Indemnification
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Indemnification

Introduction

Indemnification: a provision only a lawyer can love. I can hear you asking already “What the hell is indemnification?” Let’s look at it through an example.

Suppose Client hires Agency to develop the front end of Client’s website. Where the design calls for photography, someone at Agency populates the page with images from a Google search rather than licensing stock photography. Agency completes the site and Client pays the bill.

Six months later Client calls and is irritated. Client just received a cease and desist letter from a photographer regarding unlicensed use of the photographer’s photos in Client’s website. The photographer demands $5,000 as a licensing fee to use the photos in the site.

Wanting to avoid further trouble, Client pays the photographer but now wants reimbursement from you.

This is where indemnification comes in. In its simplest sense, indemnification is the right to be reimbursed for amounts expended in fixing a problem caused by someone else. In this case, if the contract has a typical indemnification clause, the Client can demand that Agency reimburse the $5,000 Client paid to the photographer. And if Agency doesn’t pay, Client can sue the Agency for breach of contract.

This is a simple example but a good one to keep in mind when thinking about indemnity clauses. Next, let’s look at a typical indemnity clause and break it down

Elements of an Indemnity Clause

A typical indemnification clause looks like this:

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Indemnification by Agency. Agency hereby releases and will defend, hold harmless, and indemnify Client, and/or its subsidiaries, affiliates, directors, officers, employees, agents, successors and assigns, from and against any allegation or claim based on, or any loss, damage, settlement, cost, expense and any other liability (including but not limited to reasonable attorneys’), arising from (a) Agency’s breach or alleged breach of this Agreement or (b) any allegation or claim of negligence, strict liability, misconduct or fraud by Agency or its personnel, or (c) any claim that the Deliverables infringe the copyright, trademark, patent, trade secret, or other intellectual property rights of any third party.

An impenetrable mess, right? Well don’t fret. Let’s break the clause down into chunks. There are five key elements to a typical indemnity clause:

  1. Party obligated to indemnify
  2. Scope of indemnification obligation
  3. Parties benefitting from the indemnification
  4. Losses covered by the indemnity
  5. Indemnifiable claims

Let’s look at the same clause with these elements labeled by color:

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Indemnification by Agency. Agency hereby releases and will defend, hold harmless, and indemnify Client, and/or its subsidiaries, affiliates, directors, officers, employees, agents, successors and assigns, from and against any allegation or claim based on, or any loss, damage, settlement, cost, expense and any other liability (including but not limited to reasonable attorneys’), arising from (a) Agency’s breach or alleged breach of this Agreement or (b) any allegation or claim of negligence, strict liability, misconduct or fraud by Agency or its personnel, or (c) any claim that the Deliverables infringe the copyright, trademark, patent, trade secret, or other intellectual property rights of any third party.

So here you can see it:

  1. Party obligated to indemnify
  2. Scope of indemnification obligation
  3. Parties benefitting from the indemnification
  4. Losses allowed for reimbursement
  5. Indemnifiable claims

In plain English, the clause above says that if the Client (or certain of its related parties) pays to fix problems that come from the Agency breaching its contract or engaging in things like negligence or fraud, then the Agency must reimburse the amounts paid. Note also that this example discusses the Agency’s obligation to indemnify the Client. Ideally, your contract will also contain certain indemnifications favoring Agency from Client in.

We’ll tackle each of these sections in turn.

Party Obligated to Indemnify

These clauses generally start by naming the obligated to indemnify. There will certainly be a paragraph describing Agency’s indemnification obligation. Hopefully, there will also be a paragraph describing Client’s indemnification obligation. If your contract is missing a paragraph describing the Client’s obligation to indemnify the Agency, we’ll talk about what you can consider adding in the Section below about Intellectual Property Indemnification.

Scope of Indemnification Obligation

This bit of word soup usually includes some combination of the words indemnify, defend, and hold harmless.

