Protecting Investment in Intellectual Property

It is often quoted that as much as 80% of UK business value is now held in intangible assets, such as patents, designs and trade marks. This is a complete reversal from 30 years ago, when company valuations where largely based on the amount of tangible assets owned.

It is clear that in this modern global economy, intellectual property is crucial for businesses to maintain a competitive advantage both at home and abroad. Whether companies are selling services, developing software or inventing new products, they will be underpinned by valuable IP, which is crucial to protect.

However, as the value of these intangible assets grows so does the risk of being caught up in expensive litigation. Whether competitors or licensees copy rights and steal market share or so called patent trolls claim infringement of their rights, the risk to business can be significant, both in terms of legal fees and lost revenue.

As a result, there is a real concern that a large number of SMEs in the UK are beginning to turn their back on capturing and registering their IP. A belief is growing that there is little point in spending money on a portfolio of rights, if funds aren’t available to enforce it.

In this article I shall explore the causes of these concerns and how innovative insurance products provide a solution.

IP Litigation is on the rise.

Court figures confirm that right holders are facing a huge increase in the amount of IP litigation, both in the UK and around the world. In the UK High Court alone, the number of IP cases issued almost doubled between 2010 and 2014. This is a worrying statistic but hardly surprising when put into context.

At present the UK is experiencing an entrepreneurial boom. Last year 580,000 new businesses were incorporated. Of these, all will be trading under a new name, most will be selling a product or service, and many will be innovating, whether creating online content, designing new products or building brands. That is a significant amount of new IP being created each year. This inevitably will lead to more and more companies coming into conflict with each other, whether intentionally or otherwise.

In the US, the amount of litigation brought by so-called ‘patent trolls’ is on the rise and the risk of being caught in litigation is high. Between 2010 and 2014 the amount of patent litigation in the US has doubled.

This trend is unlikely to be reversed, so companies with successful IP have to anticipate being involved in IP litigation at some point. This applies to businesses of all sizes. Only a few months ago the Federation of Small Businesses surveyed their members and found that of those who own IP, 25% had experienced legal issues relating to it.

Litigation Cost

In the UK, significant steps have been taken to reduce the cost of IP litigation. Case management in the Patents County Court, now known as the Intellectual Property Enterprise Court (IPEC) was streamlined in 2010 to make it a viable forum for SMEs to enforce their IP. It has been a huge success. Over the last 5 years hundreds of companies have chosen to litigate in IPEC over the High Court, where cases take longer and are far more expensive.

Legal costs, however, remain stubbornly high. The costs of a patent action are still likely to be in excess of £100k, a substantial amount for any business. Costs in the High Court can often run into the millions.

The reasons for this are clear. IP litigation is highly specialised and labour intensive so legal fees reflect this. Court fees have also risen dramatically this year. So while steps have been taken to try to ease the cost burden on right holders, the inevitable truth is that IP litigation will always be expensive.

Added to this is the lack of availability of alternative funding options for litigants. Prior to the introduction of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (‘LASPO’), claimants could enter into Conditional Fee Agreements with their solicitors where, in return for a discounted hourly rate a success fee became payable if the case was won. The good news for the Claimants was that this fee was paid by the losing party. However, post LASPO, any success fee must be met by the claimant. Similarly, claimants could purchase after the event insurance, where, if the premium became payable, it would be met by the losing party. Today, if a company purchases after the event insurance it must pay the premium itself. Given the size of the premiums, this is a very expensive option.

The result is that if a business finds itself in IP litigation, the legal costs will inevitably be a significant burden.

The Solution

To protect against this risk, before the event IP insurance policies are becoming an increasingly popular, especially amongst SMEs

The market has developed rapidly over the last few years with a number of ‘A rated insurers’ now offering a variety of policies.

These policies, which are purchased annually, predominantly cover the legal costs of enforcing rights or defending IP claims. They also cover a range of other IP related exposures such as:

1. Those arising under IP warranties and indemnities;
2. Damages awarded against the insured if it is found to infringe a third party’s rights;
3. The costs of recalling infringing products from the market;
4. The loss of revenue following a right being found invalid.

As each IP portfolio is unique, policies are bespoke and tailored specifically to the client’s requirements. A specialist IP insurance broker can advise on where exposures might lie.

Until the underwriters have undertaken an assessment of the risk it is always difficult to advise on how much a policy might cost. As a rough guide, I advise that premiums are likely to be between 1%-3% of the level of cover being purchased.

The client can purchase anywhere between £100k and £50million+ of cover and can choose which countries it needs protection for.

Once the client has decided the scope of cover information relating to the client’s business must be sent to the underwriter. Amongst other things, the underwriter will need details of the rights and products to be protected, the client’s turnover, litigation history along with what systems, if any, it has in place to manage its IP risks.

At this stage, the insurer will undertake a high level risk assessment and provide the client with an indication of cost. It may also request further information. If the terms are within the client’s expectation, a fuller review will be undertaken and a formal quote issued. The whole process can take a matter of days.

IP insurance can add real value to IP rich businesses. Firstly, it allows decisive action to be taken if IP litigation arises, even if a company’s financial position might not otherwise allow it. An IP portfolio protected by insurance is worth considerably more than one that isn’t, given the right holders ability to enforce its rights regardless of its financial position. Secondly, if litigation does arise, having insurance in place can certainly encourage early settlement, or even act a deterrent all together.

These are important considerations for any business that is entering into licensing agreements, launching new products or expanding into new territories. For these businesses and those that are concerned about IP risk generally, IP insurance Is becoming increasingly important option when considering their IP strategy.