The Role Insurance Can Play in Your IP Strategy

Written by Mandy B. Willis, attorney

You are a small, entrepreneurial company getting ready to introduce a product that will ensure your economic success. You have already taken steps to protect the intellectual property (the “IP”) behind the product. You invested in branding. You obtained a patent opinion that gives you clearance. But what if—unbeknownst to you—the product will infringe someone else’s IP? What if a larger company copies your idea, launches the product faster, and captures your customer pool? Can you afford to be involved in a dispute?

Consider the Risk of Exposure

How do large corporations fund the multi-million dollar suits in which they are entangled? These companies have a risk-management strategy that budgets for potential litigation. Part of the strategy is to use insurance to protect IP assets. Although not widely realized, this insurance is available to businesses of all sizes and stages of success. Insurance is available to reimburse the costs of defending charges of infringement; to cover the expense of pursuing infringers; and to indemnify for losses incurred from diminished IP value.

Defending Against Allegations of Infringement

One benefit of insurance is that it furnishes the finances needed to make a strong case against liability. Undertaking litigation is a costly and time-consuming endeavor. Consider whether your company can sustain litigation long enough to reach a final ruling of non-infringement. Or, consider whether limited funds would force a settlement, despite a likelihood of prevailing in litigation.

Insurance protection mitigates the risk of loss that may result from potentially infringing activities. Generally, a policy will cover the monetary aspects of litigation, such as attorney’s fees and damages awarded to the IP owner. However, not all disputes result in litigation. Oftentimes, if both parties are willing, a dispute is resolved shortly after the initial cease and desist (“C&D”) letter. Certain policies will cover the attorney’s fees incurred in preparing a response to the C&D letter. Policies can also pay a settlement and counsel for the insurance company will often participate in negotiating the agreement. Furthermore, policies exist that indemnify for revenue streams that are lost as a result of invalidated patents.

Pursuing an Infringer

Consider whether you can enforce the IP that you secured. In other words, can you afford to take legal action against a future infringer? Can you afford to challenge a well-financed defendant?

There are special types of coverage—such as, “pursuit,” “abatement,” or “enforcement” policies—that reimburse the expenses incurred in enforcing IP rights against infringers. The key to recovering under these policies is to discuss the potential claims with the insurer before filing a complaint, because prior approval may be required to commence an action.

Additionally, consider whether the infringer is insured before serving the complaint. The way claims are pleaded can affect the coverage available to a defendant. A well-pleaded claim for monetary damages can trigger the defendant’s coverage, while a claim for injunctive relief will not. Pleading a damage remedy may result in an insurance settlement that is larger than what the defendant can otherwise afford. Access to its coverage may also make the defendant more amenable to an early settlement.

Further, potentially limit the demand for damages to an amount that is recoverable by the defendant’s insurance. Ask whether the defendant has a policy during discovery. Should the responses indicate specific conditions be met before that coverage is available, consider amending the complaint. Some jurisdictions even allow the insurer to be named in the lawsuit.

Already Involved in a Dispute?

First, contact your insurer. Early notice is crucial because many provisions require claims be reported as soon as practical. The first opportunity to notify the insurer is upon receipt of the C&D letter, even if you doubt the matter will go farther. With your insurer, look at the provisions in your current business policies to determine if the claims trigger coverage. Your Commercial General Liability (CGL) policy may have an “advertising” provision that expressly covers infringement claims occurring in the course of the policyholder’s advertising activities. A Directors and Officers (D&O) provision may defend an employee in a lawsuit if a decision that resulted in infringement was made by him/her in good faith. Cyberspace and umbrella policies, among others, may offer coverage as well.

After determining that a policy is in place, look at the pleadings to determine if the basic requirements are met. Generally, the complaint (or C&D letter) must allege an enumerated injury or offense; that the insured-defendant engaged in activity that falls within the policy definition; that injury arose out of that activity; and that the activity occurred within the policy period. The complaint must be analyzed because some policies exclude certain IP risks. While the policy language may also be susceptible to multiple meanings, the interpretation adopted by the court having jurisdiction can offer guidance.

Whatever your IP strategy is, the different forms of coverage are worth exploring. A policy can be structured to meet your specific needs.

Mandy is an attorney with Fay Sharpe LLP. If you have questions about the subject matter of this article or IP law in general, you may reach Mandy at mwillis@faysharpe.com or 216.363.9176.

March 9th, 2017

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