Defending and Handling Intellectual Property Claims

By Kevin M. Quinley
Claims Magazine
April 1999

A hot new area of claims and liability for commercial entities involves intellectual property. Increasingly, much of a company's true worth relates to intellectual property: patents, trademarks, brand identities, copyrights and the proprietary knowledge residing between the ears of key employees. In today's hyper-competitive marketplace, businesses jealously guard these assets. If they feel a competitor or another company has infringed on any of their holdings, they bring claims and suits for monetary damages, injunctive relief and temporary restraining orders to stop the offending activities.

Commercial entities increasingly weigh the option of buying insurance coverage for intellectual property. This is partly because much of what makes a company valuable lies in its intellectual property rights. For example, MIT economist Jerry Hausman estimates that $284 billion of Microsoft's $300 billion market capitalization is comprised mostly of intellectual property value (CFO Magazine, February 1999, p. 13). You needn't be a Fortune 500 company or a Microsoft to have significant value invested in patents, trademarks, brand names or proprietary ideas.

When thinking of risk management, we normally consider risks to tangible property: cars, buildings, personal and moveable property. This is a confining view of risk management, though. To the extent that risk management aims to protect organizational assets, however, we must consider risks to intangible property, which includes intellectual property. Competitors and others who infringe on these rights or who appropriate ideas can cause huge financial losses.

Thus, businesses wanting to guard themselves from commercial claims must have a plan for handling, managing, investigating and combating intellectual property claims. They must also know their rights and options in pursuing intellectual property claims against other businesses who may have infringed on their intellectual property rights.

Let's preview the range of insurance options available for those who want to protect their organization's intellectual property:

Intellectual Property 101

In the insurance neighborhood, intellectual property coverage is the new kid on the block; policies only began appearing in the mid-1990s. Larger corporations often self-insure for intellectual property risks. Mid-sized and smaller companies may be more in need of the coverage, but ironically find it harder to purchase. Premiums are not cheap, running about $25,000 per year.

Businesses must identify risks to their intellectual property and explore ways to preserve such property from infringement and expropriation. Businesses should know of the various kinds of insurance products available to address intellectual property exposures. These include:

Patent insurance, which protects patent holders against losses from patent infringement. It is a first-party coverage. Some insurers alternatively call this infringement enforcement or abatement insurance. These policies cover legal expenses incurred in enforcing one's intellectual property rights against alleged infringers, up to a policy limit.

Patent insurance covers a policyholder when it is a plaintiff seeking damages from a third party that has allegedly infringed on an intellectual property right.

Patent infringement liability insurance is professional liability insurance for manufacturers, users and sellers who are accused of infringing a patent holder's rights. Specialty insurers provide coverage for defense and indemnity. This can include coverage for profits and royalties that a losing defendant must relinquish to patent-holders. Typically, these are claims-made policies, meaning the claim must be first made during the insurance policy period in order for the insurer to cover it.

Intellectual property insurance. This is a broadened form of patent enforcement insurance. It expands coverage to include trademarks, copyrights and computer software design. Insurers usually offer coverage on claims-made forms with coinsurance provisions. These clauses may require as much as a 25 percent coinsurance participation from the policyholder. Exclusions in these policies usually preclude coverage for fines, punitive damages and exemplary damages.

Advertising injury coverage often accompanies commercial general liability policies under "coverage B." Advertising injury is a statement made in advertising activities that causes loss to another person or business. This can be through libel, slander, defamation, violation of privacy, piracy or misappropriation ideas, or infringement on a copyright, trademark, title or slogan.

Due to uncertainties over coverage for intellectual property disputes under most CGL insurance policies, some insurers market products tailored for covering intellectual property infringement claims. Today's market features policies designed for patent infringement and trademark infringement claims coverage.

Assessing intellectual property claims

Since the stakes are high, intellectual property claims must be carefully handled. Each claim is different, but some general guidelines can help provide a frame of reference:

Each business must make its own cost/benefit analysis about buying additional policies specifically for intellectual property disputes. In light of some courts finding no coverage for patent infringement claims under standard CGL language, high-tech businesses and others who deal extensively with patented or potentially patentable products should consider this option.

