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INDEMNIFICATION CLAUSES: IMPORTANT?
updated 04/05/13 08:41 PM
Limit Your CU's Liability
It has become increasingly common to learn of credit unions being targeted with patent infringement lawsuits.

Whether the lawsuit is by an opportunistic patent holder merely seeking a quick buck (such as patent trolls) or the lawsuit is based on legitimate infringement of a patent, such lawsuits represent a significant threat to any defendant. Patent suits are, by nature, extremely expensive and time consuming.

When the focus of the patent infringement is within a product or service provided to or on behalf of a credit union by a vendor, protecting the credit union from these and other types of lawsuits often depends on a properly drafted indemnification clause.

Recommendations
A credit union should obtain a copy of the proposed contract at the beginning of the due diligence/negotiation process as opposed to waiting until the business terms are agreed upon. Attorneys stress that contract terms are as equally important as the business terms and should be negotiated in unison.

A credit union should also inform vendors from the onset of the negotiation process that it expects the vendor to "stand behind" its product and/or service. This means the credit union should demand indemnification from the vendor (or its agents, employees, subcontractors) not only for patent infringement, but also copyright and trademark infringement.

Furthermore, the credit union should demand indemnification against claims made by any third party which arises due to the vendor's (or its agents, employees, subcontractors) breach of the contract, negligence, and/or willful misconduct.

Elements of a Good Clause
The key to a good, properly drafted indemnification clause is to:

  • List all types of claims covered (patent infringement, etc.).
  • Include a specific obligation on the vendor’s part to defend all third-party claims arising from those claims covered. This is important to immediately shift the burden of defense from the credit union to the vendor. Without a specific obligation to defend, the vendor has no duty to provide a defense, and the credit union’s recourse would be to fight the claim and then seek reimbursement from the vendor.
  • Provide for approval of the vendor's defense team (attorney) with a right to remain apprised of all activity, and have a say in the settlement of any claim.

Limitation of Liability
Care must be taken if the contract has a limitation of liability section. Without a "carve out" for indemnification obligations, a vendor's maximum indemnification obligation would be up to the limitation negotiated.

This could leave the credit union liable to the third-party claimants for all amounts in excess of the limitation, even though the credit union had nothing to do with the issue under which the claim was made.

Therefore, limitation of liability sections are equally important to review and negotiate, as are indemnification clauses.

A Reminder
Recent lawsuits serve as a reminder to credit unions of the importance of having contracts reviewed by an attorney, not only for proper indemnification clauses, but to help limit credit union liability.

 
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