How to Overcome Your Intellectual

Property “Fear Factor”

Introductions

Moderator:• Margaret Reetz, Esq., Partner, Kerns Frost PearlmanPanelists:• Kimberly Cauthorn, Esq., Director, Dispute and Legal

Management Consulting, Duff & Phelps, LLC• Robert W. Fletcher, President, Intellectual Property

Insurance Services Corp• Michael Headley, Principal, Fish & Richardson P.C.• Garrett Koehn, President Northwest US, Crump Insurance

Services, Inc.• Ian Lewis, Director, SAMIAN Underwriting Agency

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Agenda

• Types and Examples of Intellectual Property (IP)

• IP Risks, Claims Scenarios, and Insurance Coverage

• IP Insurance Application and Underwriting Processes

• IP Disputes and Insurance Claims

• Discussing IP Risk and Insurance with your Clients

• IP Insurance Case Studies

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Now, This Is Scary!

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TYPES AND EXAMPLES OF IP

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You Can’t Escape IP: It’s Everywhere

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Intellectual property (IP) refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. http://www.wipo.int/about-ip/en/ Intellectual property

protection is a crucial part of each client’s business

strategy.

“[Our law firm] helps us patent our innovative products and packaging. [They] think outside the box (or bottle).”Ocean Spray Cranberries, Inc. [F&R client]

You Can’t Escape IP: It’s Everywhere

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“It is imagination made real. It is the ownership of a dream, an idea, an improvement, an emotion that we can touch, see, hear, and feel. It is an asset just like your home, your car, or your bank account.” [USPTO website]

PATENTS protect inventions and provide rights for up to 20 years; 3 broad categories: utility (medications, computer hardware), design (the look of an athletic shoe, Star Wars characters), plant (Hybrid tea roses). (Creative Idea)

TRADEMARKS protect words, names, symbols, sounds or colors that distinguish goods and services (can be renewed). [The roar of the MGM, the pink of Owens-Corning insulation]. (Origin/Reputation/Branding)

COPYRIGHTS protect works of authorship: writings, music, works of art tangibly expressed. (Life of the author + 70 yrs.) (Message)

TRADE SECRETS: information that companies keep confidential to give them an advantage over their competitors. [Formula for Coca-Cola]. (Know-How)

Invention

Branding

Message

Know-How

You Can’t Escape IP: It’s Everywhere

Packaging – Design Patent

Advertisements, Marketing –Copyrighted ©

Ocean Spray® - Registered Trademark

Recipe - Trade Secret and/or Utility Patents

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Courtesy of SAMIAN Underwriting Agency 2010. All Rights Reserved.

Copyright in Software Registered

Designs

Trade Marks

Patents

Domain Names

Licensed Manufacturers

Licensed Distributers

USB Standards

Trade Secrets

…and we mean everywhere.

IP RISKS, CLAIM SCENARIOS, AND INSURANCE COVERAGE

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Non-Patent IP Risks: What Keeps Your Clients Up at Night?

Claim Scenarios• Copyright

–Software–Publisher

• Trademark–Shockwave–Yahoo

• Trade Secret–Customer Lists–Employee hiring issues

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Types of Non-Patent IP Insurance to Help your Clients Sleep at Night

Type Coverage

Media Liability – Media company’s business activities (or any traditional company with media exposures)

– Non-media company’s marketing and advertising of its products and services

– Copyright infringement, trademark infringement, sometimes design patent infringement, sometimes theft of trade secret, title, slogan, trade name, trade dress, service mark, service name

E&O (often technology related)

– To cover claims arising out of the policy holder’s professional service activities, including software development

– May cover certain aspects of hardware– Depending on market, may include or negotiate IP protection, but cover

typically does not include trade secrets or patent

Cyber Liability – To cover claims arising out of “cyber” activities; coverage may be limited to activities on the Internet

– Copyright infringement, trademark infringement, piracy if related to copyright or trademark infringement claim

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Types of Non-Patent IP Insurance to Help your Clients Sleep at Night

Type Coverage

Package Carriers

–Typically exclude IP in their base forms (may cover some advertising exposures) and tend to be conservative about offering it on a limited basis by endorsement

Unauthorized Disclosure

–Trade secret theft protection and protection against unintentional revelation of personal identifier information

IP Stand-Alone

–Usually offers the option of trademark, copyright, and/or patent infringement liability coverage

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Patent Risks: What Gives your Clients Nightmares?

