Intellectual Property Litigation Rising: How to Protect Your Company's Financial Health

September 2009

Well, you can't say you weren't warned. In our 2001 article, Intellectual Property Coverage: Are You Naked?, we cautioned companies about the dangers of being "naked" in the technology business. Eight years later, the cost of intellectual property (IP) litigation has increased by double-digit percentages,¹ and the number of cases filed continues to steadily increase.²

by Sanford E. Warren Jr.
Akin Gump Strauss Hauer & Feld LLP

According to the most recent survey by the American Intellectual Property Lawyers Association, the average costs of patent, trademark, and copyright litigation are approximately $2 million, $700,000, and $600,000, respectively.³ It is estimated that litigation costs are rising at an alarming rate of almost 20 percent per year, with a possibility of even further increases. Therefore, it is particularly crucial today for companies to develop a risk management strategy to deal with what is approaching the inevitable—being involved in costly IP litigation.

While this article offers a variety of methods to mitigate your chances of being involved in litigation, there is no surefire way for an operating business to avoid litigation indefinitely. Thus, companies should also consider developing strategies to increase the chance of surviving injuries sustained from battles in the courtroom. Traditionally, a company might look to its insurer to supplement litigation costs under a commercial general liability (CGL) policy. However, recent court decisions suggest that this might not be the most prudent approach. The increasing costs of litigation and decreasing scope of CGL coverage make litigation avoidance and management a top priority. In addition, IP insurance coverage may be available in some cases for a company, depending on industry type, size of the company, and the amount of desired coverage.

Avoiding Litigation

One possible method of avoiding potential litigation is to know your business. Prior to seeking protection for an invention (through a patent) or work of art (by copyright) or the company brand (trademark), thoroughly investigate your competitors, the market place, industry practices, and technical publications worldwide.⁴ But don't just focus on what is currently protected; also try to find out what your closest competitors might be working on in the future. Therefore, pay special attention to your competition's press releases, shareholder announcements, or Web site updates for indications of what products or services might potentially conflict with yours. Once a company has sought and obtained IP protection, frequently monitor your IP portfolio, and immediately address any potential threats to your company's IP rights.

In addition to knowing the business, it is essential to protect the business. Not only should you not assume your company owns the creative output of its employees, you should also make sure every employee who directly contributes to the creation of any IP has contractually granted ownership of the IP to the company. You should also control the dissemination of confidential information. Procedures should be created and enforced that identify and document the inventions, methods, and other information within your business that might qualify for legal protection. This documentation may prove crucial to any challenges to your company's IP.⁵

Another way to avoid litigation is to be open to alternatives. Heading to the courthouse should be just one of—and certainly not your only—option. If you are dealing with an infringer of your IP, consider offering a licensing agreement. Perhaps there are opportunities for working together, e.g., such as a joint venture. Other alternative forms of dispute resolution, such as mediation or arbitration, may be a better option in a particular case as well.

Mitigating Losses

While avoiding litigation is usually preferred, it is not always a feasible option. Before filing suit, however, you should first determine your business objectives. Is it for damages or an injunction? You do not want to spend an inordinate amount of time and money preparing for trial, and then later realize you can never recover that amount in damages or obtain an injunction. Each lawsuit should be viewed as a proposed investment, only participating if there is the possibility of a return. Additionally, being receptive to settlement at every stage of litigation can be an important method of mitigating losses.⁶ While a majority of IP cases settle before trial, understand that a significant part of the total cost of litigation may have accrued by then.

On the other hand, there will be times when your company is a defendant in a lawsuit which no amount of planning can prevent. For example, there are an increasing number of non-practicing entity (NPE) patent lawsuits filed against companies these days, which no business practice can prevent. Also known as patent trolls, these companies buy up patents merely for the purpose of suing companies for licensing fees—they never actually produce a product. In those types of cases, the most practical advice is to ensure that your litigation is handled in as an efficient and cost-effective manner as possible.

Another possible business strategy is to purchase an insurance policy to cover some of the costs of litigation when possible. Typically, a company that has a commercial general liability (CGL) policy will attempt to obtain coverage under the “advertising injury” provisions of the policy after an IP suit has been filed, but how the coverage is applied by the courts can vary greatly.

For example, the court in Capitol Indem. Corp. v. Elston Self Service Wholesale Groceries, 559 F.3d 616 (7th Cir. 2009) (applying Illinois law), held that the insurer was required to defend the policyholder in a trademark infringement case under the advertising injury provisions of the policy. The insurer attempted to invoke an exclusion to bar coverage, but the court found the argument unconvincing, holding a plain reading of the exclusion did not abrogate the insurer from its duty to defend.

The policy language itself is the most important factor in determining coverage. Courts will not go outside the plain meaning of the language in the policy to provide relief for the insured. For example, in Discover Fin. Servcs. v. National Union, 527 F. Supp. 2d 806 (N.D. Ill. 2007) (applying Illinois law), the court granted summary judgment for an insurer, finding that it did not have a duty to defend the insured in its patent infringement action. Despite the insured's attempt to redefine the claims through interrogatories, the court held the insured's claims did not qualify for coverage.

Traditionally, companies relied solely on the CGL policy to cover their business risks, but as the insurance industry has adjusted to avoid providing protection for newly evolved risks, like IP litigation, companies should consider purchasing specialized insurance policies to ensure coverage, where and if available.

Conclusion

Knowing your business and being familiar with your competitors' activities, protecting your business from IP ownership challenges, and being open to alternative methods of resolving disputes are just a few suggested practices to avoiding or at least mitigating the costs of IP litigation. While there are varieties of methods to lessen your chances of being involved in litigation, there is no guarantee it can be avoided indefinitely. Therefore, companies should also develop strategies to appropriately deal with the increase in cost and frequency of litigation.

Mitigating litigation costs can be achieved in a variety of ways. For example, by viewing each lawsuit as a proposed investment which should garner returns or agreeing on a settlement to minimize losses. Traditionally, a company might look to its insurer to supplement litigation costs under a commercial general liability (CGL) policy. Recent court decisions and changes in the scope of standard insurance coverage, however, suggest that this might not be the most prudent approach for many types of IP litigation. Where available, companies might also want to examine the insurance marketplace for specific IP insurance coverage.

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¹Estimated increases are based on averages of litigation costs from 2001 to 2007. Percentage increases are 62%, 24%, and 32% for patents, trademarks and copyrights, respectively. AIPLA Report of the Economic Survey, 25-26 (2007) [hereinafter Economic Survey].

²Alan Ratliff, CPA/MPA-JD, StoneTurn Group LLP, Damages, Address before the In-House Counsel Institute at the AIPLA 2007 Annual Meeting 7 (stating that patent and trademark litigation filings have consistently increased since 2001. However, copyright infringement cases soared by nearly doubling from 2004 to 2005, and remaining well above historical levels through 2006); see also The Company Behind the Headlines Intellectual Property Statistics 17, FTI, May 2008.

³Economic Survey, supra note 2, at 25-26.

⁴Mark Vorder-Bruegge, Jr., A Half-Dozen Tips for I.P. Litigation, Wyatt, Tarrant & Combs, July 15, 2009.

⁵Id. ("Documentation of time, scope, and practice of an invention may be crucial if patent prosecution is received but challenged in subsequent litigation against an infringer. Documentation of how trade secrets are protected may be crucial to future relief for theft.").

⁶Thomas W. Banks, "A Few Tips to Help Ensure a Win in Patent Litigation," Boston Business Journal, June 2, 2006, Finnegan.

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