2. Middleware Promises Warranties that Don’t Indemnities that Won’t Stephen Rubin, Esquire www.stephenrubin.com

3. What are we talking about?  Warranty – a licensor’s promise to licensee that the thing being licensed is as represented or promised  Indemnity – a duty of either licensor or licensee to make good any loss, damage or liability resulting from a third-party claim

4. What are we really talking about?  The balance of power between middleware vendors and developers in contract negotiations and disputes  Who has the risk if things go wrong

5. Why are we talking about warranties and indemnity?  Middleware is ubiquitous today  Increasing dependence means defects severely impact game schedules, costs and quality  Silicon Knights v. Epic Games “... Epic violated the [Unreal Engine 3 License] Agreement by, among other things, failing to provide a working game engine, which has caused Silicon Knights to experience considerable losses....”

6. Why are we talking about warranties and indemnity?  Warranty and indemnity clauses once promised protection against defects and lawsuits  These promises have become largely hollow due to drafting devices

7. What we are not talking about  Middleware distributed through shrink-wrap licenses  Uniform Computer Information Transactions  Act (UCITA)  Middleware incorporating Unix GNU General Purpose License  Warranty for goods  Claims not based on contract

8. Potential Middleware Problems  Failure to perform as represented  Failure to deliver or upgrade  Licensor bankruptcy or closure  Middleware transferred to third party Incompetent Competitor  Disclosure or use of licensee secrets  Infringement of third-party IP rights

9. Examples of Warranties  Promises in middleware ads or documents on which licensee could reasonably rely create a warranty that the middleware will perform as promised  Descriptions of middleware create a warranty that the middleware will conform to the description  A sample or test version given to licensee creates a warranty that the middleware will conform to the sample or test version

10. Examples of Warranties  A warranty of merchantability means the middleware is fit for the ordinary purposes to which such middleware might be used  A warranty of fitness for a particular purpose arises when the licensor know of the specific purpose or use the licensee intends for the middleware

11. Sample Middleware Warranty Clause THE SOFTWARE AND SERVICES ARE PROVIDED “AS IS.” LICENSOR MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AND DISCLAIMS ALL WARRANTIES REGARDING THE SOFTWARE AND SERVICES, INCLUDING IMPLIED WARRANTIES AS TO SATISFACTORY QUALITY AND PERFORMANCE, MERCHANT- ABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, AND ACCURACY OF INFORMATION. THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF THE SOFTWARE AND SERVICES IS ASSUMED BY LICENSEE.

12. Sample Middleware Limitation of Liability Clause IN NO EVENT SHALL LICENSOR BE LIABLE TO LICENSEE UNDER ANY THEORY FOR THE COST OF REPLACEMENT SOFTWARE, LOSS OF PROFITS, BUSINESS INTERRUPTION, LOSS OF DATA, OR ANY GENERAL, SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES ARISING FROM LICENSOR’S VIOLATION OF THIS AGREEMENT, EVEN IF LICENSOR HAS BEEN ADVISE OF THE POSSIBILITY OF SUCH DAMAGES. LICENSOR’S LIABILITY SHALL NOT, IN ANY EVENT, EXCEED THE AMOUNT PAID TO LICENSOR PURSUANT TO THIS AGREEMENT.

13. Licensor Justification for Excluding Warranties  Inspection period protects licensee  Licensee may modify middleware, causing or worsening any defect  Licensor’s profit from one license is small and finite; potential liability from defective middleware is large and unbounded

14. Warranty Solutions  Warranties expire at set date  Licensor obtains liability insurance and warranty can be limited to policy  Parties negotiate a detailed “purposes and uses” clause defining warranty  Licensor provides middleware source code where possible (not cutting edge technology) to enable licensee fixes  “Liquidated damages” for defective middleware instead of paid-in limit  Escrow middleware

15. Indemnification and Third- Party Claims  Third party owns the middleware  Licensor granted conflicting rights to third party  Middleware infringes the intellectual property rights of third party

16. Sample Indemnity Clauses Licensor agrees to indemnify, defend and hold harmless Licensee, its shareholders, directors, officers, employees, agents, and affiliates from and against any losses, costs or damages (including reasonable attorney fees) due to any claims by third parties resulting from or in connection with Licensor’s violation of the provisions of this Agreement.

17. Sample Indemnity Clauses Licensor agrees to indemnify, defend and hold harmless Licensee [etc.] against any action brought against Licensee, to the extent it is based on a claim that the Software directly or contributorily infringes a registered United States patent, copyright or trademark.

18. Typical Middleware Indemnification Clause Indemnification by Licensee. Except to the extent caused by the gross negligence or intentional misconduct of Licensor, Licensee agrees to indemnify, defend and hold harmless Licensor [etc.] from and against any losses, costs damages (including reasonable attorney fees) due to any claims by third parties resulting from or in connection with the use of the Software by Licensee.

19. Indemnity Solutions  Mutuality of terms  No indemnity for infringement if licensee modifies the middleware  No indemnity for claims based on negligence or intentional acts of indemnified party  No indemnity if indemnified party fails to report claim or assist  Substitute insurance requirements for indemnification

20. Suggestions for Warranty and Indemnity Negotiations  Assess licensor bargaining strength  Anticipate real problems  Know what clauses are typical  Insist on mutuality of obligations  Insist on indemnity for infringement  Be creative in using caps and limitations to define and assign risk  Investigate insurance coverage  Make certain there is a Plan B

21. Questions?