Limiting Liability When Licensing and Distributing Technology Products

By Howard G. Zaharoff

This article first appeared in Advanced Licensing Issues, MCLE, 2002

Introduction

There is tremendous potential liability in distributing technology products, such as computer software. The two main types of liability arise from performance failures and infringements of third party intellectual property rights.

A. Performance Problems. Potential failures, defects or problems in technology products pose special risks. This is particularly true of widely distributed technology products, such as home and small business computer software, because such products serve (i) many (ii) businesses and consumers (iii) with whom the licensor has no direct relationship, (iv) often in circumstances where failure can cause significant loss or damage.

1. The “many” increases the likelihood of problems arising and the difficulty of managing problems that do arise.
2. The “businesses and consumers” means that the licensor must take into account both commercial rules and expectations and, where applicable, the special rights and protections offered by U.S. (and, where applicable, foreign) consumer laws.
3. “No direct relationship” means that the licensor cannot contract directly to disclaim warranties, establish exclusive remedies or limit liabilities.
4. “Significant loss or damage” means that a serious performance glitch, including one caused by a virus – particularly with respect to products used in high risk fields, such as transportation, energy and environmental applications, or in high stakes fields, such as banking and insurance – can quickly exhaust 1. insurance coverage and drive a business to bankruptcy.

B. IP Infringement. The potential for third party infringement claims should motivate licensors either to avoid liability if a third party claimant appears, or to manage the liability where avoidance is impossible.

1. Liability for patent infringement poses unique problems: Although one generally cannot be guilty of copyright infringement without copying or adapting a pre-existing work, and cannot be guilty of trade secret misappropriation without wrongful acquisition (e.g., stealing the formula for Coca-Cola) or improper discovery (reverse engineering a product in breach of an enforceable contractual prohibition), one can infringe a patent in complete innocence, without any awareness or use of third party knowledge or inventions. Indeed, the confidentiality inherent in the patent system (at least for the 18 months after filing) often means that suppliers and licensors cannot learn about relevant pending patents even if they conduct exhaustive patent searches.
2. The remainder of this article will suggest both practical measures and contractual techniques a licensor may use to control its liability for the above problems when licensing and distributing technology products.

The full article is available as a PDF file.

Article Outline

I. Introduction

II. Practical Measures For Containing Performance-Based Liabilities

III. Practical Measures For Containing Infringement-Related Liabilities

IV. Contract Techniques For Containing Performance Liabilities

V. Containing Intellectual Property Liabilities: 
The Indemnification Clause

To read the full article, click on this link: Limiting Liability When Licensing and Distributing Technology Products, to download the PDF.

For more information, please contact the author Howard G. Zaharoff.

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