Will the Licensor Warrant Non-Infringement?

Last week, I wrote that from time to time I will consider issues that arise in the drafting of licensing agreements. One reader has responded with the following:

"One issue that often causes problems when negotiating a licence is where a licensee seeks a warranty/indemnity that exercising their rights under the licence will not infringe the IP rights of a third party. It can be difficult to communicate to the licensee that the licensor is simply agreeing not to sue under its IP rights, not making a positive statement that there are no other IP rights which might affect what the licensee will be doing, and that it remains the licensee's responsibility to carry out any clearance searches that may be necessary to establish whether any such rights exist."

I would make the following comments:

1. As a starting point, I agree that the narrow import of the licence is that the licensor agrees not to exercise its negative right against the licensee with respect to the IP right being licensed. That said, since a full-fledged commercial licence consists of multiple elements in addition to the basic "covenant not to sue", whether or not the licensee's request is apt may ultimately depend upon the particular circumstances.

2. I must confess that, while I find this issue raised by a licensee from time to time, at least in my practice it arises less frequently than other licensing matters. It would seem to depend a lot upon the relative bargaining power of the two parties. A desperate patentee with one potential licensee, if requested to give the warranty by the licensee, may be more inclined than the licensee selected by a world-famous trade mark owner to serve as the licensee for a major territory.

Is she the licensor or the licensee?

3. An interesting twist is to migrate the issue from an IP licence to the warranties and representations given in a corporate acquisition with a major IP component. While here, as well, bargaining power may affect the extent to which the purchaser will be able to extract such an undertaking from the seller, in my experience the issue will be addressed in the agreement in some way, either with or without knowledge qualifiers or subject to other seller qualifications.

4. Following on the licence/acquisition comparison, it is not infrequent that a portion of the purchase price is held- ack for a certain period of time in connection with breach of a warranty or rep. When it comes to IP, as the purchaser, I like to carve out an additional hold-back directed specifically to IP. The greater the value of this IP hold-back, and the further out in time the IP warranty and rep extends, the more willing the seller may be to take care of IP clearance, even if not stated so explicitly in the agreement.

5. Back to the licence situation, while in my experience it is a rare for the licensor to agree to put a sum into escrow to cover potential violation of third party IP rights by the licensee under the licence, it is not unheard of.

6. Moreover, a licensee that is committing itself to a new ramp-up of facilities and resources may be well placed to expect from the licensor some form of IP clearance and/or a rep prior to entering into the agreement.

How do these observations comport with the experience of the readers? Comments are welcome.