|
Janice Denoncourt |
Legal counsel and intellectual property portfolio managers are increasingly responsible for securing insurance to protect their organization's IP assets and liabilities. Insurance is a deterrent to infringers and may prevent unexpected cash drains on operations or loss of market share by timely and forceful response to claims. Offensive and defensive IP insurance policies can be a great source of security that make IP-related financial transactions possible. Also, IP insurance has a role to play in preserving some value in the company following a business failure. The information presented in this article will assist IP managers to take control of their IP insurance programme and limit the impact of flawed commercial business and investment decisions.
Transferring risk
All businesses are exposed to varying degrees of risk in terms of scope and severity. The process of risk management assists the organization to balance its risk exposures against business opportunities to achieve corporate plans and objectives. It is important for IP managers to plan how the organization will respond to a major incident involving IP assets and the flow on effects. What advance arrangements are in place for transferring the exposure? Considering how the organization will cover the potentially exorbitant costs of an enforcement action at an early stage is extremely important.
An IP insurance premium is usually cheaper the earlier it is taken out. For example, if there is a delay in securing a policy until after a new patented product is exposed to possible predators, insurance underwriters may decline to cover the risk. At the other end of the spectrum, having a policy in place to cover legal costs will assist the organization to prevent any unauthorized use by making any desired enforcement action a reality.
Why has the securing of insurance become part of the IP manager's role? The IP manager is often the first to identify the need, especially in small to medium size organisations. In sophisticated larger corporations, securing the correct, best and most cost-effective policy is a critical part of the company's IP strategy and this directly affects IP management strategies. Finally, it is an unfortunate fact that not all brokers are up to speed with IP insurance and the IP manager may have to be pro-active in educating the broker responsible for the organization's insurance program.
The IP manager will be instrumental in collating the extensive information usally required to complete the insurance proposal forms. The IP manager may then have to liaise with patent attorneys or other experts appointed by the insurer to examine the portfolio and prepare a risk analysis report. Once the insurer has provided a policy document, the IP manager will typically have a role to play in reviewing and negotiating the terms of the policy. Finally, further down the track when a potential claim is on the horizon, the IP manager will be required to notify the insurer in writing in order to obtain the benefits of the policy and assist with any IP litigation.
Controlling the risk
Understanding the insurance market, the participants and their roles is the starting point for securing an appropriate policy. This is the best foundation for successfully dealing with brokers whose job it is to seek out and deliver IP insurance protection options.
IP managers may also interact with a number of different insurance industry participants throughout the process of providing underwriting information, negotiating final premiums and placement of cover.
Underwriting agents
Underwriting agents are wholesalers of insurance capacity provided by general insurers. They are generally established and supported by insurers based on the concept of sharing high risk or specialist exposures between a number of insurers, accessing the expertise of specific individuals and or providing a more cost-effective method of distribution.
The broker's role
The principal difference between an insurance broker and an insurer (or the insurers' agent) is ?responsibility'. A broker is appointed as a professional adviser. The broker's role is not just to purchase insurance cover, but to analyze the insured's business and find satisfactory solutions for the client's risk and insurance problems.
For most corporate business, the broker is responsible for the design and negotiation of tailored policy documentation to ensure that the coverage adequately addresses the clients needs.
| The IP manager's role in a nutshell IP managers must be equipped to:
|
The claims process is another significant area where the broker provides added value, as the project manager, on behalf of the client. The broker usually arranges for notification to insurers, appointment of loss assessors, assistance in the preparation of claims documentation, justification and expedient settlement under the conditions of the policy.
One of the fundamental roles of the broker is to perform all of these responsibilities better and at a lower cost than the client could accomplish with an in-house insurance department.
Understanding international market cycles
International insurance markets are notorious for ongoing cycles. Insurer and reinsurers move from being competitive and eager to underwrite business (a soft market), then in subsequent years dramatically increase premiums and/or withdraw from the market for certain classes of risk (a hard market). The right cover for your business can be negotiated depending on things such as the maximum cover sought and the amount of excess one is prepared to bear per court case.
