The U.S. Patent and Trademark Office (USPTO) has issued more than 10 million patents since 1836 (source 2). The number granted has grown exponentially over the last twenty years, with more than 350,000 patents issued in 2019 (source 1). As the number of patents increases, so does the opportunity for infringement. Patent infringement occurs when a patent owner alleges that products or services being manufactured, sold, or distributed by another company infringe on their patent rights. When this happens, litigation often ensues, with the plaintiff seeking an injunction against further sale of the infringing product or service along with payment of royalties or damages. The cost of defending or settling such a claim can be devastating. As of 2017, the average total cost for defending a patent infringement case worth up to $10 million, was $1.7 million.6 While larger companies may be equipped to handle millions of dollars in legal fees and settlements, patent litigation can bleed small to mid-sized companies dry.
WHO NEEDS PATENT INFRINGEMENT LIABILITY INSURANCE?
Over the last 20 years the consumer products, biotechnology, computer hardware/software, and medical device industries have been hit hardest by patent infringement claims, but it would be misguided to think that any industry is immune from patent infringement.8 Even so, businesses all across the board often incorrectly assume that patent infringement liability is only needed if a company develops products and has received a patent. In actuality, businesses are most vulnerable to litigation during the development process because competitors typically want to stop the production and sale of alleged infringing products or services. Patent infringement often occurs when two companies, working independently, create essentially the same process, service, or product. The company that applies for a patent and can prove that it was the first creator is awarded the patent. As both companies rush their newest offerings to market, the company without the patent can inadvertently launch a new product that infringes on the patent rights of the other.7
Companies that don’t develop products may think they’re safe, but according to U.S. code 35 section 271, a patent excludes any other party from manufacturing, using, selling, offering-to-sell, exporting, or importing a patented product or service.9 This means that the product or service’s end user can be sued for patent infringement based solely on using a patented invention. Distributors can be sued for selling a patented product or service, and manufacturers can find themselves the target of a patent infringement claim for making and/or selling a patented item. Not only can manufacturers and distributors be sued for direct patent infringement, they can also be the target of indirect patent infringement claims if they contribute to another party’s patent infringement by providing a vital component of a larger, patented invention.10
As if possible infringement upon the existing, patented inventions of others weren’t enough, businesses not protected by patent infringement liability insurance also run the risk of falling prey to non-practicing entities, known as patent trolls. These companies buy up unused patents without any intention of ever developing an actual product. The patents are purchased solely for the purpose of filing patent infringement claims in court to win high-value judgments or suppress competition. Doing battle with a patent troll often results in threats of bad faith infringement and licensing demands that can cost companies big without actually generating any contribution to the public good.4 It’s tempting to assume that the current COVID-19 pandemic and resulting economic slowdown would reduce patent threats as companies, especially many smaller ones, struggle to keep the doors open. In reality, about one-third of patent troll lawsuits target small to mid-sized businesses, and patent infringement lawsuits are up 20% from 2019.5
HOW DOES PATENT INFRINGEMENT LIABILITY PROTECT INSUREDS?
Patent infringement liability insurance is an important piece of any businesses risk management plan. It generally covers the fees and expenses of the professional advisers needed to defend against patent infringement claims as well as payment of any settlement or damages if the insured is found to be at fault. The Professional Fees and Expenses covered often include legal and court fees, expert witness fees, and the cost of any countersuits filed, such as invalidation or counter-infringement. Similar to additional insured status, patent infringement policies can also often extend indemnification coverage to a company’s clients in the event of vicarious exposure for selling or using a company’s product. This level of coverage is often required by retailers or technology company clients utilizing proprietary software because patent infringement litigation can be far-reaching.
Even with the prevalence of patent infringement claims in today’s litigious environment, many companies have remained unaware of their level of patent infringement exposure or have incorrectly assumed the risk was covered by another form of insurance. While it is true that some insurance policies, such as professional indemnity or Cyber Liability, often include some elements of Intellectual Property infringement, these policies typically exclude patent infringement. In addition, many Directors and Officers liability policies exclude patent infringement suits as well. Companies have also been known to avoid consideration of patent insurance because it has typically required a long and arduous underwriting process. Until recently, the patent insurance marketplace has consisted of only one or two insurers at any given time. But the marketplace is expanding, and the mild proliferation of carriers means that insurers are becoming slightly more competitive and flexible in both underwriting and pricing.
Anyone that manufacturers, sells, distributes or markets products, uses processes, or provides services has some level of patent infringement exposure. Businesses aren’t required to own a patent in order to obtain patent infringement liability coverage, and are actually most vulnerable when they don’t hold a patent.
Often, preliminary pricing guidance can be provided based solely on the insured’s revenues and industry. Insureds that wish to obtain a complete quote should be prepared to provide additional data including information about their location and business status as either a startup, emerging, or established company. Underwriting will likely also evaluate the general litigiousness of the specific industry when it comes to patent infringement. Submissions should also detail the strength of an insured’s patent infringement risk management efforts, including how a company’s products are reviewed to determine if they infringe on another’s patent and how much due diligence is completed around intellectual property issues before releasing a product or service.
Patent infringement is becoming a more common problem in our globalized economy as new products are designed, developed, manufactured, distributed, sold and used in countries all around the world.7 Contact your CRC Group producer to discuss how we can help clients protect against possible patent infringement exposures in today’s interconnected marketplace.
- Alex Slawson is a Senior Vice President of Financial Services with CRC’s San Francisco office.
- Number of Patents Issued in the United States from FY 1999 to FY 2019, Statista, 2020. https://www.statista.com/statistics/256571/number-of-patent-grants-in-the-us/
- The U.S. Patent Office has Issued 10 Million Patents, The Verge, June, 19, 2018. https://www.theverge.com/2018/6/19/17478898/uspto-utility-patents-10-million-issued
- What Number of Patents are Approved? PatentRebel, 2020, https://patentrebel.com/what-percentage-of-patents-are-approved/
- What is a Patent Troll? Investopedia, July 3, 2020. https://www.investopedia.com/terms/p/patent-troll.asp
- New Low for a Bad Patent: Patent Troll Sues Ventilator Company, Electronic Frontier Foundation, May 20, 2020. https://www.eff.org/deeplinks/2020/05/new-low-bad-patent-patent-troll-sues-ventilator-company
- Cost of Patent Infringement Litigation Falling Sharply, Bloomberg Law, August 11, 2017. https://news.bloomberglaw.com/business-and-practice/cost-of-patent-infringement-litigation-falling-sharply
- Patent Infringement: It's More Common than You Think, Industry Week, August 28, 2012. https://www.industryweek.com/innovation/intellectual-property/article/21958141/patent-infringement-its-more-common-than-you-think
- Share of Patent Litigation Cases in the United States Between 1998 and 2017, by Industry, Statista, April 28, 2020. https://www.statista.com/statistics/257245/number-of-patent-litigations-in-the-us-by-industry/
- 35 U.S. Code § 271.Infringement of Patent, Cornell Law School Legal Information Institute, 2020. https://www.law.cornell.edu/uscode/text/35/271
- Everyone in the Supply Chain Could Be Sued for Patent Infringement, OC Patent Lawyer, July 29, 2014. https://ocpatentlawyer.com/everyone-in-the-supply-chain-could-be-sued-for-patent-infringement/