Get your mind out of the gutter. I'm not concerned with what clothes you
may or may not be wearing right now. If you want to run around in your birthday
suit, feel free—just please stay out of my office while you're doing it. (Unless,
of course, you're coming in to bring me a few million dollars' worth of business,
in which case you can pretty much run around wherever the heck you want, as
far as I'm concerned.)
Running around in your skivvies may get you arrested, castigated, or even
committed, but even in the worst case, you'll probably survive. You may get
probation, but there's no death penalty for public nudity. Unfortunately, what's
true for people isn't true for technology companies. In the world of intellectual
property, getting caught naked in the technology business can very well carry
a very painful death penalty for your company.
This article deals with developing a plan of action for dealing with intellectual
property litigation issues that are becoming more and more common in the modern
high-tech business world. In particular, I want to direct your attention to
the ever-increasing likelihood that a company will be involved in intellectual
property litigation, the costs and headaches such litigation can—and generally
does—give rise to, and some strategies for dealing with litigation before it
deals with you. There's no question that you need to prepare your business for
effective competition in the cutthroat, rough-and-tumble world of the modern
intellectual property business, in which competition often takes place in the
courtroom as much as in the marketplace. Given current trends, this is becoming
truer every day.
In a perfect world, good guys would always win, bad guys would always lose,
and lawsuits would be cost-free, hassle-free expeditious affairs that settle
disputes between honest, above-board competitors seeking merely to determine
the just and rightful winner of the issue. In the real world, good guys often
lose, bad guys often win, and lawsuits are often expensive, grueling, protracted
grudge matches between cutthroat competitors seeking to gain any advantage over
their competitors. In the real world, even the winner of a protracted, expensive
intellectual property trench war may sustain so much damage in the course of
the litigation, financial and otherwise, that the very survival of the company
is placed in jeopardy.
A Million Paper Landmines
Patent litigation is the prime example of the growing likelihood and expense
of intellectual property litigation. Between 1996 and 1999, the number of patent
applications filed annually grew from just over 200,000 per year in 1996 to
over 300,000 per year in 1999. In 1998 the U.S. Patent and Trademark Office
granted a record 163,209 patents, an increase of 31.5 percent over the 124,126
patents issued in 1997.
The number of patents granted has continued to increase each subsequent year,
to the point that number of issued U. S. patents recently exceeded 6.2 million.
Over a million of the issued patents remain in force today. Each and every patent
issued represents a "paper landmine" under the control of the patent holder.
As would be expected, statistics show that patent holders are by no means
shy about taking advantage of the competitive advantage afforded by their patents,
and the court battles continue to heat up. Between 1982 and 1994, the number
of patent infringement suits approximately doubled, growing from 843 in 1982
to 1,535 in 1994, at an average rate of just over 5 percent per year. Between
1996 and 1999, the number of patent infringement suits increased from just over
1,600 to over 2,300, growing at an average rate of over 10 percent per year.
Statistics have shown that the chance that any randomly selected patent will
be involved in litigation during its effective lifespan is a little over 1 percent.
Studies have shown, however, that certain patents have a much higher-than-average
chance of being involved in litigation during their lives. Certain classes of
pharmaceutical patents, for example, have a greater than 25 percent chance of
being involved in litigation, while patents covering other key technologies
have a better than 10 percent chance. This is completely understandable owing
to the fact that, while most patents cover small advances over known technology,
certain patents represent pioneering advances in valuable technology. These
pioneering advances represent serious money, and the big players are ready,
willing, and able to wage massive and expensive legal battles over that technology.
Certain competitors take an aggressive stance with respect to issued patents
in their technology, designing as close as possible to the literal scope of
the issued patent claims. Such competitors are virtually guaranteeing a conflict
with all but the most open-minded and gun-shy patent holders. Even the litigation-wary
who steer well clear of all issued patents in their technology areas can, however,
find themselves hit with a patent of which they could under no circumstances
be aware.