Available cover
The first recognition that IP could be insured occurred in the late 1980s with the advent of defence and enforcement IP policies. The American courts first brought the insurance companies into the IP coverage arena by finding that the broad form Commercial General Lines (CGL) policies required defence and indemnification of the insureds in patent cases, as in Aetna Casualty & Surety Co v Watercloud Bed Co (US Dist Lexis 17672 (1988). It was when these CGL policies were modified to eliminate such coverage that the policies providing specific IP coverage were developed.
It was these later policies (especially the enforcement policies) which transformed the intangible and somewhat elusive IP right of "preventing others" into a serious threat and enabled the patent holders to capture a solid exclusive market share. Since that time, new industry based IP policies have been developed.
There are generally two types of coverage:
that which reimburses litigation expenses and cover awards of damages; and
that which covers loss of value of the asset itself in the event of an unfavourable outcome from litigation. The type of coverage that pays IP litigation expenses can be purchased in either of two forms, or in combination.
Offensive IP insurance
This is designed for holders of any type of IP (patents, copyright, trade marks, trade secrets) and provides for the reimbursement of litigation expenses involved in the enforcement of IP rights. This insurance allows for more assertive litigation and affords the opportunity for the insured to choose the most competent and experienced counsel available.
It is normally recommended that offensive patent insurance makes financial sense for small to medium size businesses with a key patented product or service that is likely to draw competition, or where patent royalties on a key product are the main source of revenue for the company. Patent enforcement insurance generally makes little sense for large companies.
An example of a global licensing programme launched on the strength of the IP enforcement policy secured from a Lloyd's of London syndicate is QPSX, a small publicly listed Western Australian broadband communications technology company. QPSX is suing Siemens and Deutsche Telekom for A$115 million (US$59.9 million) for infringement of its cell switch technology patent. The ultimate goal is to negotiate with the defendants, both leading European ATM manufacturers, with the expectation of delivering QPSX substantial royalties.
| Information disclosed in the proposer's application form may include details of:
|
QPSX appears to have successfully minimized its exposure to the costs and risks associated with litigation. Lloyd's has provided a funding facility for 80% of litigation expenses of up to $4 million incurred in relation to litigation in Germany and in the UK authorized by Lloyd's. QPSX is required to provide up to a maximum of $1 million on a 20% co-pay basis. The facility allows for three actions, which may proceed concurrently, to enforce the company's IP rights under certain of its European patents. Where the litigation results in QPSX receiving an economic benefit or presumed economic benefit through either monetary settlement, an award of damages or non-monetary arrangements with the infringer, the company must repay the funds advanced by Lloyd's together with a further premium of 30%. If litigation is unsuccessful, and no presumed economic benefit is received, no amount is repayable by QPSX to Lloyd's who forego the full amount advanced. The term of the insurance policy under which the facility is provided is three years. In this instance, the directors of QPSX are confident that any award or settlement from the litigation is likely to exceed the consequential repayments to Lloyd's. In addition, a US venture capital partner is contributing 25% of QPSX costs.
Defensive IP insurance
The second type is IP defence insurance. This coverage is useful for both IP holders and non-holders. It provides for reimbursement of litigation expenses involved in defending against an infringement lawsuit, and can be purchased to reimburse not only lawyer fees, but damages awarded against the insured in the event of the loss or the suit. The infringement defence insurance allows for a swift and vigorous defence to charge of infringement vis-a-vis the products or services at issue.
It is generally recommended not to buy this type of insurance unless:
one is a small player entering a new business area and the big players have patents; or
there is reason to believe you will be named as a defendant in a patent infringement suit; or
one has so few products that a serious patent claim against affecting one of them could shut down the business; or
an agreement provides that you must protect licensees against infringement claims and without insurance there are no resources.
