Brown McCarroll Attorneys at Law

You Want Me To Pay For What? Protecting Yourself with Indemnity Clauses in the Game Industry

Brown McCarroll Publication

01-05-2012

Albert A. Carrion

What exactly is an indemnity clause? When does it come into play? Why should you be concerned about them?  Indemnity clauses are common in development and licensing agreements in the video game industry.  Video game developers often request that programmers, artists or designers indemnify them, and game publishers in turn often request that developers indemnify the publisher. 

Basically, an indemnity clause says that the person granting indemnity  - - the indemnitor - - agrees to pay for any losses incurred by another person- - the “indemnitee” - -  caused by the indemnitor’s product or service. This is called “indemnifying” the other person.  If a developer agrees to indemnify a publisher from any claims that the software the developer sold him infringes on the intellectual property rights of any other person – in this case, video game software --, and a claim is later brought against the publisher claiming that the software infringes, the developer must pay for any “losses” or damages incurred by the publisher through trial or settlement of the claim.  If the indemnity clause also says that the developer will “defend” or “hold harmless” the publisher, this typically means the developer also has to pay the publisher’s attorneys fees and legal expenses in defending against the claim. 

The cost of defending even a frivolous patent infringement suit can run into the hundreds of thousands of dollars, and in the millions if the case goes to trial.  If the publisher goes to trial and loses, the developer must pay all the publisher’s legal expenses and attorneys’ fees, plus the amount of the judgment or any settlement.  Needless to say, merely paying these defense costs can bankrupt many programmers, artists and developers, not to mention any damages award that might be required if the trial is lost. 

To protect themselves, indemnitors can limit their liability by limiting who is covered by the indemnity, the type of claims covered, placing caps or limits on the indemnity, and by obtaining the rights to control the settlement or litigation of the claim.  Indemnitors should also require the indemnitee to give them prompt notice of any claims so that their attorney can make an early assessment of the claim.  The indemnity clause in development or licensing agreements is basically a risk allocation provision that should be reviewed by your attorney to avoid being surprised if another party makes a claim against a customer.