Rest Insured

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

Magazine Contributor

November 1, 1997 6 min read

This story appears in the November 1997 issue of Entrepreneur. Subscribe »

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.

Taking Cover

What all this means for small-business patent holders is that without a six-figure legal expense fund, your patent rights could be lost forever in a court of law. Is there any hope? Happily, there is. A great cause for optimism appeared in 1989 when the insurance industry announced a new type of intellectual property insurance called infringement abatement insurance. Then, in December of 1996, it offered a second type, called defense cost reimbursement insurance. Here's a look at both:

Infringement abatement insurance insures you, the patent holder, should you need to enforce your patent against an infringer. It will also reimburse you for 75 percent of your legal expenses and pay your legal costs should you be countersued for patent invalidity. These policies typically cover both U.S. and foreign patents. You can also get this type of insurance for patents that have not yet been issued (if the application process is underway). There is no deductible, and your financial contribution is 25 percent of the costs. The limits are $100,000, $250,000 and $500,000 per claim, with the respective average annual premiums running in the neighborhood of $1,555, $2,150 and $3,093, not including state and local taxes and applicable process fees. As the insured, you have control over the litigation; you select the attorney you want to represent you; and you dictate the settlement terms, if there are any.

The advantages of carrying this kind of insurance are great. Having the financial ability to protect your patent against infringement gives you power against your infringers while protecting you from an unexpected cash drain on your operations. The pressure to settle for less is reduced. And your patent becomes more attractive to investors when they know you have the means to defend it.

Another feature you receive with infringement abatement insurance is the Early Intervention Program. This program entitles you to request the Intellectual Property Insurance Services Corp. (IPISC) to contact a suspected infringer by letter and advise them of the existence of your patent and that it is insured. This program boasts a greater than 80 percent resolution rate without the insurer having to go to trial.

Defense cost reimbursement insurance reimburses you for legal expenses when you have to defend yourself against patent infringement lawsuits or when you assert patent invalidity as a defense to a patent infringement charge. The policy will also reimburse the cost of challenging a patent to reexamination proceedings if your defense strategy warrants it.

This type of insurance will reimburse 75 percent to 90 percent of your legal expenses with a $2,500 deductible for each claim. The limits are $250,000 and $500,000 per claim with a minimum annual premium of $2,500 and $3,500, respectively. The premium is calculated based on the size of your company and other qualifying factors.

For more information on these two types of insurance, or to get a quote, call the IPISC at (800) 537-7863.

I only wish I had known about these types of insurance before my patent battles began. Faced with many knockoffs, I fought legal battles in courts throughout the country. Too much of my time and energy was wasted on legal struggles. Like many business owners faced with this situation, I had little time to focus on growing my business and putting creative ideas into action.

When the dust finally settled on all my patent lawsuits, I had spent over $1 million on litigation. And I was fortunate because I had already penetrated the marketplace before the knockoffs started appearing; this stroke of luck provided me with the capital to fund my legal defense.

You should seriously consider these two types of insurance. That old saying "An ounce of prevention is worth a pound of cure" is good advice when building an entrepreneurial enterprise. Take every step to protect your idea before selling it on the open market, where the jaws of competition can chew you to pieces.

Tomima Edmark is the inventor of the Topsy Tail, the Kissing Machine and several other products, and is author of The American Dream Fact Pack ($49.95), available by calling (800) 558-6779. Write to her with any questions you may have regarding inventions or patents in care of "Bright Ideas," Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.