LIMITING LICENSOR INDEMNIFICATION IN MERCHANDISE LICENSE AGREEMENTS
Every merchandise licensing deal is based on the understanding that the licensee(s use of the licensed artwork or trademark will not subject the licensee to any claims of copyright or trademark infringement, or to any claims that the rights in question belong to or have already been licensed to someone else. The licensor will usually be required to make representations and warranties to this effect in the license agreement, and to indemnify (i.e., insure) the licensee against any judgments, settlements, attorneys( fees or other costs that the licensee incurs if it is faced with any claim that its use of the licensed artwork or trademark infringes on someone else(s rights.
Indemnity clauses represent a potential risk for licensors, and most licensors understandably look for ways to limit that risk. Some of the more common techniques for limiting a licensor(s risk under an indemnity clause are discussed below:
Due Diligence Before Granting the License
If the licensed property is artwork, the licensor should insure that he or she alone created the artwork. If another person was involved in creating the artwork, the licensor should obtain an assignment of copyright from that person to transfer all of that person(s rights in the artwork to the licensor.
If the licensed property is a trademark, the licensor should conduct a search to determine if the mark or a confusingly similar mark is already in use, and should register or initiate proceedings to register the trademark with the U.S. Patent & Trademark Office, for use on the licensed products. Even a comprehensive search may fail to reveal a prior limited use of the mark, but a full search provides the best possible assurance that the mark is available for use.
If the licensed property is a design that incorporates a word or phrase, the licensor should consider conducting a search to verify that the use of the word or phrase in the design does not infringe on anyone else(s trademark, even though the licensor merely included the word or phrase in the design for stylistic purposes, and did not intend for the word or phrase to function as a trademark. For example, a licensor may create a design for t-shirts that includes the phrase (Urban Girl,( without realizing that another person already holds a federal registration for the trademark (Urban Girl,( for use on dresses. The holder of the (Urban Girl( registration could legitimately argue that the use of the term in the t-shirt design will confuse consumers into believing that the t-shirts are associated with the owner of the (Urban Girl( registration, and will thus constitute trademark infringement.
Finally, the licensor should ensure that the current license does not overlap with any licenses previously granted for the licensed property.
Conditions/Limits on Obligation to Indemnify
Ideally, the licensor would like to have the right to use its own attorney to defend any action brought against the licensee, rather than having to pay the fees of the licensee(s attorney. Whether this is possible will likely depend on the relative sizes of the parties. A large licensor, such as Disney, will undoubtedly demand to use its own counsel. However, a small licensor, such as an individual artist, will not have this power, and will likely find that the licensee will insist on being defended by its own counsel.
Even if the licensee insists on being defended by its own counsel (at the licensor(s expense), the licensor should at least have the right to approve any settlement, given that the licensor will be responsible for the cost of that settlement, and given that the settlement may adversely affect the licensor(s rights to the licensed property. The licensor may try to limit its liability further by capping its obligations at one-half of the total defense costs if the claim is abandoned, dismissed, or judged in favor of the licensee. The licensor can argue that defending against meritless claims is simply a cost of doing business that should be shared equally.
Since the licensor is responsible for responding to claims against the licensee, the licensor would like to require that the licensee notify it of any claim, and would like to condition its indemnification on receipt of notice within a specified time. The licensee will usually agree to notify the licensor in a timely manner, but will not agree to let the licensor off the hook simply because notice is not given within a specified time.
Limits on Losses and Costs Covered
A licensor may also try to limit the types of costs or losses for which it will be responsible. While the licensor will clearly be liable for any judgment rendered and for the costs incurred in defending against a lawsuit, the licensor will want to disclaim any responsibility for lost profits that the licensee might claim it would have otherwise earned had it not been for the lawsuit and the resulting judgment. In addition, the licensor may want the right to withdraw the licensed property from the license at any time in response to a claim of infringement, subject only to being obligated to purchase the licensee(s remaining inventory of licensed products at the licensee(s cost.
While it is possible to obtain insurance against copyright and trademark infringement claims, such insurance can be costly, and may include several exclusions. In addition, insurance coverage often applies only to claims by third parties, and will not provide coverage for the licensor(s contractual promise to indemnify the licensee unless the licensor specifically requests such extra coverage.