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Average Patent Infringement Suit Costs - 2011 Survey:

Amount in Controversy < $1M $1M-$25M >$25M

End of Discovery: $490K $1.6M $3.6MThrough Trial: $916K $2.8M $6.0M

Costs above are litigation costs only and do not include awards for costs and damages.

*2011 survey, American Intellectual Property Law Association. Survey is conducted every two years.

Patent Risks: What Else Gives your Clients Nightmares?

• Contractual indemnification

• IP reps and warranties in M&A transactions

• Company rolling out a new product line or entering a new geographic market or industry market sector

• NPE/“troll” suits

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Patent Risks: Sweet Dreams Instead of Nightmares

Small player in electronic security industry sued by dominant player in the industry for infringement of patents on electronic surveillance tags.

Patent insurance allowed the policy holder to pay defense costs without diverting significant resources away from business operations. It also allowed the policy holder to mount a defense and win at trial in a plaintiff-friendly venue.

As the policy holder said: “You never know when you will need insurance.”

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Patent Risks: Sweet Dreams Instead of Nightmares

Small shoe manufacturer and distributor was accused of infringement by a non-practicing-entity (NPE). The NPE had already successfully enforced its patent against several smaller manufacturers unable to pay defense costs.

The policy holder discussed the situation with IPISC’s Litigation Management department, which was able to offer guidance on how to respond to the NPE. Using the power of its defense policy, the policy holder was able to convince the NPE to drop its frivolous claim.

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Types of Patent Insurance: Ways to Get a Good Night’s Rest

Type Coverage

Patent Infringement Liability (Defensive)

– Defense costs– Damages– Infringement liability indemnification

obligations

Patent Enforcement/Abatement (Offensive)

– Litigation costs to enforce patent rights against infringer

Patent Asset Value & Protection (Multi-Peril)

– Loss of patent asset and related product or licensing revenue, and/or

– Consequential loss due to imposition of injunction for infringing another’s patent

Reps & Warranties (M&A) – Carved out of standard reps and warranties policy

– Title, infringement, validity, enforceability

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IP INSURANCE APPLICATION AND UNDERWRITING PROCESSES

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Don’t Be Left in the Dark: the Non-Patent IP Insurance

Application and Underwriting Process

• Time – depends on marketing effort; one day to several weeks

• Submission material• Financial statements• Application (coverage specific: tech E&O versus Cyber versus Media,

etc.)

• Common hang-ups include:• Social Media - take-down procedures, automated? line of business• IP screening procedures, if using others’ content/IP

• To approach all markets, need to engage wholesaler and/or London broker although, there is some market overlap between the two

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No Monsters in the Closet: The Patent Insurance Application

and Underwriting Process

•Which risk(s) is your client seeking to cover? – Client is worried about being sued for infringing someone else’s patent = Patent infringement liability

coverage– Client is worried about someone infringing its patent = Patent enforcement coverage

•Has your client told the underwriter everything, even those pesky “offer to license” letters?•Expect detailed questions about:

– Patents– Products – Financials– Patent risk management policies and practices– Patent dispute history, including cost

•How much risk is your client willing to retain?– SIR– Co-insurance 21

No Magic Spells: Patent Insurance Policy Forms

•The form–Typically claims-made and reported, rather than occurrence (claim must be made during the policy period)– Typically written as an aggregate limit of indemnity ($1-10 million LOL)

•Conditions– Geographic and temporal scope – Scheduled products, IP, contracts – Choice of counsel and duty to defend: varies by carrier– Definitions: “Prior Acts”, “Claim”, “Litigation Costs” or “Defense Costs” – SIR and co-insurance

