Software Licenses and Indemnities: What Obligations Are You Taking On?

by Field Law

License agreements often contain indemnities. An indemnity is a contractual obligation to step in and reimburse some financial obligation such as a liability, loss, or damage. In essence, the party giving the indemnity will make the injured party “whole” by recompensing losses and expenses.

The court in Coastal Contacts Inc. v. Elastic Path Software Inc., 2013 BCSC 133 reviewed the meaning and scope of an indemnity for intellectual property infringement, which is a common clause in many intellectual property (IP) license agreements. This is what’s known as an IP indemnity clause. Coastal Contacts was an online retailer of eyeglasses. Elastic Path sold software for running e-commerce websites. The two companies entered into a Software Licensing Agreement allowing Coastal to use the Elastic Path software in Coastal's eyewear business.

One of the clauses in the Agreement was an IP indemnity which required Elastic Path to defend any claims made against Coastal based on allegations that Elastic Path’s software infringed any patent and compensate Coastal in the event of any damages or losses.

Coastal was sued for alleged patent infringement in the U.S. based on Elastic Path’s software. Coastal in turn sued Elastic Path to bring it into the patent infringement lawsuit, after Elastic Path refused to defend. Eventually, Coastal made a $200,000 settlement payment to the patent holder.

After the third-party patent infringement case settled, the dispute between Coastal and Elastic Path ultimately wound up in court to decide the question of Elastic Path’s obligations under the IP indemnity. Elastic Path had refused to defend and indemnify Coastal. Was Elastic Path entitled to refuse to defend the patent infringement claim, or was it wrong to refuse? A second twist to this case was a mandatory arbitration clause which was triggered when Elastic Path referred the dispute over its indemnity obligations to binding arbitration.

Elastic Path’s contractual obligations were two-fold. There was an obligation to defend and an obligation to indemnify. The clause stated: “Elastic Path shall defend or settle any claim made or any suit or proceeding brought against Licensee insofar as such claim, suit or proceeding is based on an allegation that any of the software supplied to Licensee pursuant to this Agreement infringes (directly or indirectly) any patent [...] Elastic Path shall indemnify and hold Licensee harmless from and against any and all such claims and shall pay all damages and costs finally awarded or settlement agreed to be paid in the settlement of such claim, suit or proceeding.” [Emphasis added.]

However, there were some conditions attached: “…Licensee shall notify Elastic Path in writing promptly after the claim, suit or proceeding is known to Licensee and shall give Elastic Path information and such assistance as is reasonable in the circumstances, at Elastic Path’s expense. Elastic Path shall have sole authority to defend or settle the same at Elastic Path’s expense.” [Emphasis added.] Elastic Path claimed that Coastal failed to satisfy these conditions since it did not provide prompt notice of the claim, and it did not cede control of the litigation to Elastic Path. Then Elastic Path relied on a favourable arbitrator’s decision to refuse any payment to Coastal. The arbitrator has decided in favour of Elastic Path by saying it was “highly unlikely” that the software directly infringed the U.S. patent. He based his decision on a balance of probabilities analysis that the software was unlikely to have infringed the U.S. patent.

In the end, the court sided with Coastal: Elastic Path’s duty to defend the patent infringement lawsuit depended on whether there was a “mere possibility” that Elastic Path’s software could have infringed the U.S. patent. The arbitrator applied the wrong test, since he essentially judged the merits of the infringement claim, and concluded it was highly unlikely that the infringement claim would succeed.

In coming to its conclusion that Elastic Path was on the hook for the $200,000 settlement payment made by Coastal, the court quoted an insurance decision, saying “ insured who is entitled to indemnity for damages or costs is entitled to make a reasonable settlement and to recover the amount so paid where the insurer denies its liability under the policy, even though the liability of the insured to the claimant has not been determined by judgment.” 

This analysis in the Coastal v. Elastic Path decision shows that courts will treat an IP indemnity clause like a type of insurance policy. A software vendor, by providing such an indemnity in favour of its customers, is essentially taking on the role of an insurer, bound to provide coverage against this risk. In this case, the risk is that of a third-party patent infringement lawsuit. Here are some points to consider:

  • Software vendors should review these clauses carefully. IP indemnities are often considered “boilerplate” (a term which many interpret as “I don’t have to read it…”). However, the implications are important, as illustrated by this case. If you are a software vendor, ensure that you understand the obligations that you are taking on.
  • Remember that under the clause in this case, the indemnity obligation was triggered by a “mere possibility” of infringement. The merits of the infringement claim are not weighed at the stage of determining whether the defense and indemnity obligation is triggered. The obligation has a very low threshold.
  • Licensees should also review the IP indemnity clause in their license agreements. In some cases, such as exclusive technology licenses, it is common for licensees to take on certain IP indemnity obligations, since they have control over the use of the technology in the marketplace.
  • In the event of a claim that triggers the indemnity clause, review the indemnity clause immediately to ensure that you are taking the appropriate steps described in that clause – for example, some clauses require notice of the claim to be given within a certain number of days.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Field Law | Attorney Advertising

Written by:

Field Law

Field Law on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.