Enforcement Insurance for Intellectual Property Assets

Who Has Intellectual Property?

Everybody has a potential IP. The name of a business, its products, or its services may be their core trademark resource. If someone else began using a name that was confusingly similar, customers could be misled and wrongly order from the competitor or blame the original user for a bad experience with that later competitor.

Trademark law protects the original user of words, designs, or other devices from later uses that cause a likelihood of confusion. Any original text, artwork, video, software, or media can be protected by copyright from later unauthorized uses. Patents protect inventions, and they provide no protection until they are sought and issued from the patent office. If a company has a secret process, formula, or even a customer list that they keep confidential, trade secret law may provide protection against improper methods to misappropriate that information.

Insuring Enforcement of IP Assets

Intellectual property enforcement coverage may be the only type of insurance available with a primary benefit to pay a plaintiff's legal expenses in a lawsuit. Sometimes called "pursuit coverage," the holder of these policies has the ability to call on the insurer to help pay the costs of suing others who infringe on their IP rights.

Simply holding IP rights does not automatically prevent others from infringing. Each entrant into a market makes their own choices on products or services to offer, and there is generally no "IP police force" to prevent infringing short of blatant counterfeiting. Stopping infringers is a civil matter requiring the engagement of private attorneys. IP enforcement policies pay the legal costs to bring and maintain lawsuits to stop infringement.

Insureds under an IP enforcement policy may be asserting infringed patents, trademarks, copyrights, or even misappropriated trade secrets. Policies may schedule insured IP to provide the insured and insurer an understanding on the scope of the rights subject to the policy.

Owners of IP strengthen their assets by backing them with insurance, which gives confidence that they won't simply be outspent by a better-funded adversary. The policy helps provide a level playing field against a larger competitor who releases knockoff products, mistakenly thinking that a smaller innovator couldn't afford to maintain a suit against them. Without insurance, IP rights holders may become pressured to settle prematurely because they can't afford the costs of the action. With enforcement coverage, innovating companies can have their complaints addressed on their merits, even if the lawsuit gets dragged out in time and expense.

Simply holding enforcement coverage can discourage potential infringers who might otherwise see an opportunity to infringe efficiently. Insureds can even give notice on their website that their IP rights are backed by insurance to warn off copycats like a real property owner might give notice of their security systems to deter theft.

In modern business, intangible assets like IP are often the most valuable parts of the company. Demonstrating commitment to their protection through insurance can support the use of IP assets as collateral for financing or other measures of valuation.

Common Elements of IP Enforcement Policies

Just as a house already on fire can't be insured for fire damage, insurance against others' infringement of IP rights may not cover pursuit of infringers who were in commercial use prior to the policy's inception. This exclusion of preexisting activity means that an IP enforcement policy becomes more valuable the longer it is held.

Where IP assets are scheduled, the best practice is to list them as soon as possible. As soon as patent applications are filed, they may immediately be scheduled on the policy to establish preexisting dates, even if they don't become enforceable until they are issued by the patent office.

Owners of IP assets may license them to others, but if the licensee breaches by not paying royalties while continuing activity, they become infringers. Enforcement policies can be endorsed to cover pursuit of terminated licensees, or that risk can be eliminated from the coverage for parties who are commercializing their own IP without licensing it out to others.

Because enforcement is such a unique type of coverage, it has some provisions that may differ from other types of policies. Consider that commercial insurance generally protects against negative events. If an infringement occurs, the IP owner can seek its remedy from litigation to receive damages or royalties as compensation. Sometimes, the legal system produces unexpected outcomes, and a court might find against the owner that the IP was invalid or not infringed. In that case, a negative event has happened, and the policy has paid its share of the cost of the proceeding, functioning as pure insurance.

However, if the suit is successful and the insured wins money, a positive event has happened. In that case, an enforcement policy generally expects to share in the recovery, but that insurer's share is limited to only the amount of the fees it paid. This may be written into the policy as a "recovery of costs" or "economic benefit" from the successful pursuit.

Sometimes, a case succeeds in removing an infringer from the marketplace, leaving more sales available to the insured, but monetary damages recovered are insufficient to cover the costs of the pursuit. Policies may provide relief from repayment of economic benefit for preset amounts where less money was recovered than the cost of the case. These provisions require the insured to use rational business judgment as to whether the cost of the pursuit is likely to be more than the potential recovery and not unreasonably spend "other people's money" pursuing uncollectable damages. Through this recovery of cost provisions, enforcement policies blend insurance and bond functions when the pursuit is successful.

The unique benefit of funding plaintiff actions requires enforcement policies to have guardrails against being leveraged to bring frivolous cases. Carriers generally require the insured to show that the proposed litigation has reasonable prospects of success. This may be shown by obtaining independent legal counsel's opinion that, more likely than not, a properly advised court should find infringement.

The cost of that opinion may be counted toward the policy self-insured retention and can provide the roadmap for a successful case. If a court later disagreed with the cause of action, the diligence of obtaining the opinion would weigh against accusations that the case had been frivolous.

Enforcement coverage may be available as a stand-alone policy, available with separate limits from an IP defense policy, or within the same policy as an IP defense. Inquire whether a combined policy creates sublimits for enforcement or for various steps in the process of a lawsuit. If sublimits apply, that policy may not have the robust coverage of a dedicated enforcement agreement.

Benefits of Enforcement Coverage

To help support insured IP assets, an insurer may offer early intervention services at no charge to inform suspected infringers that the insured owns the IP asset and that asset is backed by insurance. This opens a dialogue where the target may respond that they were unaware of the rights and seek a business resolution. This gives both insured and insurer benefits as the potential conflict is avoided.

The target may respond with reasons they do not violate the IP, providing a preview of potential defenses in subsequent litigation. Regardless of the response, the target is now on notice of the insured's rights and their ability to sustain action supported by the policy. Experienced insurers note high levels of success in resolving potential disputes at the early intervention stage.

IP enforcement insurance has been available since at least 1990 and has contributed to significant positive outcomes for insureds. Some insureds have had products knocked off by large competitors, but when they disclosed their enforcement insurance, they received royalty contracts.

A pet care company had its infomercial copied nearly shot-for-shot for a product with nearly the same features and a confusingly similar name being sold by an "As Seen On TV" company. It brought an IP suit, and at mediation with the magistrate judge, the innovators revealed the insurance to the copycat. The case settled at a significant multiple of the costs up to that point; the insurer recovered its costs, and the insured kept all the remaining amounts, free to continue to invent new things.

Innovation does not just happen in cutting-edge, high-tech industries but in many legacy segments as well. Recently, insured owners of patents for commercial grain processing equipment won an infringement lawsuit and collected over $11 million. Holding enforcement coverage enabled them to stay in that fight through trial and vindicate the rights to their inventions.

Protect IP Assets with Insurance

When a company seeks "patent infringement insurance," "trademark infringement insurance," or "copyright infringement insurance," it may want defense and/or enforcement coverage. An experienced adviser can explore the true concerns to be included in a policy.

The purpose of intellectual property is to promote innovation and the creation of new works. Businesses build value as they develop a portfolio of IP, but that value is diminished if they do not police their rights against infringers. IP enforcement insurance supports those patents, trademarks, copyrights, or trade secrets so companies can realize the full benefit of their intellectual property assets.