Potential For Harm: Indemnity Agreements and Willfulness Determinations

Patent indemnification agreements, common in asset purchases, mergers and acquisitions, manufacturing, and patent licensing agreements, reduce the possibility of liability should a third party later assert its patent against the asset purchaser or licensee. However, entering into such agreements to mitigate risk can actually increase exposure. During the damages stage of patent infringement lawsuits plaintiffs often seek, with varying success, to bring in evidence of the existence of a defendant’s indemnification agreement to show that defendant knew of the patent and committed willful infringement. Thus, the very vehicle used to shift the risk of monetary liability can sometimes itself be used as a mechanism to enhance damage awards.

Recently, in the Central District of California, the court tentatively denied Defendant’s motion in limine to preclude evidence regarding “Defendant’s indemnification by its manufacturer as proof of Defendant’s knowledge that an infringement claim was likely….” The court stated that this evidence of indemnification could not be used to infer liability, which the court previously had established. Instead, the indemnification evidence would only be used for the purposes of establishing willful infringement. It “directly shows that Defendant had knowledge of the risk that it infringed the . . . [p]atent.”

Federal Court judges often permit the introduction of evidence of indemnification agreements for some purposes. See Jurgens v. McKasy, 927 F.2d 1552, 1562 (Fed. Cir. 1991) (affirming enhanced damages when infringer continued to sell infringing products after obtaining an indemnification agreement); WesternGeco L.L.C. v. ION Geophysical Corp., 2012 U.S. Dist. LEXIS 98230, *13 (S.D. Tex. July 16, 2012) (allowing the use of indemnification agreements to show willfulness); C&C Jewelry Mfg. v. West, 2011 U.S. Dist. LEXIS 63688, *3-*5 (N.D. Cal. June 13, 2011) (compelling Defendant to produce its indemnification documents to show willful infringement). However, some judges narrow the permitted use of indemnification evidence. In the District of New Jersey, although evidence of indemnification provisions was permitted, it only could be used to show inducement of infringement, but not as evidence to establish willfulness per se. In re Gabapentin Patent Litig., 2011 U.S. Dist. LEXIS 51130, *32-*33 (D.N.J. May 12, 2011).

Although indemnification agreements can and should be used to shift the risk of potential liability in patent-related matters, such indemnification agreements could have the unintended consequences of leading to enhanced damages determinations should a future patent infringement claim arise.

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