A Checklist for Drafting and Reviewing IP Indemnification Clauses

Your intellectual property indemnification clause might look like it’s promising protection and but it still leaves your company exposed to substantial legal risks, operational disruption, and financial liability.

For customers, that risk looks like accepting an indemnity that seems comprehensive but contains exclusions that make it difficult to use. For vendors and licensors, it’s accepting obligations that are out of their control, or extend past the value of the deal.

A careful review should answer these four questions:

1. Which claims are covered?
2. Who defends those claims?
3. What happens when the technology can’t be used?
4. How much could either party owe?

Why Is IP Indemnification an Operational Business Issue?

An IP related claim could stop a product launching on time. It could interrupt customer service. It could trigger security reviews, force companies to replace their existing systems, create regulatory concerns, or lead to difficult conversations with investors and strategic partners.

Systems that are critical for businesses to operate create even more exposure. It takes time to replace internal systems and operational platforms such as for payroll or logistics, a cloud service, or a customer-facing authentication tool. A refund isn’t going to solve the problem.

In enterprise software licensing, I often see the same pattern. An entire organization is able to use a certain product for a small subscription fee. That leads to a mismatch between the value of the contract and the risk exposure.

A technology vendor shouldn’t accept unlimited responsibility for uses it hasn’t got any control over. A customer shouldn’t accept minimum protection for technology that it depends on to operate.

For the right risk allocation, you’ll have to scrap the standard template wording and start with the actual facts.

Before You Sign: The IP Indemnification Checklist

1. Be Sure About What Triggers The Indemnity

Do you need a final judgement for an intellectual property indemnity to cover third-party claims? Or is alleging infringement enough?

That distinction can determine who ends up funding years of litigation. If the vendor’s obligations only begin after a final judgment, the customer may have to pay to defend the suit.

Check whether the clause addresses the customer’s duty to defend as separate from its duty to fund settlements, judgments, and associated expenses. Does the clause say if coverage is triggered by a written demand or by filing a lawsuit? It should also say who pays the fees while the claim is pending.

For customers, it’s often critical to have an express defense obligation triggered by a covered claim. For vendors, the wording should be clear enough to prevent the duty from applying to every informal allegation, even if it’s not connected to the product.

New York Courts have consistently relied on Hooper Associates, Ltd. v. AGS Computers, Inc. to show why a contract should clearly state who pays the fees when there are disputes between the contracting parties. Don’t assume that a third party indemnity clause shifts attorneys’ fees onto the indemnifying party in a direct contract dispute.

2. Know Which IP Rights Are Covered

Check if the IP indemnity terms covers patents, copyrights, trademarks and trade secrets. Check what’s excluded. Whether exclusions work depends on both the technology, and the deal.

A company doing business licensing software may be more concerned about patent and copyright claims, while a business that licenses branded content may care more about trademark claims. Counsel should look at the actual product as well as the likely sources of exposure.

Location matters, too. A provision that’s limited to patents in the U.S. may not be a fit for a product that the customer plans to deploy internationally. The covered rights and where the product is used should align with the license, permitted users, and intended use.

3. Make Sure the Indemnity Covers the Technology You’re Buying

A broad indemnity isn’t really going to be much help if it excludes the components most likely to be involved in a dispute.

Technology products can include software libraries, commercial APIs, open-source code, third-party platforms, implementation deliverables, and updates. A contract might promise protection for the vendor’s “proprietary software” but exclude third-party technology.

Customers should check whether the indemnity covers elements the vendor selects, provides, or includes in its product. Vendors should be checking whether their supplier agreements and upstream indemnities support the promises they’re making customers.

Open-source software isn’t inherently problematic, but its licenses can impose obligations involving attribution, notices, distribution, or source-code availability. The internationally recognized standard provides a framework for managing open-source license compliance.

A blanket exclusion can leave customers without protection for an important part of the product. A blanket promise can expose a vendor to risks it hasn’t considered. The contract should assign responsibility based on who selects, supplies, modifies, and controls the component.

4. Review the Exclusions, Especially When Features are Changed Or Combined

Common exclusions I see cover customer modifications, use outside the license, customer-specific specifications, and when the technology is combined with other products. The exclusions can make sense, but the way they are worded can still leave you unprotected for ordinary use.

Consider a platform designed to integrate with the customer’s existing systems. If the indemnity excludes claims “arising from” any integration with third-party products, the vendor could argue that the exclusion applies even when the customer complied with the documentation.

Customers can ask for an exclusion to apply only to the extent caused by the excluded conduct. They could also seek protection for combinations or integrations that were required in the documentation, were approved by the vendor, or provided for in the agreement.

Vendors should keep exclusions to risks the actually controlled by the customer, like unauthorized modifications or use outside the scope. The goal’s to connect responsibility to conduct that created the alleged infringement.

5. Confirm Who’s in Control Of the Defense and Settlement

The indemnity should address:

• • • notice
    • defense counsel
    • cooperation
    • defense control
    • settlement authority

It often makes sense for the vendor to control a claim when it involves its technology, but the customer still needs safeguards. Look at whether the customer can join through separate counsel if it’s got independent exposure or a conflict of interest.

A vendor shouldn’t settle a claim by making the customer admit wrongdoing, accept obligations that don’t involve money, restrict its business, or continue handling the covered claim. Customers should consider their rights in terms of consent when it comes to those settlements and should insist on a sufficient release.

Notice requirements matter – a demand letter might not immediately reach the legal team, and that creates a risk of missing deadlines. Take a close look at the language. Does delayed notice reduce the indemnifying party’s obligations? Is it only to the extent the delay materially prejudices the defense? Vendors should maintain meaningful notice and cooperation requirements, so they are able to investigate and manage the claim.