At the risk of oversimplifying, the combination of terms you see here doesn’t greatly affect the magnitude of Agency’s indemnification obligation. The key term is indemnify and that isn’t going away. Rather than edit this portion of the clause, you are better off negotiating the types of claims covered, discussed in Indemnifiable Claims, below.

Parties Benefitting from the Indemnification

This piece of the clause usually lists a long string of parties related to Client that are protected by Agency’s indemnification obligation. The list in the sample clause is typical, though you’ll see other things thrown in there sometimes such as “representatives”, “insurers”, “vendors”, or “attorneys” and that is OK. If your contract includes indemnification in favor of the Agency, just make sure this portion of the clause mirrors the indemnification benefitting Client.

Losses Covered by the Indemnity

This string of synonyms describes the types of losses that can be claimed through indemnification. The list in the sample clause is common. Like the list of benefitted parties, just make sure any indemnification from the Client benefitting Agency contains the same list of indemnified losses.

Indemnifiable Claims

In the indemnification clause broken out above, this section is where the action is. While avoiding an indemnity clause entirely may be desirable, it probably isn’t likely with any reasonably sophisticated Client. Given that, your focus should be on making sure the types of claims covered by the clause are reasonable. What follows are some typical types of indemnification that are appropriate for an Agency to give. The difficult provision, intellectual property indemnification, is addressed in its own section below.

  • Breach of Representations. It is reasonable for Client to ask that Agency to indemnify for any damages it suffered because Agency breached a representation. The real work here is to ensure your contract doesn’t contain any representations you can’t stand behind and that your contract also contains an appropriate Disclaimer of Warranties (AS IS Provision).
  • Negligence, Misconduct, or Fraud. It is also reasonable for a Client to ask that its Agency indemnify for your negligence, misconduct, or fraud. Ideally, you’ll negotiate this to read gross negligence and intentional misconduct to limit the possible scope of your indemnification obligation.
  • Injuries. It is fair for a Client to ask that its Agency indemnify for any personal injury, bodily injury, or property damage caused by Agency’s conduct (that includes action of its personnel). But watch out for Client slipping things like “advertising injury” or other types of business losses into this list.

Intellectual Property Indemnification

This is where things get more difficult. Almost every Service Agreement will contain a clause obligating Agency to indemnify for certain intellectual property matters. Written properly, this is a fair request since Client wants a level of protection that the materials Agency creates aren’t just stolen from somewhere else. However, most Service Agreement indemnity clauses aren’t property written. They are generally overbroad and expose an Agency to unreasonable sources of liability.

We’ll start with the clause in the sample paragraph above, identify the issues, and then suggest an alternative clause. Part (c) of that clause says that the Agency must indemnify the Client for losses suffered because of:

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(c) any claim that the Deliverables infringe the copyright, trademark, patent, trade secret, or other intellectual property rights of any third party.

An important proviso: this book’s description of what constitutes reasonable indemnification by an Agency assumes your team is doing original work. If someone on your team just grabs a photo off Google image search or deliberately copies someone else’s logo, these indemnification recommendations won’t protect you (as they shouldn’t). Hopefully, that goes without saying.

Let’s break down the issues facing Agency with respect to the four categories of intellectual property described in the clause: copyright, trademark, patent, trade secret, or other intellectual property rights.