Under Patent Office regulations, patent applications have, under most circumstances,
been kept secret by the Patent and Trademark Office prior to issuance. Therefore,
it is completely possible for a company to develop its product lines diligently
and in good faith in such a way that none of their products infringe any patent
on day one, and yet infringe a patent that issues on day two. Owing to the particulars
of the patent system, the infringer may have no advance notice of its own infringement,
despite its best efforts. On the day of issuance, the unwary company could be
hit with a patent infringement lawsuit without any advance notice of the liability.
Recent changes in Patent Office procedure providing for less secrecy will make
this less likely in the future, but the possibility remains of being caught
in a lawsuit completely unaware of one's own infringement.
The chance that a high-tech business will be involved in an intellectual
property infringement suit continues to rise, and so do the stakes. The legal
fees incurred in the defense of a patent infringement lawsuit averaged $1.5
million in 1999, up by over $500,000 since 1995, and copyright infringement
defense is known to cost upwards of $150,000.
Although attorney's fees are available to the successful defendant in certain
cases, such awards are certainly the exception rather than the rule. Even in
the best-case scenario, where all attorney's fees are awarded to the defendant,
such relief may very well be "too little, too late." Any such relief will generally
be granted, if at all, years after the initiation of the litigation. In the
intervening years, the defendant is faced with the task of coming up with the
cash to keep the war machine running, while at the same time attempting to run
a business.
If you think it's expensive to fight,
you don't even want to know how much it can cost to lose. Intellectual property awards have
only continued to climb in recent years, with patent infringement awards leading
the charge. A few of the larger intellectual property infringement awards and
settlements of recent years include the following:
| Honeywell v Litton | $1.2 billion |
| Polaroid v Kodak | $900 million |
| DCS Communications v General Instruments | $140 million |
| Fonar v General Electric | $128 million |
| Honeywell v Minolta | $128 million |
| Stac Electronics v Microsoft | $120 million |
On the other hand, not all the big awards
are from patent disputes. Witness Trovan, Ltd., which was awarded $143 million
in a trademark case against Pfizer, Inc. The point is made: IP litigation is
definitely not for the faint-of-heart or the light-of-pocket.
The huge damages often awarded in patent infringement actions result from
a number of factors, but the principal factor relates to the laundry list of
damages available for patent infringement, which include lost profits, reasonable
royalties, punitive enhancement, interest assessments, and attorney fees. A
reasonable royalty is considered the minimum floor for calculation of damages.
In most cases, an award of a reasonable royalty by itself would probably not
bankrupt the defendant. Lost profits, on the other hand, very well could bankrupt
a defendant, particularly where a large patent holder has sued a small infringer.
In certain cases, the court may award both reasonable royalties and lost profits.
In exceptional cases, the successful plaintiff may be entitled to enhanced damages
of up to triple the calculated amount, in addition to costs and attorney's fees.
It is not hard to see how the numbers can quickly add up.
Even if the damages awarded are low, the accused defendant faces the very
real possibility of an injunction foreclosing some or all of its business activity
in the patented technology. A sufficiently broad injunction can kill a business
even faster than a heavy monetary loss.
With these harsh realities, it is no surprise that many defendants find themselves
negotiating from a position of weakness against a larger and better-capitalized
plaintiff, considering that damages can range between a "best case" of low seven
figures to a "worst case" of $1.2 billion. Although it may be difficult to verify,
it wouldn't be surprising to find that many small defendants settle lawsuits
that they'd have very little chance of ultimately losing, owing simply to the
financial realities of intellectual property litigation. Whether you would ultimately
win or ultimately lose is of no consequence if you can't afford to fight.
Although the small plaintiff is in a somewhat better position than the small
defendant, many of the same factors apply. A small company holding a valid patent
may have every reasonable expectation of a successful ultimate outcome in a
patent infringement suit against a larger, better-capitalized defendant, and
yet not proceed. Even if the small company does proceed, it may settle the lawsuit
on much inferior terms as compared to those that might be otherwise negotiated.
Intellectual Property Coverage under the CGL
Clearly, the risks surrounding intellectual property litigation are high.
