You signed a customer contract last month. Somewhere around page four, buried in a section labeled “Indemnification,” was a clause you probably skimmed.
Here’s what that clause actually says: if someone sues your customer claiming your software infringes their patent or copyright, you pay. Their legal fees. Their damages. Possibly a settlement. All because of one paragraph you scrolled past to get to the signature line.
Let’s translate it first, “Indemnify” means you agree to cover another party’s losses if a specific event occurs here, a third-party IP claim. “Hold harmless” means you also agree not to seek damages from that party related to the same event. Strip away the formal phrasing and it’s simple: to indemnify someone means you agree to cover their losses if a specific bad thing happens. Put together, a typical clause says: If a third party claims your product infringes their IP, you’ll defend our company, pay our legal costs, and cover any judgment or settlement.
That’s a completely normal thing for a customer to ask for. What’s not normal is signing it without knowing whether you can actually back it up.
Why this becomes an IP problem, not just a contract problem
Indemnification clauses assume you own, clearly and completely, the thing you’re selling. Under copyright law, ownership of a work initially vests in its author. 17 USCS § 201. For works created by independent contractors, the work is considered “made for hire” only in limited circumstances, and ownership does not automatically transfer to the hiring party unless there is a written assignment. 17 USCS § 101, Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 732 (1989). If your company’s core software was built using a contractor who never signed an IP assignment agreement, or a former employee’s code that was never formally transferred to the company, you may not have clean ownership to begin with.
Now layer the indemnification clause on top. You’ve promised a customer you’ll defend them against IP claims on a product whose ownership you can’t fully prove.
Let’s say a growing SaaS company gets a call from a customer’s lawyer. A former contractor is now claiming they own part of the codebase, because the original agreement never included an IP assignment clause. Suddenly the founder isn’t just dealing with a contractor dispute. They’re on the hook, under their own customer contract, to defend and cover a customer who is caught in the middle of it.
That’s the trap. The indemnification clause and the IP ownership gap are two separate documents, drafted at two separate times, that only become a single expensive problem when they collide.
The three places founders usually get caught
Contractor and freelance agreements without assignment language. Copyright ownership defaults to the person who created the work unless there is a signed written agreement transferring ownership to the hiring party. 17 USCS § 201. The Copyright Act defines “work made for hire” narrowly, and for independent contractors, the analysis turns on common-law agency principles including the hiring party’s right to control the manner and means of creation. Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 732 (1989), Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992). Without a written assignment, the contractor may retain ownership even if the company paid for the work.
Employee agreements signed after the work started. If a key feature was built before someone signed on properly, or the agreement is missing invention assignment language entirely, there’s a gap between what the company believes it owns and what it can prove. For employees, the work-for-hire doctrine generally applies to works prepared by an employee within the scope of his or her employment, 17 USCS § 101, but timing and scope matter particularly for work created before formal employment began or outside normal duties.
Unlimited liability with no cap. Some indemnification clauses have no dollar limit. If you’re a company doing $700,000 in revenue and you sign an uncapped indemnification obligation, a single IP dispute could exceed what your business is worth.
None of these are visible from reading the indemnification clause on its own. They’re only visible when someone reviews your underlying IP ownership documents alongside the contract you’re about to sign.
What to actually do about it
You don’t need to reject every customer contract with an indemnification clause. Most enterprise customers require one, and refusing to sign one can end the deal before it starts. What you need is to know, before you sign, whether you can actually stand behind the promise you’re making.
That means three things:
- Confirm every contractor and employee who touched your core product signed a proper IP assignment agreement, not a generic template that skips it.
- Ask whether the indemnification clause has a liability cap, and whether that cap is tied to contract value or something more reasonable.
- Get the clause reviewed before signing, not after a dispute forces you to read it carefully for the first time.
This is the kind of gap that’s invisible until it’s expensive. Templates rarely flag it, because templates don’t know what your specific ownership history looks like.
Have you ever had a customer contract’s indemnification clause reviewed against your own IP paperwork, or is this the first time you’re thinking about the two side by side? I’d genuinely like to know how founders are handling this before it becomes a problem.
The Garcia-Zamor Law Firm. We’re the general counsel and fractional general counsel for businesses and high-end innovators, protecting both your business operations and your intellectual property. Ruy Garcia-Zamor (founder with 25+ years experience in patents, trademarks, intellectual property, and business strategies, and a registered patent attorney with the U.S. Patent and Trademark Office), Elliott Alderman (40+ years experience in intellectual property and providing guidance to businesses), Claudia Castillo (decades of experience in business law focusing on all employment issues), and Amulya Annasamudram (focuses on patents and intellectual property and is a registered patent attorney with the U.S. Patent and Trademark Office). Contact us at garcia-zamor.com or (410) 531-9853.
