Tony Conaghan

The need for Intellectual Property Insurance

Tony Conaghan

20 January 2016

Copyright Designs Patents Trade marks

In practice, we often have clients with intellectual property (IP) who want to pursue an infringer or, alternatively have received a letter of demand or had Court proceedings brought against them.

In the absence of IP insurance and faced with an opponent with more financial resources to outspend them, this can become very difficult for the clients to handle financially – no matter how ‘in the right’ they are. We have many examples of where new clients have been caught in this invidious situation. Whilst the premiums need to be considered and set in proportion to the risk and benefits, the prospect, for example, of spending over US$5 million defending unwarranted patent infringement proceeds in the USA is not a reality a Board of Directors wants to experience.

We advise all IP clients to check out the IP insurance policies available. This applies particularly to small start-ups, as well as SME’s and public companies.

IP insurance policies have become more sophisticated and flexible than they were several years ago.

IP insurance policies are usually structured on a claims made basis and follow cover closely aligned to what you expect to see in professional indemnity wording.

Key indemnities under this type of cover are:

  • pursuit of a third party for infringement on the insured’s IP;
  • defence of infringement claims made by a third party, including counter-claims for invalidity;
  • licensing and contractual obligations;
  • cover for directors and officers if joined in an action;
  • business continuity and recall compliance expenses cover.

With the regard to the size of the insured, there is really no minimum turnover however there are often minimum premiums applicable. The minimum cover usually required is about $250,000 though $500,000 is more common. This provides basic cover that in many instances will be more than sufficient. Not every insured needs the $5 million – $10 million coverage for damages as well as legal costs.

This at least provides cover for the initial costs involved and the preliminary stages of a dispute. It should be remembered that the majority of disputes are able to be resolved at a relatively early stage, and this cover is often sufficient.

With increased flexibility, it should be noted that cover is available for:

  • a single contract;
  • a single technology;
  • a single jurisdiction (country);
  • single patent;
  • the entire IP portfolio (patents, copyright, IP, confidential information, or parts); or
  • a combination or selection of the above.

The process to obtain quotes to secure the cover can be fairly involved. Care should be taken in properly describing the IP, identifying the potential risks, and full disclosure. If it is the preference of the potential insured, insurers will agree to terms and conditions included in a non-disclosure agreement in respect of the IP and confidential information. Typically, insurers will need an understanding of the following:

  • Full details of the IP (patents, copyright, trademarks etc) to be included and the products or systems they support and protect;
  • Confidential information and how the company protects it and its IP, including any relevant employment, sub-contractor, research and development, manufacturing, agency, distribution or other contractual agreements with third parties.
  • Has the product been fully developed in-house? If so, are all the proper agreements, assignments and ownership documents in place?
  • If third party technology has been used, has the prospective insured received warranties and/or indemnities from these companies against claims of infringement by third parties?
  • Risk Management:
    •  provide copies of any ‘freedom to operate’ searches undertaken and any other IP/competitor reports performed or opinions obtained;
    • provide copies of all internal documentation/policies/procedures in place relating to the risk management of the prospective insured’s IP (for example, relating to product development, search practices and legal sign off etc);
    • who is responsible/assigned for the risk management of the IP?
    • what searches does the prospective insured or their external advisors undertake to identify the existence of any third party IP rights?
    • further, what procedures do the prospective insured or their external advisors have in place to safeguard against them infringing any third party IP rights going forward?
  • Details of relevant turnover as well as identification of the top competitors (including where they are domiciled and their turnover, if known) where issues might arise.
  • Confirmation of whether there have been any claims previously in relation to the IP and the products, processes, systems, IT etc that it protects, and whether the prospective insured is aware of anything that might give rise to a claim.
  • Generally, the insurers are interested in whether the prospective insured has previously infringed the IP of a third party.
  • In the case of pursuit cover, insurers will be interested in whether the prospective insured has had their own IP infringed by another party in the past or what concerns that they have for possible infringement(s).

Summary

The extent of this information may seem disconcerting. However, if a company is serious about advancing its market share and is taking appropriate legal steps to protect it, most of this information should already be to hand.

With the present focus on innovation, and the strive to obtain a point of difference in the market, the identification and protection of IP rights, across the market areas, both by product etc and country, is more important than ever.

The mere fact that a company is able to say that it has IP insurance can help balance the negotiating position.

However, without IP insurance, those IP rights are of no value if the IP holder does not have sufficient funds to stop infringers (“success breeds copying”) and to defend itself against other competitors appropriating its IP.

Should you require further information, or wish to discuss any aspect, please contact us.