Recalibrating Indemnification Notice & Control Post AIA

Patent indemnification provisions are a fixture of modern contractual agreements for the exchange of technological goods. The indemnification clause, whether express or introduced by default via the Uniform Commercial Code (UCC), essentially warrants that the contracted goods are free from claims of patent infringement. In the event of a claim of patent infringement, the indemnity clause obligates the Seller/Supplier to defend against the claim in some manner, typically funding the defense, or taking over responsibility for the defense effort.

While the body of law pertaining to contractual interpretation has remained largely unchanged in recent years, the passage of the America Invents Act (AIA) has altered the landscape as to patent defense practices. In particular, the battle against the dreaded patent troll has shifted more toward the post grant patent challenge proceedings of the Patent Trial & Appeal Board (PTAB). Since many multi-defendant disputes are shifting to the PTAB for resolution it is imperative that indemnitors account for this eventuality in their contractual agreements.

A typical indemnification clause defines a condition that triggers the defense obligation. In the patent defense context, the trigger may be a claim of infringement or notice letter tendered by the patentee. Many indemnity clauses include a notice obligation, which defines a set period by which the indemnified party must notify the indemnitor of the occurrence of the triggering event. Another common aspect of the indemnification clause is an identification of which party will control the defense.

Going forward, fashioning these common aspects of indemnification provision should be done with an eye toward the new PTAB estoppel and statutory bar requirements. This exercise will be especially important for organizations operating in technology spaces commonly targeted by non-practicing entities.

First, estoppel has changed under ther AIA.

In the old inter partes reexamination context, statutory estoppel was limited to the requester of the reexamination proceeding. The statutory estoppel of Inter Partes Review (IPR) extends to the real-party-in-interest (RPI) or privies of the Requester or RPI. See 35 U.S.C. § 315(e)(2). While the USPTO’s view is that the touchstone of privity is control and contribution to a PTAB filing, a later privity determination of the courts may look to the nature and depth of the business relationship. In such instances, the indemnitor might desire heightened control and notice of IPR challenges, even where indemnification is waived.

Second, the ability to file an IPR challenge is limited in duration.

The importance of a timely demand for indemnity can be especially critical. Once served with a complaint for infringement, the defendant has 12 months to seek IPR. If a timely demand is not made by the indemnified party (e.g., after a typically delayed Answer to the complaint), and/or the indemnifying party requires a set period to review and assess liability under the demand, valuable time may be lost. That is, if the indemnitor seeks IPR on behalf of the indemnified party, the same 12 month statutory bar would apply to the indemnitor.

As the estoppel for Covered Business Method (CBM) challenges is limited to issues actually raised, and there is no 12 month time window, the above considerations are primarily related to IPR practice. When PGR becomes available for the first inventor to file patents issuing from applications filed on or after March 16, 2013, the same concerns would apply, albeit the time window is shorter, and keyed to patent issueance rather than service of the complaint.

The PTAB has quickly become the busiest forum in the U.S. for patent trials. With their heightened speed and more favorable standards for patent challengers relative to traditional court based options, organizations would be wise to account for this shift in defense strategies in their indemnification clauses.