Patent Baristas

Today we talk IP insurance with Robert Fletcher, president and founder of Intellectual Property Insurance Services Corporation (IPISC).

Patent Baristas:  Hello, Bob! I’m very interested in your work with intellectual property insurance. It’s one of those things that I’ve “heard” a lot about but really don’t have any first-hand experience with it. Can you explain the basics of IP insurance so that someone like me can understand?

Robert Fletcher:  IPISC wrote the first-ever IP Abatement insurance policy. This enforcement-type policy, for enforcing IP rights against infringers, has become the bed rock of the company and started IPISC on the road to success. At first the Abatement policy was the main focus and most in demand. The IP Defense policy, for defending against allegations of IP infringement, was created and first sold by IPISC in 1996 due to the demand for a defensive IP insurance product, and quickly became in high demand, and continues to be so. This demand in large part is due to the indemnification requirements for IP coverage in contracts, as well as due to the soaring costs associated with defending against IP infringement claims and the potential associated damages. The Multi-Peril policy was introduced in 2005 by IPISC, available as a rider to the Abatement and/or the Defense policies, and is likewise increasing in demand. Over the past few years, concerns about the financial consequences associated with losing a covered IP lawsuit have continued to drive interest in the policy. The Unauthorized Disclosure policy has received more interest due to the high number of companies outsourcing their confidential information to a third party in conjunction with manufacturing.

Baristas:  What seems to be the word on the street is that IP insurance is so expensive that it’s not worth it? Of course, no one seems know how expensive, just too expensive. Can it be worth it to a company? Is there a particular market size for the company that would benefit most? Can you give us some real numbers as to costs?

Fletcher:  Companies that are successful or have innovative IP are more likely to be involved, either offensively or defensively, in an IP lawsuit. 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. With these escalating costs and exposures, insurance cost should not be the issue; it should be the company’s survival- its ability to stay in business.

The high “cost of insurance” argument is at best flawed. The small to mid-sized companies cannot 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.

IPISC’s policyholders, whether small or large, understand well the value proposition represented by these products. As these products are specialized and complex to underwrite, there is a good deal of discussion with the applicant and agent prior to binding. Thus initial focus on price quickly transforms into focus on value.

There are no typical risks in this business, so it is difficult to talk about a typical premium.  There are many different factors evaluated and formulas employed to determine final risk and associated premium. For example, for the abatement coverage some of the factors affecting the risk include the number of IP to be insured and the particular industry.  Ballpark annual premium estimates for traditional abatement coverage can run from a few thousand dollars to over $25,000. for limits of one million per claim.  An average defense policy may likely be in the range of $35,000 for limits of two million per claim for a standard risk.

Baristas:  When do I need Intellectual Property Insurance? I imagine most companies start thinking about IP insurance right around the time they learn that they might be infringing someone’s IP or someone is infringing their own IP. Can they get coverage if there is already a known infringing/infringed party at the time they ask for the insurance policy?

Fletcher:  In fact, waiting until they “may be infringing” or “someone is infringing their IP” is absolutely the wrong time to think about IP insurance. As the saying goes, “you can’t get fire insurance if your house is already on fire.” The same is true with IP insurance.  Companies cannot get coverage for an existing problem; that is why IPISC encourages the applicant to be proactive about managing their IP risk by insuring early. The Abatement, enforcement, policy uses an objective test when determining infringement. Pre-existing commercial activity, whether known or unknown, is generally excluded from coverage under the enforcement policy. That is why it is important to secure coverage for intellectual property while it is in the application stage. The Defense policy excludes pre-existing “threats” of infringement, not the actual infringing activity itself. We recommend that companies secure coverage well in advance of launching their product lines and/or services.

Baristas:  I understand that there are two types of patent infringement policies: (1) defensive policies that cover you if someone sues you for violating a patent; and (2) offensive policies that help pay your attorney fees and other costs if you sue someone else for violating a patent. Does a company have to buy both? Should they?

Fletcher:  No, companies are not required to carry multiple policies, though it is recommended to fully protect a company’s IP assets. IPISC’s IP insurance Abatement, Defense and Unauthorized Disclosure policies are stand-alone, with separate limits. An insured can opt to purchase a combined policy, Abatement & Defense, but will share the aggregate policy limits (which may be greater than the stand-alone policy). The Multi-Peril policy is available as a rider to the Abatement and/or the Defense Insurance policy, which may or may not share the limits of the underlying policy. It may also be available as a stand-alone policy with separate limits, but still tied to an Abatement and/or a Defense policy.

Baristas:  Many people claim that neither type of patent insurance is a good investment. What factors go into figuring if the insurance is a good buy?

Fletcher:  The policies really are game changers, especially when the policyholder is going up against a larger company, either defensively or offensively, as the policies level the playing field and allow the policy holder to get to the decision based on the merits and not on who has the deepest pockets. Many times the best investment is simply holding an IP insurance policy.

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. Defense insurance policy specific to cover IP risk is the only viable solution. 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 CAFC), which refers to entities that leap in and practice an invention, knowing that the patent holder can do nothing about it. The question is; how does failing to invest money on an insurance premium to protect a company’s most valuable asset, IP, avert either the “Troll” or “Grasshopper” disasters? It doesn’t.

