Patent Infringment

By Alan Gahtan - June 12, 2003

Software licensors have been increasingly limiting their liability for patent infringement.  A number of licensors have modified their intellectual property indemnification language to simply drop any reference to indemnification for patent infringement.  Other licensors may provide a patent indemnity which only applies to knowing infringement or which only applies to patents that were issued prior to the date the software was licensed.

Even if present in a license agreement, an indemnification for patent infringement may also be subject to temporal or geographic restrictions applicable to all forms of intellectual property infringement that the licensor is purporting to indemnify the licensee against.  A temporal restriction may be as short as the warranty period, but more commonly may be restricted to the term of the agreement (which term may be associated with the period during which the licensee is acquiring support services).  A geographic limitation may be limited to the country where the licensor operates, where the software is initially licensed or to certain mutually agreed upon countries.    Another very common exclusion is in respect of any infringement that may arise as a result of a modification of the licensed software by anyone other than the licensor.

An almost universal limitation contained in infringement indemnities is an exclusion of infringement which arises from the use of the licensed software in combination with any software, product or component not supplied by the licensor.  Consequently, if a customization, enhancement or add-on is added to or used with the licensed software, even if contemplated by the documentation or required for the intended use of the licensed software, the licensee could be liable for patent infringement which is not covered by the licensor's indemnity even if that customization, enhancement or add-on does not by itself infringe any third party's rights so long as that customization, enhancement or add-on when used with the licensed software performs one element of a valid patent claim which is infringed when operated in combination with the licensed software.

A recent judgment in a legal dispute between Microsoft Corporation and Timeline, Inc., a developer of database technology, highlighted the importance of the above concern.  Microsoft Corp. v. Timeline, Inc., No. 47888-5-I, 2002 (Sup. Ct. Washington, Kings County February 19, 2003) implementing Wash App. LEXIS 360 (Wash. Ct. App. March 4, 2003) concerned a dispute which arose in early 1999 shortly after Microsoft released its SQL Server 7.0 software, a product designed to manage large databases for businesses.  Within weeks of its release, Timeline contacted Microsoft alleging that the reporting and analysis functions contained in the software infringed patents held by Timeline.

In June of 1999, Microsoft obtained a license from Timeline in respect of Microsoft's SQL server software.  Soon thereafter, it became evident that the parties had different interpretations regarding the scope of the license.  Microsoft claimed that the license covered users of its SQL server software who added code so long as the code they added did not in and of itself infringe the covered patents.  However, Timeline took the position that any code added by a user that performed any step of Timeline's patented process infringed its patents if the combination of that code ad the SQL Server software infringed the patents.  While Microsoft won the first round at the trial level, it was Timeline who prevailed on appeal.  As a consequence, other data management products from Microsoft or from other vendors that utilize SQL Server, or enhancements developed by users built on top of SQL Server, may now be infringing.

One implication of these developments for licensees is the need to narrow the exclusion for infringement arising out of a combination, to specifically exclude (and thereby permit the indemnity to cover) software, products or components that are intended to be used with the licensed software by very nature of the licensed software, are contemplated by the documentation or are otherwise agreed to by the licensor, provided such software, products or components do not on their own result in an infringement.  If the licensed software is of a type that can and is intended to be modified by the licensee then the licensee should also attempt to exclude from the exclusion any modification that can be reasonably expected to make based on the nature of the software, its documentation or which is agreed to by the licensor, provided such modification on its own would not be found to be infringing. 

Licensees must then give careful consideration to the possible combinations that can be expected to arise, as well as any modifications that they anticipating making to the licensed software.  They then need to document, as part of the license agreement, the licensor's agreement to such combinations and modifications.

Another important action that licensees should undertake to help identify possible risk is to query the licensor regarding any allegations of infringement that have been received by the licensor concerning the licensed software.  Potential licensees should also ascertain if there are third party owned patents have been licensed by the licensor with respect to the licensed software and if so, the scope of what such licenses cover.  The licensor's response can then be documented as a representation and warranty.

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