia for one of the world’s largest
resources companies, and over 10 years working
in the top tier legal practice specialising in
litigation strategy and procedure. Carla has
led numerous negotiations in connection with
technology-focused agreements; developed
and implemented legal strategy for global
technology projects; and conducted significant
IP litigation.
As more industries and sectors have
become alive to concept of IP risk,
it is now not uncommon to see IP
warranties and indemnities being included in
everything from research and development
agreements to the most routine procurement
agreements. Notwithstanding their pervasive
presence, it is only sometimes that IP is
genuinely a source of significant risk in a
transaction, i.e. the transaction primarily or
fundamentally relates to the creation, transfer
or licence of IP rights.
Where IP is a material risk, the inclusion of a
standardised IP warranty and indemnity
clause will rarely adequately manage or
balance risk between the parties – just
when it is most important to effectively do
so. In truth there is no one ‘ideal’ solution
for management of IP risk. Such risk is best
managed through a combination of precontractual
acts, contractual terms and
performance, namely by:
• independent assessment, or due diligence,
of the rights involved that are in existence
and which are critical or registered;
• customised warranties and/or indemnities
primarily for the purpose of managing risk
associated with rights that are not yet in
existence; not known to be critical; or not
registered; and
• incorporation of mandated behaviours into
contracts which act to mitigate IP
risk and overreliance on the warranties
and indemnities.
Risks and Rights – How does the
risk profile change depending
on type of right?
Different rights can be differently exposed to
entitlement, validity and freedom to operate
risk. For example:
• historically, warranties as to copyright
were fairly routinely and broadly given.
Such a position may still be appropriate in
relation to, for example, the creation of a
logo, promotional campaigns or corporate
photography or copy. Consider whether,
however, broad warranties should be given
routinely in relation to copyright in software
which may include open source software?
• warranties are often given in relation to
patent entitlement, but what proportion of
patentees would sensibly warrant without
any qualification as to actual knowledge
that their patent is valid and enforceable?
Perhaps none but the reckless or patentees
who have already had their rights survive a
claim of invalidity before the court?
IP Benefit and Risk
The fundamental positive function of IP is to
secure competitive advantage. It can also be
used defensively to prevent third parties from
using the rights granted. Typically, an entity
which is looking to create, acquire or licence
some form of IP is looking to:
• maximise the certainty of maintaining the
competitive advantage through the IP (derisk
entitlement/ validity of rights); and
• minimise the risk that a third party will
at any point assert pre-existing IP which
precludes the use of their IP (de-risk
freedom to operate issues).
IP Risk: Technology Development
and Maturity
The required scope of the warranties
and indemnities in a contract also needs
assessment against the stage of development
of the technology or product in which the
rights exist or will be created.
In early development, the technology of
interest and any associated rights are nascent
or non-existent: i.e. are matters to be created.
While one or both parties may come with
background IP, neither party has an existing
solution to the technology issue in question.
As a consequence, at project commencement:
• the risk associated with securing any
competitive advantage is high. This risk will
decrease as the technology develops and:
- is exposed to the marketplace and/or
- further market and competitive
assessment is undertaken; and/or
- proposed rights protecting the preferred
technology solution are examined by
independent IP regulators.
• the exposure to operational risk (i.e. the
consequence of any freedom to operate
challenge) becomes higher. As it matures,
technology becomes less adaptable as
it is fixed into plant, process or products,
making workarounds challenging or
impossible to implement cost effectively.
If the agreement in question relates to
development or creation of IP, it is therefore
necessary to assess what stake (or exposure
to risk) each party has in the outcome of the
agreement. If both parties are sharing risk in
the success of a project, it is typically more
appropriate that only light touch warranties
and indemnities be required (for example,
in relation to mature background IP). If one
party is carrying all the risk of success, it would
be expected that the contribution of the
32 VOLUME 26, ISSUE 1 – AUTUMN 2016