Monday, October 31, 2011
Insurance for Patent Enforcement?
Right, you had a question. Yes, an independent inventor with limited funds is in a bind when it comes to patent enforcement. Even if the funds can be found to fight a big company, the battle can drag on for years and cause much personal turmoil. Like patent expert David Pressman puts it, the utility patent is basically a hunting license. Obtaining the license without the necessary funds to use it against others makes it a useless piece of paper. There are three common solutions for this issue:
- align yourself with a big company. A big company usually will -- as part of your licensing agreement -- chase down (or possibly scare off) thieves and competitors. The downside is that you may end up earning less from your invention if someone licenses it (versus the profit margin if you manufacture it). On the other hand, often it's just the opposite and the right licensee can earn you substantial profits and save you a lot of hassle.
- consider offensive insurance. Yes, there is such a thing as offensive patent insurance and you can read more about its pros and cons.
- find a contingency litigator. Some patent attorneys take cases on contingency. This is often difficult and can be expensive (giving up a third or more of the recovery). Learn more here.
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The author of, “Do Inventor’s Need Patent Infringement Insurance,” which recently posted on your blog, correctly affirms that patent infringement lawsuits are very expensive. In fact, according to the most recent survey by the AIPLA, the cost to litigate a patent infringement lawsuit averages $2.8M dollars when the amount in controversy is between $1M and $25M. Damages average close to $9M.In spite of escalating costs and exposures, the author, goes on to advise against purchasing IP insurance. Though the author does acknowledge the existence of intellectual property (IP) insurance, cost is not the issue; it’s the company’s survival- its ability to stay in business.
ReplyDeleteThere are two policies to consider, and it is important to note the difference. Defense insurance is for defending against allegations of IP infringement. Enforcement is for the enforcement of IP against infringers.
In recent years the infringement allegation scenario has been worsened by a common problem, the much publicized NPEs, a.k.a. “Patent Trolls”, who are notorious for suing companies for the sole purpose of extracting royalties, frequently irrespective of the lawsuit’s merit. In these instances, companies may turn to their CGL policies for coverage, but most insurance companies exclude any coverage for IP; and, patents are frequently, specifically excluded. Any coverage for IP under a CGL policy is extremely rare and explicitly limited to the cases where “Advertising Injury” involves the patent claims directly covering the act of advertising itself. Otherwise, a Defense insurance policy specific to cover IP risk is the only viable solution. See DISH Network Corp. v. Arch Specialty Ins. Co.,__F.3d__ No. 10-1445 (10th Cir. Oct. 17, 2011).
The Enforcement policy provides the means to enforce IP rights against infringers. This scenario is frequently triggered by a “grass-hopper” (a term coined by Chief Judge Randall Rader of the U.S. CAFC), which refers to entities that leap in and practice an invention, knowing that the patent holder can do nothing about it. Enforcement insurance is essential because many discerning law firms won’t even take the case if he can’t fund the litigation; since the result is always the same- an initial struggle and then the “little guy” runs out of funds and capitulates. On the other hand, the author suggests that the insurance premium would best be spent on product marketing. The question is; how does spending money on marketing efforts rather than insurance premium avert either the “Troll” or “Grasshopper” disasters? It doesn’t.
The high “cost of insurance” argument is at best flawed. Can the “little guy” really put a price on the cost of going out of business? Even the insurance underwriting process itself is beneficial and informative. It’s simply good business and legal practice to know the strengths and weaknesses of a patent whether owned by the applicant for insurance or facing him. In the case of his ownership, remedies exist under the law to correct or repair these weaknesses. While these corrections and remedies are the responsibility of the patent owner on a day-to-day basis, if they arose or are needed during the course of litigation, they are paid for by the policy.
Similarly on the defense side, there are steps that can be taken administratively to diffuse and nullify an asserted patent, e.g. reexamination which, if arising during authorized litigation, is paid for by the policy while the case-in-chief is stayed.
Failure to accurately grasp a basic understanding of IP risk, intelligently discuss, and then offer a real solution to companies to allay this extraordinary exposure can be detrimental to a company, and potentially their professional advisor’s E&O. It is always important to talk to an insurance professional about potential IP exposure and policies designed to specifically address IP risk.
by Robert Fletcher, founder and CEO of Intellectual Property Insurance Services Corporation (IPISC), bfletcher@patentinsurance.com.