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

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

Intellectual property litigation is one of the most expensiveforms of litigation in our country. So what can a strapped-for-cashentrepreneur do when he or she needs to defend the most valuableasset 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 TrademarkOffice (PTO), you immediately have the right to exclude others fromthe manufacture, use or sale of your patented product. However,once your idea is patented, it's vulnerable to legalchallenges. Your patent can be attacked and possibly invalidated,thus rendering it worthless. It's up to you to enforce anddefend it. If you choose not to, however, your intellectualproperty rights will be abandoned and possibly lost forever.

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

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

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

3. The invention is not new and useful.

To make matters worse, winning one lawsuit does not make youimmune to future lawsuits. Your patent can be challengedrepeatedly. One of my patents has been challenged at least fivetimes, and each time I've had to pay to defend it. It'seasy to understand why more than 50 percent of patent lawsuits arebrought by large corporations, according to the IPLA: They can moreeasily afford the cost than can individuals or small companies whodon't have the means to enforce their patents.

On the flip side, your company can be sued by anyone who feelsyour product infringes on their patent. The Uniform Commercial Code(UCC) is a federal code that relates to the sale of goods betweenstates. Most states have also adopted this code (with a fewchanges) for sale of intrastate goods as well. Section 2.312(3) ofthis code contains a provision that requires all who manufactureand sell goods to warrant that these goods are free frominfringement. This provision forces you to defend your customers inthe event they are sued because they bought a product from you thatinfringes on another patent. Again, this is a very expensiveendeavor.

Many entrepreneurs think their general liability insurancepolicy will cover them if such a defense is necessary. Think again.Most general liability insurance policies are carefully written toexclude 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 isobligated to defend any patent infringement actions brought againstyou. If it isn't, chances are you're on your own.

Taking Cover

What all this means for small-business patent holders is thatwithout a six-figure legal expense fund, your patent rights couldbe lost forever in a court of law. Is there any hope? Happily,there is. A great cause for optimism appeared in 1989 when theinsurance industry announced a new type of intellectual propertyinsurance called infringement abatement insurance. Then, inDecember of 1996, it offered a second type, called defense costreimbursement insurance. Here's a look at both:

• Infringement abatement insurance insures you, the patentholder, should you need to enforce your patent against aninfringer. It will also reimburse you for 75 percent of your legalexpenses and pay your legal costs should you be countersued forpatent invalidity. These policies typically cover both U.S. andforeign patents. You can also get this type of insurance forpatents that have not yet been issued (if the application processis underway). There is no deductible, and your financialcontribution is 25 percent of the costs. The limits are $100,000,$250,000 and $500,000 per claim, with the respective average annualpremiums running in the neighborhood of $1,555, $2,150 and $3,093,not including state and local taxes and applicable process fees. Asthe insured, you have control over the litigation; you select theattorney you want to represent you; and you dictate the settlementterms, if there are any.

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

Another feature you receive with infringement abatementinsurance is the Early Intervention Program. This program entitlesyou to request the Intellectual Property Insurance Services Corp.(IPISC) to contact a suspected infringer by letter and advise themof the existence of your patent and that it is insured. Thisprogram boasts a greater than 80 percent resolution rate withoutthe insurer having to go to trial.

• Defense cost reimbursement insurance reimburses you for legalexpenses when you have to defend yourself against patentinfringement lawsuits or when you assert patent invalidity as adefense to a patent infringement charge. The policy will alsoreimburse the cost of challenging a patent to reexaminationproceedings if your defense strategy warrants it.

This type of insurance will reimburse 75 percent to 90 percentof your legal expenses with a $2,500 deductible for each claim. Thelimits are $250,000 and $500,000 per claim with a minimum annualpremium of $2,500 and $3,500, respectively. The premium iscalculated based on the size of your company and other qualifyingfactors.

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

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

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

You should seriously consider these two types of insurance. Thatold saying "An ounce of prevention is worth a pound ofcure" is good advice when building an entrepreneurialenterprise. Take every step to protect your idea before selling iton the open market, where the jaws of competition can chew you topieces.

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

Contact Sources

American Intellectual Property Law Association, (703)415-0780, http://www.aipla.org

Intellectual Property Insurance Services Corp., (800)537-7863, http://www.infringeins.com