IP indemnity risk in transactions – the ADS story
On 29 September 2021, Borgarting Court of Appeal handed down their decision in a matter concerning the scope of an indemnity provision in a share purchase agreement ("SPA") relating to the founders' sale of shares in an oil service company called Future Production. The SPA was entered into on 21 June 2013 and the case illustrates how important it is for smaller companies and their founders to be aware of the IP landscape that they operate within.
By Thomas Hagen and Anette Øvrehus
In the case at hand, Future Production had manufactured and sold so-called automatic disconnect systems ("ADS") for oil rigs. The ADS disconnects the rig in case of a drift-off and is a required safety system to prevent oil spill disasters if other safety measures are ineffective.
When the buyers bought Future Production, it was discovered that Future Production did not have any rights to Seadrill's patent covering the ADS. The founders explained that there were "gentlemen's agreements" etc. in place, but the buyers were not comforted. Thus, the following indemnity clause was included in the SPA:
"Notwithstanding anything to the contrary set out in this Agreement, the Seller shall indemnify and hold the Buyer harmless from any and all loss, claims, damages, costs and liabilities of whatsoever nature arising out of any of the following matters or events:
- any infringement of patent NO 316331 through any unauthorised manufacture or sale by the Company of the product referred to as the LMRP Safe Disconnect System in the Disclosed Information («LMRP»), or any claims for royalty from the owner of such patent, or any claims from customers of the Company which arise due to royalty claims being presented to them from the owner of such patent"
When Seadrill discovered a patent infringement relating to four rigs owned by Transocean supplied with the ADS, it presented a claim against the rig owner. A settlement was reached between Seadrill and Transocean. Transocean thereafter sent the bill to its supplier, who passed it further down the supply chain until it ended up in the hands of Future Production and its new owners.
The Court of Appeal considered the wording of the indemnity clause and found that there was a situation covered by the indemnity clause under the SPA. It also found that the indemnity claim was not time-barred. With respect to the size of the claim, the Court of Appeal found that the settlement between Seadrill and Transocean was on commercial terms and that there were no irregularities with respect to the calculation of the settlement fee.
The Court of Appeal commented that a practice based on oral agreements and lack of notoriety had to be considered unusual in professional, IP and international relations where large economic interests are at stake. The founder's arguments concerning the statute of limitation andpassivity etc. were not successful.
In the end, Future Production's sale of ADS triggers had been unauthorized and without any license agreement. Thus, the founder was ordered to indemnify the buyer by paying NOK 11,258,004.50, in addition to the legal costs of NOK 2,536,340 for the District Court and NOK 1,883,240 for the Court of Appeal.
The lesson learned from the decision is that founders (and sellers as such) should be careful when agreeing to IP indemnity clauses, as the consequences can be both costly and time-consuming. While we understand that the risk may be calculated in some situations, it may make sense to try to mitigate the risk by entering into a dialogue with the IP owner and obtaining a license instead of relying on the IP owners not enforcing its IP rights.