David Gauntlett joins us for a conversation on the intersection of intellectual property, insurance and risk management. In Part III, David discusses various strategic issues that confront IP practitioners and corporate counsel.
IP insurance often gets overlooked, especially when limited resources are often assigned to other priorities. But, with the best coverages available issued on a claims made and reported basis for media liability or straight IP coverage, waiting to secure policies until after business operations generate income can be problematic. This is because such policies are typically issued with the inception date on a claims made and reported basis as of the date of their purchase. The danger is that any operational activity that creates liability for claims of IP infringement may predate the purchase of these policies.
Policyholders must therefore seek a policy form that has no retroactive date or one that is coterminous with the start of business operations. The longer the enterprise has been in existence, the harder it is to secure that kind of coverage.
The amount of liability coverage can grow as the company’s operations mature but some form of media liability coverage upon enterprise inception is the smartest move many companies may take to allow their technology and innovation to not be snuffed out by more well-healed competitors who use intellectual property litigation as competition by other means to eliminate startups that do not have the financial ability to defend themselves or their product. It matters not if the startups’ IP rights are stronger if it does not have the ability to pay for litigation expenses it will incur in resisting IP claims brought by larger competitors or fighting through legal barriers to enter a key market segment.
What kind of IP issues do inventors and business executives face? What are common pitfalls you see C-suite executives making when they look for IP insurance? What makes IP Insurance so important and what are some strategic uses of insurance coverage in IP disputes?
On the abatement side, the ability to have insurance funding to enforce IP rights can be critical to helping new companies gain market penetration and become viable. Having patent rights simply means you have procured a right to sue. Without the wherewithal to sue infringers, patent rights may be of limited value.
Some forms of technology, especially those involving business patents, may take years to secure. In the interim, placing potential infringers on notice of the right string sought by a patent applicant can forestall competitors from gaining a foothold in an emerging market. If competitors know that their conduct may be deemed infringing, a larger competitor may choose to work for the smaller innovator that has the patent rights – simply because it knows that any alleged infringer’s business profits may ultimately belong to the innovator if it successfully pursues a patent infringement suit.
On the flip side, C-Suite executives need to make sure that they have defensive coverage for what can be time consuming and expensive IP litigation. In one case, an Asian-based competitor was sued in an ITC proceeding where six figure monthly defense fees were incurred in short order given the rapidity with which such actions move. The federal court lawsuit was stayed while that ITC action proceeded. Even though it included covered trade dress infringement allegations, an issue arose about whether the nature of the ITC proceeding itself was potentially covered because no damage remedy was available in an ITC forum.
However, the complaint in the ITC proceeding sought recovery of “such other and further relief” which includes a potential award of attorneys’ fees. Fees awarded to successful ITC claimants has been held by courts to be a form of damages because it is money ordered by a court and thus satisfies the “as damages” element of commercial general liability coverage. Consequently, even though the ITC proceeding was not (as clearly as the stayed federal court action) one in which compensatory damages were clearly sought, it was nonetheless a proceeding which the elements of the asserted claims triggered potential coverage.
Another interesting aspect of the above-referenced case is that the stay of one action does not mean that related actions cannot be within the defense parameters of the stayed action. Exposure remains for the other actions that have not been finally determined. That is, legal activity in an ITC case may trigger the insurer’s duty to defend because the proceeding involves an activity “conducted against liability.” Further, the legal proof to establish ITC liability can be used against the defendant in the stayed action following its conclusion in a manner that makes it essential to defend that claim not only to get over the practical issue of assuring the right to import product into the U.S., but also by showing no liability can arise for that activity.
What are some strategic points that IP Practitioners and Corporate Counsel should bear in mind in securing coverage to address IP claims? What do IP practitioners and corporate counsel typically not understand about the intersection between insurance and IP that can make a difference for their clients? What forms of insurance coverage do you recommend to companies who have IP exposure in light of the available products in the marketplace, including proposed levels of self-insurance?
Think not only of the operational activities that lead to IP defense exposure, but also whether IP pursuit may be part of what the company needs to contemplate to protect its market share. Counterclaims are an area of focus now and can trigger coverage if they involve forms of unfair competition, disparagement, defamation, malicious prosecution, abuse of process and other competitive activities that may implicate coverage under a CGL or certainly media liability policy, even absent an express IP policy. Also keep in mind that while an IP policy is the gold standard to secure ready defense benefits, not all companies need indulge in that expense especially where they are venturing into new product arenas where the value of their new enterprise and their products are untested and the costs of securing IP coverage may be difficult to justify until that market develops.
The first step is to seek the broadest coverage available under the commercial general liability form. Typically, that is an ISO policy form, and will cover such offenses as offense (f) “use of another’s advertising idea in your ‘advertisement,’” and (g) “infringement of copyright, trade dress or slogan in your ‘advertisement.’” These coverages can implicate a duty to defend in a number of typical IP claims even though they will not readily extend to coverage of trade secret and patent suits, or straight up limited trademark infringement claims. Beyond the commercial general liability form, remember that media liability coverage will address trademark infringement claims and that IP policies are the only way to secure direct coverage for patent and trade secret.
Often IP lawsuits involve a mixture of covered and uncovered claims. Typically, when facts are intermingled between covered and uncovered claims, the whole lawsuit, including uncovered claims, must be defended by the insurer and that can be a significant benefit.
Finally, a denial letter from an insurer is simply an opinion, often wrong and frequently un-researched and unsubstantiated by analysis of case law and the facts, especially as they are likely to develop given the larger dispute between the parties which the initial IP lawsuit may only touch the surface Again, the analogy to an iceberg is relevant, the 90% below water may be where the coverage exists and to definitively conclude that it does not exist at the beginning of a lawsuit is improper.