By Steve Bauer
In today’s litigation happy society, few things can drain a company’s budget faster than defending (or pursuing) its intellectual property rights against a competitor in court.
In response to the rise in patent and trademark lawsuits in recent years, several companies now offer intellectual property insurance to protect companies that would otherwise be left on their own to battle in the courts, providing potential relief from legal costs associated with any court proceedings.
Although the insurance services can be helpful, it’s important for businesses to understand what intellectual property insurance is, specific cases where it’s needed and when it becomes important to have.
T. Earl Levere, a partner in the Columbus, Ohio-based law firm of Schottenstein, Zox and Dunn Co. LPA, specializes in intellectual property rights and has been involved with the subject for 14 years as an attorney, and for several years before then while working in the music industry.
He says intellectual property insurance can be a lifesaver, but it depends largely on the value of the product or idea.
“If it’s something that is a centerpiece of your product line or an integral part of your business, then it would be worth the cost,” he said. “It’s not wise to take out a policy on everything you patent or trademark, as the costs can get steep as you add more coverage.”
What is it?
Intellectual property insurance coverage protects companies for copyright, trademark or patent infringement claims arising out of a company’s operation. It pays the defense costs and any judgment up to the policy limits.
Levere says the two most common types of intellectual property insurance coverage available to purchase are infringement and enforcement policies.
Infringement policies are designed for companies that are seeking protection against liabilities (inadvertent or otherwise) that are large in nature and that could, by their size alone, greatly affect a company’s earnings or cause rapid sell off by investors if it’s a publicly held company.
Enforcement policies are purchased to protect against intellectual property that can be stolen, infringed upon and invalidated. Most enforcement policies will cover the litigation expense and share in the recovery of theft and infringement claims. If the intellectual property is invalidated, typically the coverage will terminate and expenses paid to date must be returned to the company.
“Enforcement policies are more common than infringement, because infringement policies are purchased if a company can predict its product will be copied or stolen, and that it will have a negative effect on a company’s bottom line,” he said.
When to have it
Levere says it’s wise to have intellectual property insurance if the threat exists that you could be sued by a competitor for infringing on an idea or intellectual property belonging to someone else. The key is to file for protection before you’re aware of any possible conflicts.
“As long as you are not aware of any known infringements or violations, you can apply for insurance to protect your trademark or patent,” he said. “However in order to get coverage, in most cases you will be required to prove that you have completed an intellectual property search or have filed a registration for a trademark, service mark, copyright or patent.”
He adds that this coverage is often bundled with technology errors and omissions liability coverage, but it can also be purchased on a stand-alone basis. If you haven’t filed for an official government registration, however, you won’t be considered eligible for intellectual property insurance.
“If you’ve been lazy about getting a patent for your product or registering it, these policies are not designed to protect you,” Levere said. “They’re not a ‘get out of jail free’ card, so to speak. They’re meant for companies or individuals that have gone through the proper legal channels to ensure their intellectual property has been registered with the U.S. government. Buying these without holding legal documentation to back you up is a waste of money.”
Are these policies necessary?
The tremendous growth of Internet commerce has allowed more companies than ever to compete to be the first to develop and sell new products and ideas. Many of these companies only consist of one or two people, however, and wouldn’t withstand a legal battle over the validity of a patent or trademark.
In cases where smaller companies believe they might be at risk for future legal issues, intellectual property insurance can be the main difference between a thriving business and a bankrupt one.
“Unfortunately it happens all the time, a larger competitor will drain the finances of a smaller company, forcing them to either abandon the product or go under,” he said. “If you do not have the funds to hire an attorney and also pay the cost of the legal fees associated with defending your intellectual property rights, these policies can be an excellent alternative.”
Levere says an intellectual property policy will usually pay the costs to defend you if someone tries to claim the rights to the same business model, process or application.
Other advantages of such policies are that they deter frivolous suits from competitors by demonstrating the ability to financially protect yourself, and reduces the pressures on you to settle infringement cases because of mounting legal expenses.
Weighing the costs
Although the actual cost per product will vary and depends on several factors, minimum premiums can range from $1,400-$10,000/month (some policies also allow payments quarterly or yearly, as well).
Additional intellectual property might increase the premium also, and all policies are subject to state and local taxes.
Levere says when compared to the sometimes steep costs of litigation, however, these policies can be a great long-term investment if you believe that your product or idea has staying power.
“Litigation of these cases can get quite expensive,” he said. “Median litigation costs for an infringement suit through trial can range from $250,000 for copyrights to $2 million for patents for the U.S. alone. When you are thinking about the cost of the policy, keep those numbers in the back of your head as you weigh the positives and negatives.”
Levere says the most important litmus test is to sit down and determine what the product(s), services or ideas you are protecting are worth monetarily in the long run.
“If you believe this is going to be a mainstay in your product lineup for years to come, then that’s going to factor heavily into your decision,” he said. “On the other hand, if this is something that you might be holding in your back pocket and waiting to unveil to the public, how detrimental would it really be to your company’s bottom line if a competitor used your product name, etc., first?”
Finally, Levere suggests the potential growth of a company will dictate whether it should purchase policies for its intellectual property, and that a short legal consultation can save you from problems down the road.
“You have to step back and look at your business as a whole,” he said. “If you’ve hit on a great idea that you believe will launch you into the stratosphere in terms of sales growth and sustainability, then you should protect yourself by all means possible.
“Set up an appointment with a lawyer who specializes in intellectual property and have them give you a second opinion. That initial hour consultation could end up saving you time and energy you could be spending growing your business.”