In a service agreement, it is common for clients to ask – nay insist – that branding firms indemnify them for a whole host of legal claims including trademark infringement claims. And sometimes the price tag associated with the new relationship is so great that branding firms will agree to indemnify their clients. We talked before about a customized naming project costing $20,000 or more. And while that fee is tempting, more often than not, branding firms need to think hard before opening themselves up to what could be significant liability.
Most people misunderstand what it means to indemnify. Moreover, the word indemnify is often paired with its two cousins: defend and hold harmless. To “indemnify” means to compensate the other party for losses or damages flowing from the legal claims identified in the contract. In other words, to indemnify means to insure the other party against losses or damages. In a trademark infringement case, the most common form of damage is disgorgement of profits. So if the indemnification obligation in your contract survives the termination or expiration of the agreement, which is most likely will, and the trademark infringement claim you indemnified for does not arise for 5, 10, 20 years, the $20,000 fee you accepted may be a drop in the bucket to what your branding firm could be liable for.
To hold harmless the other party in a contract in most judicial districts is the same as agreeing to indemnify them. However, some courts have found that to hold harmless also requires protection against liability.
Finally, there is the duty to defend. This contractual term requires the obligating party to pay the legal costs of the other party to defend them in the lawsuit where they also have the obligation to indemnify the other party. Think of it as a double whammy. In most cases, when one party does not have to write a check every month to its lawyers, the incentive to settle a case early is also lowered. And as we discussed before, the cost to litigate a trademark infringement case can be $300,000 or more. Again, the $20,000 fee is a drop in the bucket.
The reason branding firms should never indemnify for trademark infringement claims is because there is no such thing as a perfect search. However, the real harm from a trademark infringement lawsuit generally comes from a federally registered mark. Most parties that do not federally register their trademarks tend to operate in a small geographic area, which can reduce the amount of a profits award significantly. If you are going to indemnify for trademark infringement claims, at least make sure the USPTO database is clear.