Protecting your intellectual property with litigation insurance

published in McAfee & Taft Agricultural Law Update | July 1, 2008

By John Kenney and Jeff Todd

American agriculture defines progress through invention. In the 1830s, over 250 man hours were required to farm five acres of wheat. Today, through inventions, less than five man hours are required to produce wheat from the same acreage.

One of the most famous inventions in American agriculture is Eli Whitney’s cotton gin, which was patented in 1794. While this invention revolutionized the process of cotton production, legal battles with infringers kept Whitney and his partner in court during the first 10 years of the patent’s life. Whitney eventually sold his patent to the state of South Carolina. Ironically, Whitney did not become rich until he invented a musket manufacturing process.

Today, inventions continue to revolutionize agriculture. “Intellectual property” creates value for agri-business and producers. Intellectual property includes patents, trademarks, copyrights, trade secrets and other intangible assets. Intellectual property allows businesses to build a competitive niche which differentiates them in the marketplace. Rights to a valid patent, trademark or copyright can also be licensed to create a revenue source. However, as Eli Whitney learned, protecting or defending these rights can require costly litigation.

Intellectual property litigation – whether pursuing infringement or defending against a claim of infringement – can be expensive. Of course, many factors such as the nature of the product, amount of money at issue, jurisdiction, etc., can cause these costs to vary significantly. Surveys have found median costs range range from approximately $600,000 to $5,000,000 for patent litigation; $300,000 to $1,000,000 for copyright litigation; and $250,000 to $1,250,000 for trademark litigation.

The cost of attorneys’ fees and expenses, including experts, can deter or preclude the ability to engage in intellectual property litigation for many businesses. If a defendant loses a claim of infringement, it can also be subject to a substantial damage award. In the case of a finding of willful infringement, treble or punitive damages may be awarded. In some cases, attorneys’ fees can be awarded by the court to the winner.

Businesses with substantial reserves and/or cash flow may choose to assume the risk of incurring these significant costs. On the other hand, in many instances, it makes good business sense to consider insuring some of this risk. Commercial general liability insurance does not ordinarily cover these claims. (There are exceptions and these policies should be investigated in light of the facts in each case.) However, abatement policies designed to cover this type of claim are available which reimburse litigation costs and other expenses incurred by the insured in seeking to enforce its patents, trademarks or copyrights against alleged infringers. Defense policies are also available which are specifically designed to reimburse litigation costs defending against charges of intellectual property infringement. Coverage is also available to insure all or part of damages which may be awarded against the insured.

Infringement abatement insurance is generally written on an annual basis. It is not prohibitively expensive in many situations. One company that writes this coverage, Intellectual Property Insurance Services Corporation through the carrier Gotham Insurance Company (New York Marine Group), reports that in 2006, average premiums were just over $20,000 per year. The policy is issued as property coverage. The acts of the alleged wrongdoer must begin after the policy is in effect but may have begun during a previous continuous policy period. The insured is required to provide the insurance company with a favorable legal opinion letter from qualified intellectual property counsel regarding the issues of enforceability, validity and infringement. If the policy terms are met, the insurance company will authorize suit by counsel of the litigant’s choice, subject to the insurance company’s approval.  The litigation expenses will then be reimbursed according to the terms of the policy.

The policy limits per claim can range from $250,000 to $5,000,000. There is usually a significant retention or deductible provision and typically a provision for payment of 80 percent of the costs of litigation by the insurer.  A provision for recovery of some or all of these costs by the insurance company in the event of a final judgment in favor of the insured is usually included.

Similarly, coverage is available for litigation expense reimbursement where
the insured is sued for intellectual property infringement. Again, the insured must obtain a legal opinion of non-infringement. The insurance company issues an authorization for payment of defense costs under the terms of the policy after the claim is received and all conditions are met. The company shares pro rata in any award of attorneys’ fees and costs up to the amount the company has spent in respect to the covered litigation. Willful acts of infringement, lawsuits which the insured was aware of or knew were imminent at the time of the purchase of the policy, asbestos liability and nuclear liability are not covered. Damages that could be awarded against the insured are also typically not covered, although coverage for certain kinds of damages can be obtained as an option. The costs for these kinds of policies are similar to those for abatement policies.

Depending on your type of business and the associated risk of having to pursue or defend intellectual property lawsuits, intellectual property litigation insurance should be carefully considered. It may provide a cost effective means of allowing you to take the necessary steps to preserve your competitive niche. Coverage can be obtained through insurance brokers.

One must wonder whether Eli Whitney’s financial success from his cotton gin would have been different if he had access to patent litigation insurance 200 years ago.