The importance of an IP indemnification clause in procurement contracts

What can a distributor do if the purchased products turn out to be infringing third-party IP rights? Can the distributor recover damages from its supplier? That depends on the procurement terms with the supplier. The importance of an indemnification clause follows from a ruling by the District Court of The Hague.

A distributor of emergency power supplies receives a summons letter from the trademark owner for purchasing products that were put on the European market without the trademark owner's consent. The trademark owner and distributor reach a settlement. The distributor then claims the settlement amount as damages from the supplier.

The District Court of The Hague grants this claim. This is because the procurement contract between the distributor and its supplier contains an indemnification clause to the effect that the supplier is liable for all costs arising from the sale of infringing products. The fact that the products had been bought at a lower price than normal does not alter this.

What do we learn from this? Retailers and resellers would do well to have good purchasing conditions. They must be able to prove that trademarked products were first put on the market in the European Economic Area with the consent of the trademark owner (exhaustion). In practice such proof is often not available, leaving the retailer with the risk of infringement. An indemnification clause for infringement of third party IP rights is therefore important. Even if the distributor knows or should have known about infringing products, such an indemnity clause applies and the distributor can recover damages from the seller. 

Luna Snellenberg