Bo's bLAWg - Indemnification Provisions

 

MJ Bogatin (“Bo”) of Bogatin, Corman & Gold, is an Arts and Entertainment Attorney in San Francisco.  He is also Co-President of California Lawyers for the Arts. www.calawyersforthearts.org  Bo is available to answer some of your questions surrounding the business of Art Licensing. - THANKS BO!

 

Lisa asks:  Why would a manufacturer to whom I have licensed designs for toys expect me to indemnify it?  Shouldn’t the manufacturer indemnify me?

Thanks for your question, Lisa.  Indemnification is an important legal consideration in every Agreement, and particularly in conjunction with licensing illustrations for use with manufactured goods.  In short, indemnification means that if an “innocent” party to the License is sued by a third party because the other did something wrong, the party who did something wrong should be responsible for any potential liability of the innocent party.  It would be appropriate for each party to a manufactured goods illustration License to indemnify the other in conjunction with their particular contributions to the goods being manufactured.

When you look more closely at your License you will note that the manufacturer has likely asked you to warrant certain things.  Typically, the Illustrator Licensor will be asked to warrant:

1.  That the illustrations you are licensing are yours alone – meaning that there is no one else who will claim a joint copyright interest and claim that the manufacturer must pay them, too;

2.  That the illustrations are original to you – meaning that you have not infringed any copyrights held by someone else;

3.  That you have not violated any other person’s right with respect to your licensing these images – meaning that you have not included any trademark or recognizable face (without a signed Release)  See my February 2016 bLAWg on the Right of Publicity: click here , and,

4.  If the License is exclusive, that you have not otherwise licensed the same illustrations to other manufacturers of competing goods.

If the manufacturer is sued by a third party for a violation of any of these rights, then the manufacturer has a reasonable expectation that the Artist indemnify (be responsible for) the damages for which the manufacturer might be liable for copyright infringement or other warranted use right.

While a comprehensive License will include an Express Indemnification provision, you should know that there is also a legal doctrine called “Equitable Indemnification.”  In short, in the absence of Express Indemnification, most courts will “in fairness” allow an innocent party to invoke indemnification rights anyway.  However, in some states, only Express Indemnification, not Equitable Indemnification, will cover the innocent party’s attorneys’ fees and costs.  Since attorneys’ fees (including mine even though they are so reasonable!) can total even more than actual damages on claims like these, Express Indemnification provisions are favored by manufacturers.

However, I do have pro-active advice to limit the scope of the Artist’s indemnification obligation.  Many of these provisions are drafted so as to make the Artist Licensor responsible for damages and attorneys’ fees and costs arising out of a claim of infringement.  Heck, anyone can claim their illustration has been infringed by you!  However, there are two requirements to prove infringement, both “substantial similarity” and “access” to the copyright holder’s artwork so as to have provided the opportunity for copying.  See Bo’s bLAWg from last June: click here

If your illustration is only substantially similar by coincidence, and there was no access, hence no copying, why should you still have to indemnify the manufacturer?  I don’t think you should have to. As a large corporate entity, the manufacturer is in a much better position to afford to defend a meritless claim than the Artist.

To that end, I recommend looking to edit the standard Express Indemnification provision to make sure that the manufacturer (with its own ample insurance) should be required to defend itself, if not also the Artist, unless there is a “substantiated” breach of warranty on the part of the Artist.  Most manufacturer business reps and/or counsel will recognize the reasonableness of such an edit request.  In addition, I look to limit the attorney’s fees and costs obligation to “reasonable” attorneys’ fees and costs.  It is not only possible that an outside counsel will overcharge for defense services, but that they will assign too many attorneys to a small case.  A judge (or arbitrator) can assess whether or not the fees due are in fact “reasonable” or not.

One issue related to the manufacturer’s handling of unsubstantiated claims is that the manufacturer may try to make the Artist responsible for its insurance deductible, to be paid out of current and future Artist royalties.  That might be a risk that the Artist is willing to take if the manufacturer is not obligated to make any payments on its insurance deductible unless there is a settlement or a Judgment that implicates the Artist.  If your manufacturer offers a compromise on the “claim” indemnification language making you responsible for any part of its deductible, make sure that you have a right to pre-approve unconditionally any settlement into which it might want to enter, and that your share of responsibility for the deductible is reasonably limited.  Some of these policies have deductibles of $50,000 or more!

The flip side to the Indemnification issue is that an Artist can reasonably expect the manufacturer to indemnify them in the event an action (or claim!) is made against the Artist occurring through no fault on the Artist’s part.  Express Indemnification can and often should be reciprocal.  The Artist can be exposed to a legal action on their illustration contribution when the manufacturer requires the Artist to include content it provides in her illustration, like its logo in the packaging that the Artist is illustrating.  If it turns out that the manufacturer’s new logo infringes upon someone else’s trademark the Artist might be sued for trademark infringement along with the manufacturer.  Or, if the toys your illustrations decorate are defectively made and a child ends up getting hurt playing with them, a Plaintiff attorney could name as Defendants both the Artist and the manufacturer!  

While it is not common, it is not unheard of for the Artist to be sued along with the manufacturer.  In which case, you absolutely want to be sure that the manufacturer not only is providing indemnification on any damage claim, but that there is legal defense coverage available to you as the innocent Artist.  Most manufacturers have Product Liability insurance, and will agree to include the Artist as “an Additional Insured” on their policy for these purposes.  Then you should have no worries.  You will have the same coverage the manufacturer has, including legal defense and associated legal defense costs.  However, once again, make sure that the manufacturer is responsible for any deductible that the coverage might otherwise impose on the Artist as an insured under the Policy.

Probably a lot more than you wanted to hear, Lisa, but you asked a good question!

Disclaimer: The information contained in this website is not intended as legal advice. Because the law is not static, and one situation may differ from the next, we cannot assume responsibility for any actions taken based on information contained herein. Also, be aware that the law may vary from state. Therefore, this website cannot replace the advice of an experienced attorney. Receipt of this information does not create an attorney-client relationship. MJ Bogatin, Bogatin, Corman & Gold, www.bcgattorneys.com

© 2015 mjbogatin

Have a legal question? email it to info@AnnGraphics.com. I will forward it to Bo. It might be a blog post! You can search "Bo's bLAWg" to read more posts. I am looking forward to your comments and thanks for sharing this great information on social media.