Assess whether you may already have insurance coverage. If in doubt, report a claim out. Put the onus on the insurer to assess and to make a coverage determination. When faced with defending a claim of intellectual property infringement, a business and its counsel must promptly determine whether insurance coverage exists.

If insurance coverage may exist, quickly notify your insurance company and tender your defense to it. If your insurer issues a reservation of rights letter, this signifies that it feels it may cover the claim, but it wants time to investigate the allegations. In such cases, many state courts hold that the policyholder is entitled to a separate attorney, to be paid for by the insurer.

Exercise this option. Most law firms routinely hired by insurance companies to defend policyholders lack specialization in intellectual property defense. You may not want to entrust your defense of an intellectual property claim to someone who is learning intellectual property on the job, perhaps at your expense.

If the insurer rejects the tender, consider filing a declaratory judgment action. This is a petition to a court to rule on whether or not coverage exists. It avoids having to fight a claim, burdened by a cloud of uncertainty over whether or not insurance will cover the claim and the legal costs attaching to it.

Watch for allocation issues, where coverage exists for one count within a lawsuit but not for others. Allocation means that the insurer may say, "We will pay for this part of the legal fees but not this other part over here." Insurers may partition those legal fees related to the covered counts from those they attribute to the non-covered counts.

When a claim involves proprietary knowledge of key employees, one of the first things an adjuster or risk manager should do is determine whether the employee signed a confidentiality agreement. Also, find out whether the employee handbook contains a confidentiality provision. These documents should be requested up front, as part of the early investigation.

If your company is considering pursuing an intellectual property claim against another organization, consider the issue of insurance coverage for the defendant in preparing your case. There are at least three reasons for this: (1) Insurance eases the process of collecting a judgment; (2) insurance funds let you mount a more vigorous defense; and (3) strategic pleading of facts and claims can maximize or minimize your chances of insurance coverage.

Options and adjuster tips

Steven Brower, of the law firm of Ginsburg Stephan Orhinger & Richman in Orange County, Calif., offers the following suggestions for those faced with handling intellectual property claims:

Explore late notice and prior notice. Intellectual property claims are often brought after (sometimes long after) prior notice. This can consist of a cease and desist letter, settlement discussions, etc. Most policies require prompt notice of losses and occurrences. Failure to do so may create a coverage defense. This is especially important where you have claims-made coverage.

Keep a lid on defense costs. Defense costs on intellectual property claims often exceed $1 million. For example, Brower was involved as coverage counsel in one case in which the insurer paid $20 million for defense. These claims should generally involve coverage counsel to monitor expenses.

Courts tend to expand coverage. Courts have not been kind to the new ISO language on advertising injury, or "style of doing business." California, among other states, has found a duty to defend trademark infringement.

Look under the 'boards.' These claims are often board-level concerns. Brower once handled a case as coverage counsel in which he found a document showing that the insured's board of directors had received a report, stating that they were guilty of infringement, before the underlying litigation was started.

Howard Schwartz, of the Porzio Bromberg & Newman law firm in Morristown, N.J., recommends the following investigative tips:

Get the relevant documents. For example, is the trademark registered? Is it a federal or state registration? If the claim involves a claim of copyright infringement, get a copy of the copyright registration.

Trace the chain of title and the documents showing the rights of ownership. While the adjuster could get a copy of the patent filing, chances are that these documents will be almost too voluminous.

Was the product for sale? In patent claim disputes, determine who filed for the patent first. You can learn this from the PTO (Patent and Trademark Office) or the Federal Register.

For trademarks and patents, find out if the offending product in question was actually for sale. For a trademark dispute, get a sample of the two products to compare them. Do they look alike? Schwartz adds, "My office looks like a retail store."

Intellectual property claims are off the beaten path trod by many insurance claim professionals and business executives. For this reason, among others, they must be handled carefully. The sums involved often make most bodily injury and property damage claims look like small change. Being aware of your insurance coverage options and having an investigative blueprint, however, will help you save money and heartache in this exploding area of liability.

Kevin M. Quinley, CPCU, ARM, AIC, is senior vice president of risk services for MEDMARC Insurance Co. and Hamilton Resources Corp. based in Fairfax, Va., where he handles intellectual property claims.

Copyright 1999 Claims Magazine

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