Inventors do not usually pay much attention to the section of license agreements that deals with warranties. They should.
Warranties are simply guarantees or promises that the parties of the agreement make to each other. The ones that the Licensee or manufacturer make are usually pretty benign, and not too important, if they are included at all. They are things like, “we are a bona fide company in the toy and game industry”, “we adhere to all laws and standards that apply to our industry”, “we make safe, good quality stuff” and so forth.
The Licensor or inventor warranty that most companies require is something like, “All rights to the licensed property that is the subject of this agreement are the sole property of the licensor and there are no impediments to the licensor licensing these rights to the licensee”.
Of course the inventors believe this to be true because they came up with the invention on their own without referring to anyone else’s work.
But what if someone comes out of the woodwork with a patent or proof of having shown something similar to the licensee in the recent past? If your warrantee reads like the one above you, through no fault of your own, you are in material breach of your contract and might be liable for damages, depending on how the sections on Indemnity and Infringement are worded.
This is why it is critically important to include the words “TO THE BEST OF MY KNOWLEDGE” at the beginning of the warranty above. That way you violate the warranty only if it can be proven that you knowingly stole someone else’s idea or knew it existed and lied about it. You still might lose future royalties and might even be liable for paying back some already paid but you won’t be automatically in breach of your contract.
It is possible and desirable to draft the language of the Infringement and Indemnity clauses so that the inventor is only liable to lose future royalties if there was fraud on their part. The principle here is that the company should bear the onus to do the due diligence to insure that there are no patents or prior submissions waiting to spring out from the weeds to bite you.