•Exclusions– Willfulness– Consequential damages– Certain counterclaims and declaratory judgment actions– Specific exclusions (i.e., claims brought by certain entities or certain patents)

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No Scary Stories: Available IP Insurance Markets

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Available Contracts Insurance Markets

Media Liability Market

Ace Westchester, AWAC, Axis Pro, Beazley, CFC/Lloyd’s, Chartis, Hiscox/Lloyd’s, One Beacon, ThinkRisk

Technology / Cyber Markets

Ace Westchester, Aspen, AWAC, Axis Pro, Ace/Lloyd’s, Barbican/Lloyd’s, Beazley, CFC/Lloyd’s, Chartis, CNA, Corona, Euclid Managers/ Hudson, Hiscox/Lloyd’s, Kiln, NAS/Lloyd’s, ThinkRisk, XL

Patent IPISC, Liberty, RPX, Samian (Europe offers additional carriers)

IP DISPUTES AND INSURANCE CLAIMS

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Falling off the Cliff: IP Litigation

• Typical Allegations:– Patent: Plaintiff alleges it owns and has standing to sue for infringement

of a U.S. patent [specifically named]; defendant has infringed patent by conducting commerce on its website, which is covered by at least several claims of the named patent; plaintiff seeks judgment, injunctive relief, damages, attorneys’ fees/costs.

– Copyright: Plaintiff (owner of various works) alleges copyright infringement, contributory copyright infringement, and vicarious copyright infringement. Plaintiff seeks equitable relief to prevent or restrain infringement of Plaintiffs’ copyrights, including a permanent injunction requiring that Defendant ceases infringing Plaintiff’s copyrights, an award of either actual damages and profits derived by Defendant as a result of the infringing activities or statutory damages, attorneys’ fees and costs.

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Falling off the Cliff: IP Litigation (cont’d)

• Typical Allegations:– Trademark: Plaintiff alleges defendant has conducted business under a

specific designation virtually identical to Plaintiff’s registered mark. Plaintiff seeks damages for infringement in violation of the Lanham Act and false and deceptive trade practices in violation of state law. Plaintiff seeks permanent injunctive relief, monetary damages, Defendant’s profits, attorneys’ fees and costs.

– Trade Secrets: Plaintiff alleges Defendant, founded by former employees of Plaintiff, stole Plaintiff’s trade secrets, customer lists, and other proprietary information. Plaintiff seeks damages for trade secret misappropriation and unfair competition, including injunctive relief, damages, recovery of all profits attributable to Defendant’s alleged wrongful acts, and attorneys’ fees and costs.

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Falling off the Cliff: IP Litigation (cont’d)

• Critical Phases:•Patent – Markman Hearing

•Discovery•Copyright – Beyond Motion to Dismiss•Trademark – Pre-suit/pending suit

•TTAB proceedings•Trade Secrets – Identification of Trade

Secrets•Discovery Essential

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Breaking the Fall: the Claims Process

•Enforcement policies: may first be required to submit evaluation and claims chart before claim accepted and lawsuit initiated

•Other first party policies: may require a financial valuation

•Infringement liability policies: may need to obtain a legal opinion of non-infringement or invalidity before claim will be accepted

•Claims handling will depend on whether the insurer has a duty to defend

•Assuming no duty to defend, counsel selection is usually flexible but may be subject to different retentions and co-insurance percentages, and counsel will be expected to adhere to insurer-mandated billing, budgeting, and reporting procedures

•Notify the carrier early and often: notice of circumstance provisions

•Carrier settlement approval usually required

•No surprises28

Making the Pain Go Away: Claim Resolution Strategies

• The O’Hare Exit: Meet at a neutral site and reveal you have insurance = early settlement

• Initiate a re-exam of the asserted patent(s) and move for a stay• Agree to early mediation

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Reality Games: Discussing IP Risk and Insurance with your Clients

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Opportunities to review intellectual property exposure:

In reviewing other insurance coverage:Package Placement -- review implications of Advertising Related lossesErrors and Omissions -- may or may not include some IP in base formDirectors and Officers -- not part of coverage offering, but right audience, especially GC

As part of general risk audit. Intellectual property should be specifically discussed in four parts:Patents (if any)Trade Secrets (everyone has them -- ask about employees)Copyrights relating to technology (in particular software companies)Trademark and Media related topics and Web publishing exposures

Do they simply use their web page as a brochure, or do they publish content?Have they had any trademark or service mark fights? Are they launching any new products that may have naming exposures?

Traps for the Unwary

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Problems to Avoid:Failure to notify of claim:

Client purchased media liability coverage. The treasurer (insurance contact) failed to tell general counsel they had coverage. The company then wound up in significant trademark litigation. The GC quickly settled suit for $2 million. No coverage applied!

Events that would trigger a claim that are not noticed. For example, a takedown notice may trigger the definition of claim, but may not be noticed.

Duty to defend or consent to counsel:Too many times to explain a single incident! Here is what happens:Duty to defend policy is purchased. The insured is sued, quickly engages counsel, then notifies the carrier. The carrier does not want to use insured’s (expensive) counsel. Fight begins over counsel, rates, etc.

Not Understanding the coverage purchased: Beyond obvious limitations of what type of IP cover you want or purchase (e.g., Patent v Copyright), failure is in to what the coverage applies -- Internet only? Advertising only?

Facing Reality: A Few Takeaways

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Clearing up common misconceptions:

1. “We don’t need insurance for IP risk because we don’t have any IP.”

2. When asked about patent exposures, responds “Don’t we already have IP insurance?”

3. “Isn’t it too expensive?”

4. “Won’t the carrier make us use inexperienced, inexpensive legal counsel?”

5. “I don’t want to share the company’s confidential information with the carrier.”

6. “My lawyer says we don’t have any risk because we have a freedom to operate opinion.”

7. “We’re indemnified by our suppliers.”

8. “My IP lawyer carries malpractice insurance.”

9. “What’s IP?”

10.“Didn’t the America Invents Act fix everything?”

Facing Fears: Unauthorized Disclosure Coverage for

Frozen Food Manufacturer

• Term - 1 Year• Premium - $60,852.00• Limits - $3M per claim/aggregate• SIR - $100K• Co-pay - none• Endorsements: Damages, Additional Insureds, Schedule of

Insured Confidential Information

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Facing Fears: Cyber Liability/Tech E&O

• Software Company with $10 million in Revenue• Premium - $10,000, $25,000, $35,000• Limits - $1, $3, $5 million respectively per claim/aggregate• SIR - $25 to $50,000• Co-pay - none• Key IP Coverage - Copyright, Trademark, Trade name, some

Trade Secret coverage• Excluded: Patent

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Facing Fears: Patent Enforcement Coverage for 5 Seed Production

Patents + Applications

• Term - 1 Year • Premium - $28,038 • Limits - $1M per claim/ $2M per aggregate• SIR - $0• Co-pay - 20%• Endorsements: Territory, Renewal, Schedule of Insured

Intellectual Property

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Facing Fears: Patent Infringement Liability Coverage of

Liquid for Use in Septic Systems

• Term - 1 Year • Premium - $12,192 • Limits - $1M per claim/aggregate• SIR - $100K• Co-pay - 10%• Damages Covered• Endorsements: Additional Insured, Renewal, Schedule of

Insured Manufactured Products

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Facing Fears: Multi-Peril Coverage of Medical/Healthcare Products

• Term - 2 Year• Premium - $44,438• Limits - $2M per claim/aggregate• SIR - $150K• Co-pay - 10%• Perils: Business Interruption, Cost of Redesign, Remediation and

Reparations

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Questions&

Answers

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Many thanks to …

• Peggy Reetz• Kimberly Cauthorn• Robert Fletcher• Michael Headley• Garrett Koehn• Ian Lewis

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