Traditionally, intellectual property litigation has been viewed as a risk inherent
to technology-related business. Although companies routinely look to their insurers
for assistance with risk management and with claims giving rise to expensive
litigation, the idea of insurance protection for intellectual property claims
is a relatively new concept. Many business owners may be surprised to find out
that, in addition to physical injury claims protection, the standard commercial
general liability (CGL) insurance policy provides coverage for certain claims
arising from intellectual property-related "advertising injury," which is defined
as injury arising out of "advertising activities." This is particularly true
for claims related to copyright, and to a lesser degree, trademark infringement.
Most companies are engaged in a broad range of activities that could not
reasonably be considered "advertising activities." Under the standard CGL policy,
intellectual property infringement claims arising out of these activities would
not generally be considered covered by the policy. Additionally, acts of infringement
that can be considered intentional are likely to be denied by the insurer. For
defense of these types of claims, the accused infringer is on its own under
the terms of the standard CGL policy.
Intellectual Property Insurance Coverage
In order to prepare for the very real possibility of intellectual property
litigation not covered by the standard CGL insurance policy, many companies
have taken out specialized insurance coverage to protect against claims falling
outside of the scope of "advertising injuries." These types of policies are
becoming increasingly popular. According to one survey, intellectual property
insurance coverage has been growing at a rate of 300 percent annually in recent
years. The most popular form of intellectual property insurance coverage is
"defense" coverage, which covers the costs of defense of an intellectual property
infringement suit and any resulting settlements or judgments.
In addition to "defense" coverage, companies holding a valuable intellectual
property portfolio sometimes purchase "enforcement" or "pursuit" coverage, which
is designed to aid the policyholder in pursuing infringers. This may be particularly
valuable to a small company that is concerned that its valuable patent rights
may be infringed by a larger and better-capitalized competitor. Absent such
insurance, the larger competitor may be more likely to infringe the smaller
company's intellectual property rights with the expectation that the small company
may not be able to afford to defend its rights.
This sort of coverage may be particularly valuable to a small technology
company having an asset base consisting largely or entirely of a small portfolio
of intellectual property. Faced with a shameless infringer, the small company
has the option of either allowing the competitor to infringe, thereby jeopardizing
its only assets, or filing suit on its own dime, thereby jeopardizing its financial
stability. Enforcement insurance provides the small technology company with
a way to protect its rights and its financial stability.
Conclusion
The cost of intellectual property litigation can be astronomical, and continues
to increase. In certain cases, the high stakes of intellectual property litigation
can pose a very real threat to the company itself. Furthermore, the risk that
a given company will be involved in some form of intellectual property litigation
continues to increase. Given these facts, it is understandable that certain
insurers have developed policies tailored to the needs of the technology company
concerned about these risks. In general, the range of protection available under
any of the various policies available can often be tailored to meet the needs
of the policyholder.
Intellectual property insurance coverage may not make sense for every company.
For the small technology company having an intellectual property portfolio as
its most valuable asset, or for the new competitor trying to break into a market
in which aggressively enforced intellectual property rights are the rule rather
than the exception, the right level of insurance protection may mean the difference
between survival and mortality. In other words: Don't run around naked!
Ken Emanuelson is an associate with the intellectual property section of Gardere & Wynne, LLP.
His clients range in size from small startups to established Fortune 500 companies,
in various areas of technology, from online commerce to aerospace. His regular
practice includes client counseling in all areas of intellectual property law,
patent and trademark drafting and prosecution, litigation, licensing negotiation,
and infringement analysis. In his prior career as an engineer, Mr. Emanuelson
worked for Texas Instruments and Ford Motor Company. His engineering experience
included work in semiconductor processing, factory automation, microwave communications,
aerospace materials, automotive technology, and superconductive ceramics. Mr.
Emanuelson is a graduate of the University of Texas School of Law, where his
course of study focused primarily on patent, trademark, and copyright law. He
also holds a BS degree in mechanical engineering from the University of Arkansas.
He can be reached by email at