Pursuit and Defense of Patent Infringement at Insurer’s Expense
/Pursuit and Defense of Patent Infringement at Insurer’s Expense
By David A. Gauntlett*
Introduction
Patent infringement litigation fees constantly escalate. According to a 2023 American Intellectual Property Law Association (“AIPLA”) survey, the median cost of litigating a patent lawsuit through trial ranges from $600k when the amount in controversy is less than $1M to $3.625M when the amount is over $25M.[1] Patent holders have secured significant settlements and judgments premised on reasonable royalty awards. These recoveries have led patent litigation entities such as Burford to finance this litigation.[2] Cross-licensing of patents also factors into resolutions of these lawsuits. Companies that do not have a significant patent portfolio cannot exchange licensing rights with competitors to resolve infringement disputes. Therefore, the inability to afford costly patent litigation may cause the abandonment of key market advantages that are central to the company’s strategy.
Options for IP Pursuit Insurance
Known as “pursuit,” “abatement,” or “enforcement” coverage, These policies reimburse a policyholder for legal expenses it incurred in pursuit of a patent infringer. The industry pioneer is Intellectual Property Insurance Services Corp. (“IPISC”). It continues to offer policies ranging in price for limits as low as $250k and as high as $10M. Not a traditional form of insurance, it is a risk-transfer mechanism with insurance-like aspects that call into play insurance policy benefits.
Over the years, other insurers have entered this market with varying degrees of success. One is CFC, who specializes in Cyber and Intellectual Property coverage options for smaller entities that include professionals. Their policies reimburse intellectual property counsel fees incurred in pursuing patent litigation. The CFC policy provides:
We agree to pay on your behalf costs and expenses incurred, subject to you demonstrating reasonable prospects of success in accordance with CONDITION 3, as a result of any pursuit claim made by you against a third party arising out of the infringement, whether actual, alleged or threatened, of a patent owned by you or for which you have an exclusive license, provided that the infringement is first discovered by you during the period of the policy.
Typical issues are whether: (1) a viable infringement claim exists; and (2) facts not disclosed at time of application bar the right to pursue a claim (i.e., an on sale bar applies because products within patent claims were advertised one year or more prior to application for the patent).
Defense Is Often More Significant Than Procuring Pursuit Coverage
When shopping for IP Pursuit coverage, the policyholder should not neglect its own potential liability as complaints may precipitate IP claims against it. In fact, many policies offer both forms of patent coverage in one package. Some policies (such as that issued by AIG) are strictly limited to IP coverage, while others come in the form of a Media Policy. The version offered by CFC[3] excludes patent and trade secret claims but includes copyright and trademark infringement.[4] The CFC IP policy also includes Directors & Officers (“D&O”) coverage.[5] This policy, like many D&O policies, does not include exclusions for any IP claims including patent or trademark infringement where an individual officer or director is named as a defendant.
A significant issue in comparing patent infringement defense policies is determining what infringement claims fall within a particular policy’s scope. For example, both AIG’s and OPUS Underwriting’s policies preclude coverage for pre-existing infringement. AIG’s exclusion, however, is more strict, excluding all infringement occurring prior to the policy’s inception. By contrast, OPUS’s only applies if the infringement was known by the policyholder prior to the inception date.
Coverage Counsel Is Key in Evaluating Policies
Properly assessing which purveyor of IP policies best suit the needs of a particular business requires not only access to the market but appreciation of what language may be interpreted by a court to include. IP savvy counsel can best discern preferred choices to assess how courts might interpret policy language once claims arise that are proffered to insurers for procurement of policy benefits.
Coverage counsel, unlike insurance brokers, may extend the protection of attorney-client privilege to these consultations. This facilitates freedom of discussion to analyze all of the needs of a business in its quest to acquire the most appropriate coverage. For example, a policyholder that receives a demand letter asserting patent infringement claims may be able to procure patent or other IP defense policies where the policy applications do not require disclosure of such communications to the insurer. But seeking a broker’s advice on which policy to procure would not be protected by the attorney-client privilege.
