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Rest Insured

How the right insurance policy can protect you in a patent lawsuit

Here's an eye-opening fact: In the 1997 Economic Survey by the American Intellectual Property Law Association (IPLA), the median cost of litigating a patent infringement lawsuit through trial can range from $300,000 to $3 million.

Intellectual property litigation is one of the most expensive forms of litigation in our country. So what can a strapped-for-cash entrepreneur do when he or she needs to defend the most valuable asset of his or her fledgling company?

There is good news, but first let's lay a little groundwork. Once you are issued a patent by the U.S. Patent and Trademark Office (PTO), you immediately have the right to exclude others from the manufacture, use or sale of your patented product. However, once your idea is patented, it's vulnerable to legal challenges. Your patent can be attacked and possibly invalidated, thus rendering it worthless. It's up to you to enforce and defend it. If you choose not to, however, your intellectual property rights will be abandoned and possibly lost forever.

Most patents are invalidated by competitors appealing to the PTO using one or all of the following attacks:

1. The invention isn't novel because it existed prior to the patent.

2. The invention is not unique but rather obvious to one skilled in the industry of the invention.

3. The invention is not new and useful.

To make matters worse, winning one lawsuit does not make you immune to future lawsuits. Your patent can be challenged repeatedly. One of my patents has been challenged at least five times, and each time I've had to pay to defend it. It's easy to understand why more than 50 percent of patent lawsuits are brought by large corporations, according to the IPLA: They can more easily afford the cost than can individuals or small companies who don't have the means to enforce their patents.

On the flip side, your company can be sued by anyone who feels your product infringes on their patent. The Uniform Commercial Code (UCC) is a federal code that relates to the sale of goods between states. Most states have also adopted this code (with a few changes) for sale of intrastate goods as well. Section 2.312(3) of this code contains a provision that requires all who manufacture and sell goods to warrant that these goods are free from infringement. This provision forces you to defend your customers in the event they are sued because they bought a product from you that infringes on another patent. Again, this is a very expensive endeavor.

Many entrepreneurs think their general liability insurance policy will cover them if such a defense is necessary. Think again. Most general liability insurance policies are carefully written to exclude infringement defense. Check your policy under the "Advertising Injury" heading to find out whether the term "piracy" is included. If it is, your insurance company is obligated to defend any patent infringement actions brought against you. If it isn't, chances are you're on your own.

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This article was originally published in the November 1997 print edition of Entrepreneur with the headline: Rest Insured.

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