How to Draft IP Infringement Remedies Waterfall That Works

The mitigation paragraph is not boilerplate. The waterfall of remedies, the trigger language, and the sole and exclusive remedy clause together determine what actually happens when an infringement claim hits. Give this section its due. Provide as thorough of a review and analysis as you would a limitation of liability or the indemnification scope.

The trigger controls everything downstream. The trigger language is the introductory phrase that identifies under what circumstances the rest of the provision applies. That may be the indemnifying party, the indemnified party, or both. If there’s optionality there, the party making the decision determines if any action happens. For example, if the vendor has sole discretion and a vague imprecise standard, the customer facing a potential IP infringement claim may find itself waiting on the vendor’s decision to move forward with the remedies. If the customer can exercise the trigger using a reasonable standard, the customer can move the remedies forward even if the vendor disagrees. There is a lot of leverage in the trigger.

Allegation versus claim is a real distinction. Pay attention to whether the trigger standard includes “an allegation” in addition to a claim. An allegation could be a letter from a troll testing the waters but without a valid claim. That matters for how easy it is to invoke the remedies. A broader trigger allows the party in control to initiate the remedies on a credible threat. A narrower trigger means that they need a formal claim. Which approach is right for a vendor or customer depends on multiple factors.

"Procure a license" is rarely as simple as it reads. Remedies often include a simple statement requiring the vendor to procure a license without details about what that means. A vendor procuring a license from a third party can come with use restrictions that reduce the customer's rights or restrict its operations in a critical way. Or the vendor may not be able to procure a license at all, including when the price is unreasonable for the deal size or remaining term. The other challenge is the typical language around "the right to continue using the product." This wording may be read narrowly to mean the product without the infringing feature, which is not what the customer paid for. It is critical that you evaluate the remedy against the product definition and the customer's actual use case.

"Functionally equivalent" is vague. The remedy "modify or replace with a functionally equivalent non-infringing substitute" does not say who decides what equivalent means or how that will be assessed. Some customers negotiate to include reasonable customer approval rights in good faith. Without it, the vendor decides and the customer may end up with a product that has similar functionality but doesn’t fit its use case.

Modify or replace is a very different story when there are goods involved. If the replacement is software only, that can often be quickly and remotely. That’s not the case with hardware, components, and equipment. When the product includes physical goods, it may require shipping and physical labor. The parties also have to think about whether the replacement product restarts the warranty period. So if the deal involves anything physical or anything mission-critical with heavy implementation, the parties need to verify modify-or-replace makes sense for the deal.

The refund formula has to match the deal. If there are prepaid fees for a an unused term, refund makes sense. It may not for consumption pricing, milestone pricing, tiered pricing, or physical goods. Consider whether it’s appropriate to replace refund of prepaid fees with a formula that actually reflects what the investments made and costs to unwind.

The refund may be minimal compared to transition costs. There are significant implementation costs when the customer purchases a comprehensive large-scale or mission-critical system. A refund of unused fees does not pay for finding a replacement product, installing it, migrating data, or getting the original vendor to cooperate with the new one. If the provision specifies it is the sole and exclusive remedy, the customer may be giving up the right to recover any of those costs. Customers should try to negotiate transition services into the remedy itself or carve them out of the sole and exclusive language.

Sole and exclusive remedy replaces other damages. Sole and exclusive remedy language may wipe out every other remedy in the agreement triggered by the same event, including ones the parties expressly negotiated like an IP warranty or liquidated damages. Customers need to map every other remedy in the agreement that touches IP infringement before agreeing to sole and exclusive language. Try to either narrow what it applies to or carve out the remedies you want to preserve.

The provision is operational, not magical. IP infringement remedies are an operational tool for a specific scenario. As Gabe put it, just go in and ask what you actually want to happen. The reluctace to raise the issues and push for tailored remedies is what produces the bad outcomes in the first place.