Changing Landscape

Allegations of intellectual property (IP) infringement are becoming increasingly common, presenting a strong opportunity for the insurance industry to play a role in mitigating this risk. Publicly available data does not show the whole picture, as a significant number of disputes in Canada and elsewhere are settled before reaching court. The harsh reality is that without even considering the question of culpability, a company defending allegations faces the prospect of substantial legal costs and possible settlement costs. Deciding to pursue an infringer also takes significant resources and needs to be weighed against the benefits of winning.

In either defence or pursuit, an inability to effectively handle the matter could lead to loss of market share, severe financial impairment or even in extreme cases, particularly in the case of small and medium-sized enterprises (SMEs), bankruptcy.

Clearly a significant part of protecting IP is having the financial ability to do so. As awareness of this has grown, companies have been increasingly looking at insurance to provide a solution. For example, Orbite Aluminae Inc., a clean technology company based in Montreal, recently announced in a press release that it had secured insurance coverage from a Munich Re company for its intellectual property, including its portfolio of patents, trade secrets and trademarks.

In a press announcement, it was noted that the “coverage will allow Orbite to respond to any allegations of infringement and defend its intellectual property rights without creating a financial burden on the company.”

TRENDS IN IP INSURANCE

Intellectual property insurance usually refers to cover for costs and damages in relation to infringement claims, rather than cover for IP asset values. As such, a better name for the cover is perhaps IP infringement insurance.

Cover may be available both for defence actions where the insured is accused of infringement, and pursuit actions, where the policyholder’s own IP is infringed by a third party. Predominantly written by the industry out of London (U.K.), this coverage has been available for a number of years. But, from the perspective of insurers, it is still a niche product.

In the past, it has largely been companies in high-tech sectors that have sought this coverage. More recently, as awareness that the value of IP to the business has grown and that litigation is not restricted to the largest corporations, companies with lower-risk profiles have started to buy. As a result, IP insurers will now see a much more balanced portfolio. This trend has been accelerated through the development by insurers of underwriting mechanisms that enable them to produce terms and conditions that mirror the risk exposure of the individual insured company.

Another trend is increased interest wherever emerging technologies create patent thickets. As companies jostle for positions as leaders in disruptive technologies, IP disputes may form part of the landscape in years to come.

Similarly, changes in human behaviour may force companies to take unprecedented action. As an example, copyright holders now have to deal with an increased lack of respect for copyright amongst the general public in relation to contents on the Internet. Such trends are naturally important for an insurer to identify and handle with care, and it is possible that some challenges simply cannot be met by the industry.

The available market capacity for IP infringement insurance has changed over time and the latest evidence suggests a growth in excess layer capacity rather than an increase in specialized IP primary insurers. While this may be of value for larger corporations buying large IP infringement insurance limits to smooth quarterly cash flow, it is less so to the SME market where a company’s ability to protect its IP can be a matter of survival.

THE RISKS AND THE COVER

As a consequence of the increasing number of sectors buying IP infringement insurance, the types of rights that are relevant are also increasing. Insurance can typically cover all intellectual property, including patents, trademarks, copyright, design rights and trade secrets. Over the past 10 to 15 years, the environment around patents in particular has become ever more litigious and it is now a playground in which entities with limited resources may find themselves bullied for their lunch money.

In such an environment, insurance can be essential. Two scenarios illustrate this point:

1) Large Company v. SMEs: A larger entity may decide to accuse an SME of infringement as this offers a way to get rid of a company that is bringing strong products to the market, but which has not yet built a strong cash balance. A lawsuit may also bring down the market value of such a company, making it a suitable acquisition target later in the process. Alternatively, a large entity may decide to ignore the SME’s rights on the basis that there is nothing the small company can do about it. Taking a less cynical view, the large company may not be aware of the SME’s rights if the SME is not a known entity. Maintaining a patent portfolio is an expensive, yet ultimately futile, exercise if the rights cannot be enforced efficiently.

2) NPEs v. SMEs: Non-practicing entities (NPEs), also known as patent trolls, often seek royalties from large numbers of companies that they claim potentially infringe their patent portfolio. From a defence perspective, NPE settlements or litigation can be costly and, in some sectors, frequent. They require a different approach to traditional disputes since the NPE is not a competitor in the traditional sense and has nothing to lose. Some believe that NPEs only target large corporate entities, but this is not the case.

For many small companies, the largest threat is not an action against the company, but rather actions made against their customers or licensees, which they indemnify or hold harmless for IP infringement. Providing means to meet this obligation makes the insurance a true business enabler.

The insurance should also cover all the related exposures that a company could reasonably face. Legal costs and damages or settlement amounts form part of this, but if a company wishes

to pursue an infringer and request an injunction, it may also need an amount for cross-undertaking of damages, which the court may direct to be paid in order to grant such injunction.

With IP litigation often being complex, the policy must be clear in its response to pre-emptive actions, counter-claims and multi-jurisdictional disputes in relation to a wide range of IP rights.

HOW TO TREAT THE RISK

It is not unusual to find elements of defensive IP cover in, for example, multi-media, errors and omissions or general liability insurance. This may be sufficient, particularly where a policy is specifically designed for a sector’s unique requirements. However, with the above complexities in mind, it is prudent to ask whether or not a policyholder’s risk warrants a separate policy for IP infringement exposures.

In terms of pursuing infringers of own IP rights, such cover is not commonly offered under other policies. As IP risks are not typically related to other events, there is no obvious benefit in linking it to other insurance cover since it has to be underwritten and rated individually.

As always, insurance should not be seen in a vacuum. Developing, logging and maintaining own IP rights, performing the IP searches suitable to the business activities and maintaining a reasonable contract management should form part of the day-to-day IP risk management. Important IP decisions should be made at senior levels.

Just as an insurer may demand sprinklers in order to provide property insurance, similarly an insurer will expect that a company takes appropriate steps to reduce its IP exposures.