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Patent pending

Intellectual property claims can be expensive and time-consuming

By Michael J. Moody, MBA, ARM

Many corporate insurance buyers depend on their brokers for advice and counsel with regard to structuring property and casualty insurance programs that meet their specific needs. Most of the time, coverage is for risks that are easily identified. Property coverage on the buildings, general liability for slips and falls, workers compensation for injured employees, and the list goes on.

For the most part, mid-sized agents and brokers can identify and provide coverages for the vast majority of traditional risks. However, it takes innovative agents and brokers to rise above the crowd and offer assistance for more unique risks. A perfect case in point is the evolving world of intellectual property (IP).

Intellectual property 101

Most of us are familiar with large IP cases involving firms like Apple and Microsoft. Other large firms including Ford, GM, Dow Chemical, Motorola and DuPont have suffered significant IP losses annually, notes James Crowne, director of legal affairs for the American Intellectual Property Law Association (AIPLA). Smaller cases go on all the time. A common mistake is to lump all IP cases into one bucket when, in fact, there are several specific classifications for IP claims, notes Crowne. He points out that in fact, there are three types of IP claims that fall under federal jurisdiction. These include:

• Patents—Involves a document that is issued by the federal government "that grants its owner a legally enforceable action." The patent is issued by Congress for a period of 20 years, points out Crowne. Their thinking was "to favor the overall progress of technical innovation, while rewarding inventors for their specific contribution."

• Trademarks—Frequently known as "brand names or service marks," this is another important classification of intellectual property. The reason for the importance of this IP is that the public learns to rely on the identity of a source and an accompanying standard of quality for the products or services purchased. In reality, trademarks can be words, phrases, designs, sounds, or symbols. Buyers, through purchasing experience, learn they will meet or exceed a certain standard of quality when purchasing these products. Over time, goodwill will build up with the consumer base.

• Copyrights—Protects intangible original works of authorship, as well as protects the expression of ideas, but not the ideas themselves. Copyrights are most often thought of with regard to books, music, movies and computer programs.

These three classifications, noted above, are based on federal statutes, and relief is found in federal courts. However there is a fourth classification of intellectual property that falls outside of federal oversight.

Trade secrets are the fourth group and they are causes of action in the area of unfair competition. This is an area where a commercial enterprise is entitled to be protected against unfair dealings. It should be noted that trade secret cases are a matter of state statute and determined in state courts.

Serious concerns

The above was the briefest of overviews; however, it's important from several standpoints. First and most notable are the insurance aspects of intellectual property. Surprisingly, the issue of insurance has a rather long history with IP. Originally the insurance industry, in one of its innovative phases, decided to provide a limited form of intellectual property coverage. But, for the most part, that effort failed due to a variety of reasons, not the least of which stemmed from a misunderstanding regarding the scope of coverage.

Subsequently, insurance buyers and lawyers began looking to the general liability policy for IP protection. This proved to provide numerous coverage aspects and was, at least from the buyer and lawyer standpoint, a success. As a result, for several years, the majority of IP protection was found under the general liability policy. However, underwriters began to notice a spike in IP claims and soon placed specific IP exclusions on most general liability policies.

Over the past decade or so, the insurance industry has developed insurance products that specifically address the IP exposures. Despite the current competitive nature of the market, less than a handful of carriers offer IP insurance coverage. While coverage is available, it should be pointed out that the policy forms vary significantly. It is therefore important for an agent or broker to understand the exact IP risks that their clients face and then find a coverage that best fits the exposures. While all aspects of the coverage are important, such as who is covered, what is covered and the limits of liability, one of the most important areas is the defense coverage. Since many claims result only in defense costs, this aspect of the coverage is extremely important.

Another growing problem is employee theft. Employee theft has picked up markedly since the beginning of the recent financial crisis. A number of recent studies noted that employees felt little to no concern about taking funds from an ex-employer. While this situation on its own is costing Corporate America millions of dollars annually, a recent trend is even more alarming. This is an issue that concerns those employees who are taking confidential data with them when they go. But, unlike financial losses, it may be years until the true cost of this type of loss is fully realized.

"Well, there is something else that is also important and needs to be pointed out about liability in this area," notes Crowne. IP claims typically involve what's called strict liability which "means that you are liable whether your actions were intentional or not." If you are a retailer for example, "you're liable whether you meant to put that infringing product on your store shelf or not." That's certainly a very absurd approach to vulnerability. When strict liability was introduced, "every business that was involved with an IP loss, whether they knew of its existence or not, could find itself involved in the claim," says Crowne. Thus it becomes extremely important to make certain that the proper insurance coverage is secured. Crowne indicates that "strict liability remains a straight line and involves many corporations in an IP case. I think that is generally not understood by many insurance buyers or their agents and brokers.

"Additionally, there's another phenomenon currently going on in the IP area," he says. "You may have heard of it referred to as trolls—patent trolls," Crowne says. "It's a very vague kind of term but, by and large, it's used to refer to a bad actor who is trying to game the system by buying up a whole lot of patents indiscriminately and then looking for potential targets to sue, not with the intention of collecting a judgment, but with the intention of extracting a settlement which would be for less than what the cost of litigation would be."

While it is still an evolving issue, he says, "It's a very big public policy problem right now as folks are trying to sort it out because you don't want to sweep out the good guys with these bad guys, and to try and distinguish them is a difficult thing." But, he says, "One of the practices that people complain about with respect to trolls, those new patent holders who are the clear-cut bad guys, is that they will go and send a threat to file a lawsuit against an end user or against a retail outlet that just happens to be putting the manufacturer's product on their shelf." He continues, "You can imagine how difficult it would be to verify the legitimacy of every single product that a retailer puts on its shelf." Many lawyers are doing this strictly for the nuisance value and for many in the legal profession this is viewed as "a growth industry."

Conclusions

Today we live in an international world. In many instances, long-standing court precedents in one country mean nothing in other countries. Innovation in our own tech sector, for example, has blurred the lines even further. However, one issue is constant—authors, inventors, filmmakers, etc., all deserve protection under the law. But this gets harder with each passing day. Dealing with such things as patent trolls, nuisance law suits, international competitors and strict liability all must be considered when designing a corporate risk management program, as well as a specific IP owned by the insured corporation. And, as noted at the beginning of this article, the insurance business will go to the agents and brokers that can provide solutions to complex issues such as intellectual property.

One of the questions that has mystified many within the IP insurance sector is why is there is not a rush for coverage. Certainly, intellectual property is a major topic; just pick up a national newspaper and you will likely find two or three significant IP claims both national and international. For example, IP appears to be one of the major stumbling blocks to our current dealing with China. Just how bad is this problem? According to Commander of the United States Cyber Command and Director of the National Security Agency General Keith Alexander, whether domestically or foreign-grown, the ongoing theft of IP represents "the greatest transfer of wealth in history."

So why is there not more IP insurance being sold? While it is difficult to be certain, it may well be a lack of information both on the part of the buyer and the agent/broker. Bottom line, this is one area where agencies can significantly differentiate themselves from their competitors, and it is only going to continue to grow and evolve. Maybe it's time to learn more about IP coverage and see what all the buzz is about.

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