Baristas:  Would the Comprehensive General Liability Insurance (CGL) policies typically obtained by businesses provide coverage?

Fletcher:  Obtaining CGL coverage for patent litigation continues to be a difficult and unpredictable endeavor. 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. Companies are well advised to proactively obtain insurance coverage specifically tailored to address their most valuable asset, intellectual property rights. Instead of taking the chance on CGL coverage, a company can obtain a dedicated policy where patent infringement allegations can be explicitly insured without the need to litigate coverage through trial and appeals courts. These dedicated IP policies can even cover the cost of pursuing a CGL carrier in those exceptional cases where it should provide coverage.

Baristas:  Are issues that come up during litigation covered by the policy such as invalidity counterclaims, declaratory judgments or anti-trust issues?

Fletcher:  As part of the Insured’s defense, the Defense policy automatically extends coverage to the cost of an invalidity defense to a charge of infringement, the cost of patent re-examination proceedings initiated as a defense arising out of a lawsuit for infringement and coverage for damages are available (IPISC covers damages back to the date the infringing activity began.) The Abatement policy covers retaliatory declaratory judgments as they arise during the course of approved litigation; and, initial DJ actions if the Insured can charge infringement.

Baristas:  Are there any downsides to getting insurance? Does it make it more likely to be sued? Is the review of the intellectual property prior to quoting a premium discoverable in a subsequent trial?

Fletcher:  Holding an IP insurance policy often makes an insured entity less likely to become involved in frivolous litigation, because the potential opponent can be put on notice of the insured’s financial ability to reach a decision on the merits.

IPISC works with applicants and insureds to minimize exposure of communications to discovery, through use of common interest and non-disclosure agreements, and aggressive defensive response to discovery requests on grounds of relevance and privilege.  Recently, a U.S. District Court fully granted IPISC’s motion to quash a subpoena, noting that “it is difficult to determine whether any particular request may be satisfied without violating work-product and/or attorney client privilege,” and that “the unusual nature of the insured/insurer relationship in the patent context also cautions the Court against allowing such an overbroad request.”  American Medical Systems, Inc. v. Biolitec, Inc., No. 3:11-MC-13-H (W.D. Ky. May 24, 2011).

Baristas:  Does the coverage apply just in the US or worldwide? What about changes in the law like the Patent Reform Act? Does the coverage remain the same or do law changes reshuffle the deck?

Fletcher:  Worldwide coverage is available under all of our policies. The companies do not have to be domicile in the US.

As a result of patent reform, patents are expected to become stronger and more valuable, making companies more likely to enforce their rights granted by patents. While the America Invents Act may limit the litigious disposition of some non-practicing entities, companies arbitrarily accused of infringing activity will continue to be the subject of IP litigation disputes. Due to this uncertainty of the outcome of impending patent disputes, companies are realizing now more than ever that it is critical to have protection for their intellectual property assets in place through specialized IP insurance products. Coverage remains the same and is not dependent upon changes in the law.

Baristas:  OK, you must have some really good war stories. Tell us the scary things that have happened — and give us names.

Fletcher:  Sure…Sensormatic Electronics Corp. v. EAS Sensorsense, Inc.  (ED Texas; No. 04-cv-167-TJW) A federal court jury in Marshall, TX rejected the patent infringement allegations of Sensormatic Electronics Corp against WG Security Equipment, Inc. and EAS Sensorsense, Inc. (Insured through IPISC). The plaintiff filed suit in alleging infringement of three patents, one of which related to shoplifting deterrence tags or electronic article surveillance (EAS) tags.  The jury found unanimously that none of the claims of any of the patents were infringed. The jury’s decision was reportedly the first verdict in the Eastern District of Texas for a defendant accused of patent infringement in the past twenty-one cases that have gone to trial. Our Insured stated that the defendants would have been more exposed with less guidance and resources had it not been for their patent infringement defense insurance policy through IPISC that covered the litigation costs and any potential liability. “You never know when you will need insurance,” said Art Fuss of EAS. “Unless you have gone through the experience of defending your company in patent litigation it is hard to identify what is and is not necessary in those circumstances.”

Baristas:  Bob, you’re a good sport. Any other advice for companies already freaked out but this article?

Fletcher:  Intellectual property exposure can be a significant risk to companies, yet many legal and insurance professionals are not proactively advising their clients about the availability of IP coverage. Assessing your IP risk and ensuring companies have the right protection in place for this potentially costly exposure is essential to a company’s overall financial survival. You do not have to be an IP insurance expert, but it is important to work with proven IP insurance experts.

Robert Fletcher is the President and CEO of Intellectual Property Insurance Services Corporation (IPISC).  In addition to founding IPISC 20 years ago, Mr. Fletcher is a patent attorney with more than 40 years of experience in the prosecution of patents and the business and legal phases of patent practice. He holds degrees in Chemical Engineering and Law from the University of Wisconsin and an MBA from the University of Louisville.   He can be contacted at bfletcher@patentinsurance.com or 502-491-1144.  (www.patentinsurance.com)