  • Copyright. Copyrightable material includes creative expression put into tangible or digital form: web and print design, illustrations, photography, video, software code, music, logo designs, copy, etc. So long as your Agency is doing original work, it is safe for Agency to indemnify Client against claims that Agency’s work infringes someone else’s copyright
  • Trademark. Trademark covers things like logos, names, and similar brand work. Unlike copyright, even if an Agency does original work, a logo, slogan, or name you create could infringe on someone else’s trademark rights. Because of this, an Agency should work to exclude trademark from the scope of its indemnification obligation. If trademarks can’t be outright excluded from the indemnification obligation, indemnity should be limited to knowing infringement. For more on this and some sample language, visit this book’s section on Names, Logos, and Slogans (Trademarks).
  • Patent. The concern with patents generally surrounds back-end software development and inventions. Again, like trademark, even if an Agency does original work, it could still be considered infringing. So, also like trademark, an Agency doing back-end software development should exclude trademark from the scope of its indemnification obligation. If patent can’t be outright excluded, it should be limited to knowing infringement.
  • Trade Secret. An Agency can violate trade secret rights by incorporating someone else’s confidential information into work for Client. Because an Agency can prevent this type of problem (through good hiring and information management practices), it is generally fair for Client to ask for trade secret indemnification.
  • Other Intellectual Property Rights. For most Agencies, the “other” intellectual property rights of concern related to privacy and publicity. This can be important with film, video, and storytelling. Responsibility for indemnity in this category should fall to the party responsible for obtaining rights clearances (talent releases, photo releases, etc.). Exclude this provision if your Client is providing talent or location.

Even if you negotiate the intellectual property indemnity as recommended above, there is still work to do. You’ll need to consider whether to add a couple important carve outs for third-party materials and client materials.

  • Third Party Materials. If an Agency includes third-party materials in its work (open source code, stock photography, etc.), intellectual property liability should be excluded from the Agency’s indemnification obligations. Quite simply: an Agency isn’t in a position to confirm that third-party materials are original works. For more on this, see this book’s section about Third-Party Materials (Including Open Source).
  • Client Materials. If an Agency’s work includes any client materials (information, specifications, materials, logos, content), the Agency should try to exclude indemnification responsibility related to these items. This can be critically important when the client is providing content (copyright) or instructions / specifications for back-end software development (patent).

Let’s look at the combined effect of these concepts and some sample language in an example.

Example

Agency is asked to redevelop Client’s website and develop a new logo. Website will be built on an open-source CMS with some back-end customization to handle certain database functions. Most textual content will be provided by the Client but Agency has been asked to source licensed stock photography and to shoot a short video including Client’s key executives at a local park.

This project has a little of everything. Scope of work includes copyright (web design, logos), trademark (logos), patents (back end development), and other intellectual property rights (video including talent). As part of the contract, Client agreed to be responsible for talent and location releases for the video.

A portion of the indemnification clause requested by Client reads as follows:

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Indemnification by Agency. Agency hereby will indemnify Client, … from (a) Agency’s breach or alleged breach of this Agreement or (b) any allegation or claim of negligence, strict liability, misconduct or fraud by Agency or its personnel, or (c) any claim that the Deliverables infringe the copyright, trademark, patent, trade secret, or other intellectual property rights of any third party.

After a few rounds of negotiation, Client negotiates the following edits to subparagraphs (b) and (c) of the clause:

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Indemnification by Agency. Agency hereby will indemnify Client, … from (a) Agency’s breach or alleged breach of this Agreement or (b) any allegation or claim of gross negligence, strict liability, intentional misconduct or fraud by Agency or its personnel, or (c) any claim that the Deliverables infringe the copyright, trademark, patent, or trade secret, or other intellectual property rights of any third party. Agency has no responsibility under this section for claims arising from: (i) the grossly negligent or willful acts of Client; (ii) Client Materials, (iii) Third Party IP, (iv) trademark infringement, or (v) claims related to talent and location releases for Client personnel and properties.

This edit addresses the key elements of Agency’s intellectual property risk by limiting the scope of the indemnification promise it is making to Client. The edits to paragraph (b) narrow the scope of the claims covered by the clause. The new language added to the end makes clear that Agency is not responsible for Client’s bad acts, Client Materials (copy and instructions included in the project), Third Party IP (open source CMS and stock photos), and clearances for the video (talent and location clearances). This is a fair balance between the Client’s reasonable needs and the Agency’s scope of work.

Conclusion

Indemnification can be one of the toughest provisions to negotiate. Many businesses have entrenched and unprincipled positions about indemnification–usually because they don’t understand it well. Using the guides above, you can be the voice of reason in these discussions–carefully adjusting the indemnity provision to fairly allocate risk between your Agency and the Client.

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