The Problematic Intellectual Property Indemnity "Combination" Carve Out, State Bar of Texas, Intellectual Property Law Section Newsletter

This article originally published in State Bar of Texas, Intellectual Property Law Section Newsletter.

In licenses and supply agreements it is typical for the supplier to offer an indemnity that will protect a customer from claims alleging that the product infringes a third party's patent, copyright or other intellectual property right. It is also typical that such an indemnity have certain "standard" carve outs, including the following combination carve out:

"Supplier will have no obligation to indemnify Customer with respect to any infringement claim based upon . . . any use of the Product in combination with other products, equipment, software, or data not supplied by Supplier."

While such a carve out is common in agreements, this carve out should not be accepted by customers without careful consideration. If carefully analyzed, one can see that such a combination carve out is exceptionally broad and problematic.

For example, imagine you purchase a telephone and the agreement with the supplier contains an intellectual property indemnity carve out similar to the one above. Now imagine that a third party has a patent covering the process of converting a voice into a digital signal and transferring that signal over a network. In such an instance, it may very well be possible that the telephone, sitting on your desk, is not infringing. However, by plugging the telephone into a telephone jack and making a call - it becomes infringing. In this instance, the combination carve out could very well exclude such an infringement from the supplier’s indemnity obligation (i.e. the telephone was "combined" with equipment (the network) and data (your voice) not provided by the supplier). This is a real problem given the fact that it is impossible to utilize the telephone without such a combination.

The same problem exists related to software. Software, by design, must be combined with equipment (a computer) and data (input from IO devices such as a keyboard and mouse) that was not provided by the software maker. The combination is the only method by which the software can operate. However, if the infringement claim arises from a patent covering the processing of data on a computer, the combination might be the basis of an infringement claim (i.e. combining the software with the computer hardware to process data). Again, the combination carve out above would shield the supplier from any infringement liability even though utilizing the software with hardware and data is a necessary combination.

Two possible compromises to this broad indemnity carve out are to limit the carve out to: (i) combinations "not reasonably anticipated" by the parties, or (ii) combinations “not anticipated in the supplier's documentation.” For the customer, the first is likely better then the second, but both of these compromises would likely cover the telephone and software examples above. It would be next to impossible for the supplier to argue that it did not "reasonably anticipate" that the customer would plug the telephone into a phone jack or install a piece of software on a computer. Furthermore, the documentation provided with the telephone and the software will likely anticipate the typical combinations.