Intellectual property (IP) insurance coverage is having a moment. The post-pandemic economic recovery has been driven to a large extent by technology startups.1 For a new tech company, strong IP can provide both a competitive and fundraising advantage. Without the ability to protect that IP, the advantage is limited. Effective and appropriate insurance coverage, however, can both preserve the company's intellectual property and provide its own basis for corporate exceptionalism and exclusivity.
Not all intellectual property is created equal. Neither is IP coverage. Intellectual property insurance coverage policies are manuscripted, meaning the coverage is not written on uniform state-approved forms, but with unique terms and provisions that may vary from policy to policy. Intellectual property coverage may be (1) defensive; (2) offensive; (3) contingent; or (4) some variant of these three. At a very basic level, defensive IP coverage will defend and indemnify the insured against suits alleging infringement, which may include coverage for affirmative inter partes review (IPR) proceedings challenging the validity of the claimant's patent(s) and/or satisfying claims by indemnitees embroiled in litigation over the insured's licensed IP. Offensive IP insurance will cover the insured's enforcement of its own intellectual property, such as affirmative infringement claims against and unlicensed third-party. Contingent IP coverage is like other litigation insurance because it is intended to bracket existing litigation risk by protecting the insured against catastrophic loss in an ongoing IP case. Other variations on these coverages may include residual value insurance, which protects the value of intellectual property assets pledged as collateral for secured loans, or trade secret value insurance, which protects the value of trade secrets in the event of misappropriation.
Litigation risk for IP-heavy businesses can be substantial. Attorneys' fees, expert expenses and other costs in patent infringement litigation may consume a substantial portion of the value of the IP at stake.2 And the ultimate damages at issue may be catastrophic.3 Because of the high cost of litigation, defensive IP coverage is, by far, the most prolific IP insurance product available in the market. For those companies who have never purchased defensive intellectual property coverage or for those companies going through a renewal, here are seven key policy terms to consider:
- Trigger of Coverage & Notice. The
trigger of coverage is the event described in the policy that must
happen before the insured is obligated to give notice and the
insurer is required to start paying to defend the insured or an
indemnified party. Some policies will specify that the triggering
event is a "claim" or "demand" for compensation
made by a third-party during the policy period. Other policy
wording may include claims and demands, but also a licensing
request or other circumstance, which, whether objectively or
subjectively, is likely to give rise to a future demand or
litigation. Although individual considerations may vary, if the
right "circumstance" can warrant the retention of counsel
to investigate and preemptively defend against a potential
infringement claim, many insureds will prefer a more inclusive
trigger of coverage, as opposed to waiting for a specific demand
before coverage incepts. At the same time, those policyholders, who
elect the broader coverage trigger will also need to ensure that
timely notice is provided in response to such circumstances and not
only in the event of a specific "claim." In either case,
policyholders should carefully review and be familiar with the
terms defining the trigger of coverage and notice obligations both
before and after purchasing a defensive IP insurance policy.
- Related Claims Provisions. Like other
"claims made" coverages, some IP insurance provisions,
including those embedded in professional or media liability
policies, will provide that all "claims" arising out of a
common set of facts and circumstances are deemed to be a single
claim first made when the earliest of the claims was made. Such
provisions may be intended by underwriters to prevent a situation
in which multiple policies apply to a single claim. But in the
hands of an adverse claims adjuster, these provisions can be
manipulated to avoid coverage. For example, a lawsuit in year one,
involving bodily injury arising out of a defect in a patented
product or an alleged misrepresentation in a disclosure about the
insureds' intellectual property, could undermine coverage for a
patent infringement lawsuit involving the same IP in year
2—unless the IP policy's "related claims"
provision is narrowed. To avoid a situation in which failure to
give notice of non-IP litigation under an IP litigation insurance
policy results in a potential loss of coverage, "related
claims" provisions should be worded to aggregate only claims
alleging the insured engaged in infringement of a third-party's
intellectual property.
- Defense Costs & IPR Proceedings. A
policyholder, who purchases defensive IP insurance coverage, can
reasonably expect the policy to cover the cost of defending against
allegations that the insured is infringing a third-party's
patent, copyright, trademark or other intellectual property. But
what if "defending" against a claim of patent
infringement involves challenging the validity of the third-party
claimant's patent in an IPR proceeding? Will the insured's
initiation and affirmative pursuit of an IPR proceeding be
considered defensive or outside the scope of the policy's
coverage? Brokers, risk managers and counsel advising an insured on
the purchase of IP coverage should carefully review policy terms to
ensure that the cost of pursuing an IPR proceeding or other
"affirmative" actions taken to defend against allegations
of IP infringement, including counterclaims or third-party actions,
are not excluded from coverage. Policyholders should also avoid,
where possible, those exclusions that would preclude coverage for
counterclaims or cross-claims initiated by an insured in defending
otherwise covered IP litigation.