6. Check That the Remedies Address Loss of Use

Knowing who pays legal costs doesn’t necessarily solve the biggest problem for the customer. An infringement claim may place the customer’s right to keep using the technology at risk.

There are some common remedies, such as obtaining the right for continued use of the product, making modifications to it to avoid infringement, replacing it with an alternative that’s non-infringing, or terminating the service and refunding agreed amounts.

Customers should check the importance of a replacement technology preserving materially equivalent functionality. If termination is the only option, customers may also want assistance through the transition and a refund of prepaid, unused fees.

Vendors must have flexibility. A third-party license may be unavailable or too expensive to actually use. The agreement should give the vendor room to address the claim and allow it to set a workable process for ensuring the customer’s operations are protected.

Review any “sole and exclusive remedy” language against provisions relating to indemnity, warranties, termination rights, and liability. If the remedy is meant to be exclusive, the agreement should clearly list exactly which claims and obligations it limits.

7. Read the Indemnity with the Liability Cap

An indemnity may promise extensive protection while the liability clause caps the vendor’s total exposure at fees paid during the prior 12 months.

Suppose we have a customer that pays $100,000 a year for software. The vendor’s agreed to defend infringement claims, but the contract caps liability at annual fees. A claim’s created $600,000 in defense and settlement costs. Suddenly, the customer has far less protection than expected.

When contract values are modest, vendors may resist when customers request uncapped IP indemnification. In this case, customers could negotiate a separate IP cap, sometimes called a super-cap.

The right structure’s going to depend on the technology itself, the potential exposure, how much the customer relies on the technology, what insurance is available, and each party’s ability to pay. The parties should decide whether defense costs are included in the cap. If legal fees start to approach the full limit, little could remain for a settlement or judgment.

8. Evaluate the Different Risks for the Vendor and Customer

Vendors and licensors are being asked to take responsibility for technology, being used in settings it may not have control over. Their priorities might be clearly defining when the technology can be used, limiting responsibility when it comes to customer materials, maintaining appropriate exclusions, and setting liability limits that actually reflect the deal.

Customers and licensees on the other hand, rely on the vendor’s technology and its ability to provide the necessary rights. Their priorities could include coverage for the product they’re actually buying, defense when claims arise, settlement safeguards, and remedies that protect continuity.

Neither side should rely on a standard agreement without considering the facts. Unlimited liability may be more protection than a vendor can support, and a low cap may not provide enough protection to a customer that depends on the technology. The question is this: What will the promise will be worth if a claim occurs?

9. Address IP Risks Related to AI

AI products can involve various sources of risk. The contract should distinguish risks related to a model, an application layer, materials provided by the customer, outside data, connected tools, and generated outputs.

Assess whether the indemnity covers claims involving the underlying model or platform, the generated outputs, or both. Review the conditions involving customer inputs, safeguards, edits to outputs, integrations, and use down the line.

Sometimes companies describe specified protection for certain claims involving output content, subject to certain conditions. That’s another example of why procurement teams should be reading the fine print behind a broad AI protection statement.

There’s also a clear distinction between ownership and infringement. The US Copyright Office when human authorship may support copyright protection in its 2025 Report on Copyright and Artificial Intelligence. Whether or not a company owns rights in an output is a separate question from whether or not using that output infringes someone else’s rights.

Customers should look at how the model provider, application vendor, customer inputs, and downstream uses interact together. Vendors should be clear about what they’re prepared to stand behind, including any safeguards required or activities outside their control.

10. Should The Indemnity Be Mutual?

A customer could provide code, content, designs, data, or specifications that create entirely separate infringement risks. A customer indemnity may be appropriate in this case, for claims that arise caused by those contributions.

The obligations should stay tied to risks that are actually in the customer’s control, not every claim connected to the customer’s use, or risks created by the vendor’s own product, modifications, or conduct.

11. Confirm the Protection Survives and Reaches the Right Parties

Infringement claims can still arrive even after the customer stops using the technology. Counsel should check whether the indemnity stays intact after termination, when it’s for claims tied to use during the agreement term.

Confirm the clause protects the right parties. Depending on the deal, that could include third parties such as named affiliates, authorized users, or contractors acting on the customer’s behalf. Vendors should make sure that the list is clear, reflects the agreed relationship and doesn’t create exposure that’s open ended.

12. Will The Indemnity Be Financially Meaningful?

An indemnity’s only useful if the party responsible can actually perform. For customers, that means considering if the vendor has the financial capacity and available insurance, as well as if it relies on upstream technology providers. Vendors should confirm that their contracts with their suppliers support the obligations they’re accepting. In other words, vendors should make sure their promises to clients flow down to their subcontractors. 

Do defense costs count toward the cap? How long does protection survive? Does the indemnity cover the customer entities that need it? A vendor should evaluate any gap the protection that it receives from key suppliers before it makes broad protection promises to downstream customers.

The Final Review

Before you approve the clause, ask:

1. If we are hit with a claim tomorrow, who pays for the defense?
2. If the customer loses usage rights the technology, what happens next?
3. After the liability cap is applied, how much protection is actually available?

If the agreement isn’t answering those questions clearly, take another look at the indemnity clause again, and read it with the exclusions, remedies, termination rights, and liability provisions.

How Gouchev Law Can Help

Gouchev Law’s Commercial Contacts Group advises enterprise legal teams, technology companies, and growing businesses on SaaS agreements, technology licensing, and complex commercial contracts. We help clients identify gaps in IP indemnities and negotiate terms that fit the technology, the intended use, and the deal.

Have an IP indemnity holding up a deal? Let’s talk.

This article is for general informational purposes and doesn’t constitute legal advice or create an attorney-client relationship.

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