Report reveals perception versus reality of IP litigation risk

Report reveals perception versus reality of IP litigation risk

Willis Towers Watson chart

More than 50% of in-house survey respondents agree that IP litigation costs could have a material impact on their businesses but only 7% purchase IP insurance, according to a Willis Towers Watson report

IP litigation, if not managed properly, can greatly dent an organisation. Costs include litigation expenses, damages or settlements, lost customers and lost productivity.

Around the world, businesses continue to create intellectual property at a high rate, generating increasing IP litigation, according to the Global Intellectual Property Litigation Risk Report from insurance broker Willis Towers Watson. The report reveals that between 2002 and 2016 the number of trade mark registrations and granted patents almost doubled.

Willis Towers Watson chart

Willis Towers Watson examined data collected through in-house surveys that revealed nearly half (45%) of the respondents asserted that they were most worried about competitors initiating lawsuits. However, US data reveals that since 2008, 50%-70% of suits have been brought by non-competitors.

Furthermore, the report notes: “While 50% of respondents were most concerned about being sued in the US for IP infringement, over 40% do business in China where the number of IP cases eclipses that of the US. The number of patent cases filed in China is increasing, while the number of patent cases filed in the US is levelling off.”

More than 70% of survey respondents generate between $100 million and $10 billion in annual revenue, and nearly half are domiciled in the US.

Companies need to be aware of all the possible costs that could arise from a finding of infringement. The infringer may be required to pay damages and a licence fee. It is also essential to remember that if a patent holder brings a case against a supplier’s customers, the supplier may be faced with additional costs if it has agreed to indemnify these customers. Fifty-six percent of the respondents – most of which were technology, products and services providers – said that they indemnified customers for IP infringement and 41% asserted that the indemnification is uncapped.

Reasons behind IP litigation

The report notes that the number of in-force global IP rights rose to 58 million in 2016 from 53 million in 2015. The rising number of trade secrets owned by businesses means that the number of trade secret cases could increase.

Changes in where IP rights are received will govern where cases are filed in upcoming years. From 2015 to 2016, Asia’s share of worldwide patent grants almost doubled to 57%. China had 12.38 million in-force trade mark registrations in 2016. The US, Japan and India were also in the top five jurisdictions for trade mark registrations.

The report points to a market that has emerged in the past 15 years: operating companies are selling patents as a business asset, rather than using patents to stop others using an invention. The report states that such a marketplace “fuels uncertainty about patent ownership and use and may drive an increase in future litigation”.

The growth of technology poses risks for companies. M&A activity in the technology sector means that “patents, trade secrets and other IP rights are being transferred along with the technology” leading to potential risks for companies.

Technology also aids accessibility, making it easier, for example, for hackers to reach information protected by trade secrets.

Managing risk

The report states that “just over half of the survey respondents track what IP litigation is costing their company on a per-incident or annual basis.” This suggests that several businesses do not measure the financial impact of litigation.

According to the report, general liability policies do not cover IP risks or only provide limited protection. Cyber, tech errors and omissions and media policies also provide a limited scope of protection or explicitly exclude coverage for certain areas of IP such as patent infringement.

The report reveals that more than 50% of survey respondents agree that IP litigation costs could have a material impact on their businesses, but only 7% purchase IP insurance. However, over a third of participants would consider purchasing stand-alone IP insurance, according to the report. It asserts: “Several providers offer stand-alone IP insurance that has been specifically developed to cover IP exposures.” Some specialist insurance providers include Ambridge Partners, RPX and Liberty Specialty. 

Willis Towers Watson says it is impossible to identify the number of IP insurance policyholders, annual gross written premium, loss ratios or market size.

The report notes: “While coverage has been available for approximately 30 years, the market has been slow to develop. Initially, a lack of available data made it difficult to underwrite IP risk. Today, underwriting models are better developed but underwriters struggle with what is fortuitous versus business IP risk.”

An IP liability checklist

The report provides the following checklist which may be helpful when you consider your organisation’s IP infringement liability risk and the potential financial impact.

·         Does your organisation have a cross-functional, coordinated team responsible for IP risk that includes members from finance, risk management, legal, procurement, IT, marketing and sales?

·         Are your IP-related enforcement and infringement liability costs budgeted and tracked on an individual and annual basis?

·         In light of your current projects, partnerships and joint ventures, how is intellectual property risk managed and quantified?

·         Is IP risk identified and quantified as part of M&A due diligence and deal negotiation?

·         Is insurance considered to cover deal-related IP exposures?

·         Have you quantified your IP indemnification risk on an aggregated basis and explored whether insurance in lieu of or behind indemnification obligations makes sense?

·         Have you assessed and quantified IP risk, determined your risk tolerance and explored available risk transfer options?

·         Have you performed a gap analysis to determine if your current insurance coverage addresses potential IP exposures across all business areas?

·         Have you considered stand-alone IP insurance for your underinsured and uninsured IP liability exposures?

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