Patents are a key component of any intellectual property risk management program. Patents represent a company’s most valuable assets; especially when linked directly to their revenue stream. It is imperative that companies recognize the value and risks associated with their patents and must consider taking the appropriate steps to protect them. Are patents exposing your company to potential risk? Are these risks insurable? Does patent risk affect how potential investors evaluate your company? This Partners’ Perspective will examine some of these risks and illustrate solutions to effectively build a risk management program.
What are the risks and values related to patents?
According to the World Intellectual Property Organization (WIPO), the number of applications for patents has increased over 85% in the past decade (1998-2007). This illustrates the value more companies are placing on their intellectual property and highlights the increased potential for intellectual property litigation.
The exact value of a patent can be difficult to determine. This is particularly true of products that have not been commercialized or even produced. However, it is widely accepted that defending patents through litigation can be an expensive proposition. The costs impact companies in several ways including defense costs, settlements, and the length of time to settle claims. The average patent case costs between $3,000,000 and $10,000,000 and can take years to litigate. Based on the length of time to litigate and compared to the typical time period that a portfolio company is held, this risk can adversely impact exit strategies.
What are the litigation challenges?
Patents pose several litigation challenges. Even companies that do not own any patents can be sued alleging infringement of another company’s patents. If this occurs, there are three possible options:
- Abandon the product in question
- Attempt to obtain a license from the accuser
- Defend yourself using cash reserves and available credit lines
Alternatively, it may come to your attention that someone is infringing on your patents and legal recourse is necessary against the other company.
Risk control still remains the best approach to mitigate litigation. Taking the necessary precautions to ensure that a technology or process is not infringing on others is still the best risk management practice. However, even when best practices and procedures are utilized, unexpected events can still occur. Insurance can be a mechanism to help plan for these events.
What are the benefits of insurance?
Intellectual property risk management and insurance provides several benefits for companies.
- The ability to evidence intellectual property risk management through planning and insurance demonstrates a well run company that has gone through the due diligence of risk analysis.
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Insurance can respond to protect an insured’s balance sheet and cash flow.
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The use of risk management and financial protection offered by insurance makes a company more attractive to potential investors. It provides additional security to investors because an insurance company is providing the financial backing to protect the company’s assets.
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The insurance also acts as an asset to private equity firms post acquisition as various exit strategies are contemplated.
Additionally, insurance enhances an alleged company’s options by allowing them to avoid early settlement solely due to lack of funding. Smaller or emerging companies, as well as non-profit organizations, find insurance particularly useful as they attempt to compete with large companies with greater financial resources.
Are Patents Viably Insurable?
A common misconception is that patents are either uninsurable, or if they are insurable, the process is too time consuming and expensive. Insurance for patents has evolved since its inception to better meet the needs of its insureds. Annual premiums can commonly range from $25,000 to $50,000; making this a cost effective risk transfer solution. With regard to the time involved, premium indications can usually be obtained with some basic information (which varies by industry) prior to the completion of any patent searches. Two types of insurance are most prevalent:
- Patent Infringement Insurance
- Intellectual Property Abatement Insurance
Patent Infringement Insurance
Patent Infringement Insurance protects companies from actual or alleged claims made against them for infringing on another company’s protected patent. It can be used to cover damages, inclusive of lost past profits and royalties, and prejudgment interest. Additionally, the legal expenses required to defend the claim can also be added as a supplemental coverage to the policy. Policy limits are typically available in the $1,000,000 to $5,000,000 range.
Intellectual Property Abatement Insurance
Intellectual Property Abatement Insurance reimburses a company for its legal expenses used in enforcing a patent, copyright or trademark against another company from infringers on the company’s intellectual property. Essentially, the policy is designed to provide the financial means to file suit against other companies in an effort to protect your intellectual property by offensively suing an infringing party. It would also pay the legal costs in the event of any countersuits for invalidity. Policy limits are typically available in the $100,000 to $500,000 range.
Risk Evaluation
Intellectual property and specifically patents can be one of a company’s most valuable assets. Insurance is an effective risk management method to provide the necessary capital to fund this risk. Insurance covering patents also provides security to investors throughout the acquisition process.