Loss of IP value insurance
The newest entrant in the IP insurance market is the coverage which compensates for the loss of IP value on either a first or third party basis on the occurrence of an adverse happening. Under these policies, it is possible to insure on the basis of: business interruption; loss of commercial advantage; loss of trade dress identity; loss of trade secret advantage; loss of ongoing royalties or licence fees; loss of benefit of research and development expenditures; loss of covered IP portfolio value and the costs of redesign, re-mediation and reparation. Such losses may result from such things as a key patent being held invalid, an injunction being imposed prohibiting further commercial activity, cancellation or suspension of performance under a licence agreement, unauthorized disclosure of trade secrets, and various other unfavourable results emanating from civil proceedings and/or administrative hearings.
IP cover combined
The two types of insurance in combination provide the benefits of
the legal enforcement/defence of the only right given by IP, which is the right to exclude others from making, using, selling or offering for sale the subject matter of the IP, as well as
the opportunity to recoup the value lost because of the loss of that IP right or the corresponding loss of freedom because of being subjected to another's IP right.
Licence agreement disputes coverage
This is a relatively new insurance product that covers both prosecution and defence of allegations of a breach, by either party, of any licence agreement.
Hidden costs
A major hidden cost of litigation is the diversion of management time. If the company's executives are attending trial, drafting affidavits, preparing to give evidence, they are not attending to other company business. These costs are not recoverable costs even if the company wins. IP counsel must be involved determining whether the executives can handle both their regular tasks and the added tasks of litigation. There is also the stress on management and possible adverse publicity involved in being in court over patent infringement.
Insurance has been the traditional option taken because the costs of premiums are reasonably stable and predictable, but risk management philosophy is based on only insuring those residual risks that the organization cannot economically self-fund. There are obvious cash flow advantages to an organization if it can retain funds until they are actually needed to pay losses. Self-funding also assists in the philosophy of driving greater accountability across the organization. However, for the reasons discussed above, self-funding litigation is not the best strategy in many instances.
| Costs and premiums The insurance premiums that you may be offered may seem expensive, but it is important to weigh this against the fact that litgation is very, very expensive. The average cost of patent litigation through trial in Australia alone ranges from A$1 million to A$2 million (US$520,400 to US$1.04 million) for each side. These numbers can easily be higher for high profile cases. Patent litigators in Australia charge A$350 to A$500 ($182 to $260) per hour and many hours are required. Multi-million dollar judgments and injunctions are the norm in successful patent infringement matters and these matters are often ?bet-the-business? gambles for one or both sides. One might be liable for the other side's costs too. While corporate giants such as Microsoft and IBM can afford patent litigation without insurance, infringement litigation presents small or start-up companies with a great risk of being overwhelmed by big players. Patent insurance can turn a small player into a big player in a big fight. The presence of insurance may encourage the other side to avoid the fight. |
Deterrent to infringers
Once insurance cover is in place, it is important to highlight the fact of its existence as well as the subsistence of intellectual property rights. This could deter potential infringers and may be done, for example, by media release, marking the packaging of your product and letterhead. There is no doubt that insurance demonstrates the IP owner's ability to financially protect IP rights and enhance security by reassuring investors.
IP insurance cover has another advantage, that is it may prevent an unexpected cash drain on operations, prevent loss of market share by timely and forceful response to lawsuits, and reduce any pressure on the patent holder to settle litigation because of mounting legal expenses.
Companies can benefit from insurance as it can serve as excess of loss coverage over and above a normal litigation budget. Even better, insurance can strengthen the balance sheet of the company by giving value to the IP portfolio, make the IP litigation costs more predictable and budgets more accurate, and allows financial institutions to securitize licence/royalty payments.
Irrespective of whether a company is a plaintiff or a defendant, uninsured IP litigation can cause a significant fall in assets. In such a case, the reduction in assets may cause others to question the company's IP management strategies. IP managers would be wise to consider insurance as one way to reduce this threat.
© Janice Denoncourt 2002. The author is head of the IP/IT Group of Minter Ellison Lawyers ? Perth