Significant Distinctions Between Patent Defense Policies
Unlike many policy types (such as CGL policies) that are largely standardized, patent policies vary widely.[6] For example, AIG’s Patent Infringement Indemnity Insurance policy only provides coverage for insureds domiciled in the United States, whereas OPUS Underwriting’s Sabre policy excludes entities domiciled in the United States. Available policy limits range from $100k (Chubb) to $185M (Ambridge Partners).
Tokio Marine Kiln policy language is typical:
Any written notice received by the Insured, or an Indemnified Party that it is the intention of any person or entity to hold the Insured or the Indemnified Party responsible for monetary damages or injunctive relief; arising from the Insured’s or the Indemnified Party’s alleged infringement of third party IP rights, and Awareness of infringement of the Insured Intellectual Property or breach of an Insured Contract.[7]
One variation on this policy wording comes from Ambridge Partners, which includes “any cease and desist letter” as part of its policies’ “claim” definition.[8] Knowing what is covered will facilitate the best use of IP coverage.
Before committing to a particular policy, several important questions must be addressed. Expert coverage counsel may be consulted for a thorough consideration of the following issues:
When is it advisable to file a protective declaratory relief action to secure the forum most favorable for coverage?
What pleadings or other communications from an opposing party trigger an opportunity for a defense?
Does the company’s history of acquisitions, joint venture relationships and other forms of corporate interaction expand the coverage opportunities available to it in a manner that requires revisitation of the potential for coverage under previously filed and existent lawsuits?
Can knowledge of insurance coverage help corporations reallocate risks arising from licensing activities to better assure against problems posed by defaulting or under-performing licensees?
Can an insurance coverage audit reveal hidden opportunities to recapture monies paid for defense fees/settlements and/or judgments under existing insurance policies and, given the exposure revealed by a review of past coverage opportunities, is the present insurance portfolio properly attuned to risks your company now confronts.[9]
Conclusion
Securing coverage for patent pursuit or defense policies requires prospective policyholders to address a number of challenging policy application questions. This inquiry is a valuable checklist to shore up the risk management profile of any business policyholder. Where issues arise that render such policies problematic, other resources to address potential exposure including litigation financing, cross-licensing, or strategic acquisition of patent insurance are other resources to consider in this IP coverage evaluation.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] 2023 AIPLA Report of the Economic Survey.
[2] For more information, view Burford’s website here: https://www.burfordcapital.com/what-we-do/disputes-we-finance/patent-ip/.
[3] For a more granular examination of several options from various insurers, see https://drive.google.com/file/d/1gH7EXZjqWBaD8RFygMFpkj9wJ1COLTTF/view?usp=sharing.
[4] For a discussion of the unique protections offered by Media Policies, see David A. Gauntlett, Insurance Coverage for Intellectual Property Risks, https://www.gauntlettlaw.com/news/insurance-coverage-for-intellectual-property-risks-1 (July 15, 2021). Commercial General Liability (“CGL”) policies may also offer some limited coverage opportunities. David A. Gauntlett, Insurance Coverage for Intellectual Property Claims, http://us.practicallaw.tr.com/7-521-7901 (2022). For a free copy of this last article, email me at DAG@gauntlettlaw.com.
[5] For a discussion of how a D&O Policy enhances coverage for IP claims, see David A. Gauntlett, Insurance Recovery for Restitutionary Intellectual Property Claims, https://gauntlettlaw.com/news/insurance-recovery-for-restitutionary-intellectual-property-claims (Jan. 6, 2022).
[6] Information in this section is taken from the Betterley Report’s 2022 Intellectual Property and Media Liability Insurance Market Survey.
[7] Tokio Marine Kiln IP Combined Liability Policy definition of “Claim.”
[8] For more information on the significance of such a distinction, see David A. Gauntlett, Avoiding Malpractice by Providing Prompt Notice of Intellectual Property Claims to Insurers, https://www.gauntlettlaw.com/news/avoiding-malpractice-by-providing-prompt-notice-of-intellectual-property-claims-to-insurers (July 15, 2021).
[9] David A. Gauntlett, Buried Treasure, https://www.gauntlettlaw.com/news/intellectualpropertytorts-m7c76 (July 15, 2021).