- Infringement Withdrawal Expenses.
Defensive IP insurance policies will typically insure
"loss," including defense costs and amounts payable to a
third-party claimant as damages in satisfaction of a judgment or
settlement. But beyond compensation for a plaintiff or indemnitee,
a policyholder found liable for infringement may also incur
substantial expenses to become compliant by, among other things,
withdrawing any infringing product from the market. These costs may
include transportation, labor, storage, labelling, and public
relations. To avoid potential disputes over whether such expenses
qualify as "damages," those considering purchasing IP
coverage and exposed to this risk should review a prospective
policy's terms with an eye toward coverage for infringement
withdrawal expenses.
- Fee Awards. Depending on the nature of
the intellectual property claim against the insured, the
plaintiff/claimant may be entitled to recover attorney's fees,
costs or other expenses against the insured. For the reasons
articulated above, such fee awards may be substantial. Prospective
purchasers of IP insurance coverage should review policies to
confirm that coverage is extended for an adversary's award of
fees or costs, particularly where the policy otherwise addresses
the recovery of the insured's fees and costs in
subrogation.
- Contractual Liability
Exclusions. Intellectual property risk for potential
defendants and insureds exists on at least two levels. For example,
a non-practicing entity may pursue statutory claims for
infringement of a patent, copyright or trademark against a
practicing policyholder without establishing any privity or other
relationship between plaintiff and defendant. Alternatively, a
licensee may, by exceeding the constraints of a limited license,
incur both statutory and contractual liability to a licensor. An
insured may also incur liability through a contractual promise to
indemnify a licensee accused of infringement by a third-party.
Despite the potential overlap between infringement and contractual
liability, some IP insurance policies include exclusions purporting
to eliminate coverage for any claim arising from any breach,
repudiation, termination or suspension of any written contract,
license or other agreement by the insured. In evaluating coverage
terms, policyholders should carefully scrutinize contractual
liability exclusions (1) to avoid potential conflicts with express
coverage for liability to indemnified parties; and (2) to ensure
consistency with the parties' intent to provide coverage for
patent infringement liability, even when framed in terms of a
breach of contract.
- Bad Conduct Exclusions. Like customary D&O policies, many defensive IP insurance policies include exclusions for claims (1) arising from an Action or Licensing Request caused or contributed to by the Insured's actual or alleged dishonesty, fraudulent, malicious or criminal conduct; and/or (2) arising from the Insured gaining any profit or advantage to which the insured is not legally entitled. While these kinds of exclusions may be appropriate for a traditional D&O policy, such terms have no place in an IP insurance policy to the extent that they conflict with and potentially eviscerate coverage for infringement claims that necessarily require as elements of proof some evidence that the defendant insured engaged in acts of unauthorized infringement. At a minimum, the policyholder should insist upon exceptions, also typical of D&O insurance, for the defense of otherwise covered claims and requiring a final, non-appealable adjudication of the excluded conduct.
No insurance policy is perfect. Nor will underwriters always agree on every policy enhancement or modification in terms requested by an insured. But focusing on the foregoing terms will provide policyholders an opportunity maximize defensive IP insurance coverage in the event of substantive underlying infringement litigation.
Footnotes
1. See, e.g., Yusuf Berkan Altun, Pandemic Fuels Global Growth of Entrepreneurship and Startup Frenzy, Forbes (Apr. 9, 2021), available at https://www.forbes.com/sites/forbestechcouncil/2021/04/09/pandemic-fuels-global-growth-of-entrepreneurship-and-startup-frenzy/?sh=7eb8fcb97308; Howard Schneider, Soaring U.S. business starts in pandemic show new normal evolving, Reuters (Oct. 28, 2021), available at https://www.reuters.com/business/soaring-us-business-starts-pandemic-show-new-normal-evolving-2021-10-28/; Andrea Hsu, New businesses soared to record highs in 2021. Here's a taste of one of them, NPR (Jan. 12, 2022), available at https://www.npr.org/2022/01/12/1072057249/new-business-applications-record-high-great-resignation-pandemic-entrepreneur.
2. See generally AIPLA, Report of the Economic Survey (2021).
3. Britain Eakin, Intel Hit With $2.18B Jury Verdict In VLSI Patent Fight, Law360 (Mar. 2, 2021), available at https://www.law360.com/articles/1360627.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.