It is one of the worst types of communication a wholesaler can get from one of their retail customers: “____ has alleged that the following product(s) supplied by you infringe on at least one of ______’s patent/copyright/trademark(s). Please confirm within 48 hours that your company will fully comply with its indemnification obligations. Failure to do so will result in us selecting our own counsel to defend against ______’s claims at your expense.” Or something like that. The point is simple. In an age where the number of financially viable retailers is dwindling, wholesalers are lucky to have any customers to sell to. And those customers, to the extent anyone raises any allegations of IP infringement against them, often do not hesitate to demand full compliance with the indemnification obligations that are part-and-parcel of wholesaler-retailer relationships. Typically, the task of making sure that indemnification obligations are met is left to in-house counsel at the retailer, working in concert with the buyer for that wholesaler in order to communicate the retailer’s demands.
For the vast majority of wholesalers, failure to comply with the retailer’s demands is simply not an option. Yes, there may be situations where a wholesaler takes a calculated risk that the retailer is headed for imminent bankruptcy and as such can be ignored when it comes to indemnification. But even in this age of constant retailer blow-ups, such a scenario is rare. Instead, it is more likely that the wholesaler will have no choice but to respond quickly to the retailer’s demands, including by providing full assurance that it values the relationship with the customer and will take full responsibility for defense of the IP claims. There really is often no other option, considering the increased sway large retailers have with their vendors, who are often increasingly dependent on the sales they are making to the shrinking pool of retailers for their company’s viability.
Savvy wholesalers will usually decide not to offload handling of the defense to the retailer’s chosen counsel, though there could be certain situations where the retailer insists on choosing counsel and leaves the wholesaler with little room to protest. The latter situation is perhaps more likely to arise where the retailer has had prior experience with the company making the allegations — and pushes the wholesaler to pay for the same counsel that previously represented the retailer (hopefully with some success) against that same claimant. Add in the fact that it is often the retailer that pushes the wholesaler to produce products that skirt (and sometimes cross) the line of IP infringement and the whole dynamic can feel like an unfair one. But what choice does a wholesaler really have in an environment where the pool of potential retailers is so limited?
Another situation where the retailer’s selection of counsel may be thrust down the throat of the wholesaler is where the allegations of IP infringement target a series of products supplied by different vendors to the retailer. In that situation, it can be more efficient (and cheaper) for the retailer to select one firm as defense counsel to coordinate the defense of all the claims against the retailer. With each wholesaler contributing to the defense cost in an amount proportional to its sales of accused products to that retailer.
That said, it is usually in the interest of the wholesaler when confronted with an indemnification request to make clear to the retailer that its indemnification obligation only extends to products it actually supplied to the retailer. Moreover, it is also almost always better for the wholesaler to be able to retain its own counsel, under engagement terms that it negotiates, to handle IP disputes related to products it supplies to retailers. At a minimum, of course, the wholesaler will also look to its own suppliers for potential indemnification from them for the products accused of infringement as well.
Part of the problem for wholesalers is that their competitors know that retailers will lean on existing suppliers to meet their indemnification obligations. That incentivizes challengers to try and disrupt retailer-wholesaler relationships by making claims of IP infringement, either against products already on the shelves of the retailer or even for products that the retailer is considering.
In short, a wholesaler’s competitors will sometimes try to create an impression of risk for the retailer in selecting the wholesaler’s goods. How effective these tactics are often depends on the level of IP sophistication at the retailer, as well as the depth of the relationship between the retailer and the threatened wholesaler. The more confident the retailer is in the indemnification promises of the wholesaler, the less likely it is that random infringement claims will be enough to disrupt dealings between the two parties. When a retailer is less confident, however, threats of IP infringement can be enough to foreclose that retailer from doing business with an accused wholesaler.
To be sure, wholesalers accused of IP infringement are not powerless, but the burden is often placed on them to act decisively in response to allegations of infringement. In fact, at least one prominent example of a wholesaler deciding to proactively make representations of noninfringement to retailers recently came to light, in a patent dispute over super-luxe “female stimulation devices.” The plaintiff in that recently filed case is the maker of the hit “Womanizer” (link may be NSFW) line of devices, which sued an Oregon-based competitor for patent infringement. One of the interesting things about the complaint was that the defendant had apparently sent a notarized letter from its general counsel to “various retailers and distributors in the industry” arguing that its products were not “in conflict with” any patents. Whether or not this type of tactic gains steam remains an open question, but it is illustrative of the lengths wholesalers will go to in order to head off retailer IP concerns.
Ultimately, there is a strong element of “the customer is always right” when it comes to consideration of indemnification requests regarding IP infringement allegations. While the majority of wholesalers do what they can to live up to their indemnification obligations, there is always the temptation for a wholesaler to decide to make themselves scarce when it comes to a dispute lodged with, or filed against, a customer. Depth of relationship, amount in controversy, and the retailer’s own contribution to the alleged infringement are all factors for consideration in any indemnification situation. In most cases, however, the recognition of the wholesaler’s obligations are straightforward. IP claims are serious — and the wholesaler is expected to indemnify … or else.
Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.
Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.