How insureds can address the uptick in patent litigation
Intellectual property liability insurance helps clients make better decisions to protect them against threats or infringement charges.
For most companies, no matter their size, stage or industry, intellectual property (IP) is likely their most valuable asset.
It is estimated that 90% of the value of S&P 500 companies comes from intangible assets, and yet IP continues to be one of the least understood, valued or protected business assets.
At the same time, there has been a consistent rise in patent litigation since the onset of the COVID-19 pandemic, which means it is now critical for companies to make every effort to protect and insure their IP.
In 2021, following a sharp downward trend from 2016 through 2019, patent litigation rose for a second consecutive year. This comes after a surge in fillings in 2020, with the most significant numbers coming from the technology industry.
Financial constriction fuels litigation
During recessionary periods, there’s typically an increase in IP litigation for both trade secret theft and IP infringement, due to a desire to maintain a competitive advantage and a way to monetize and generate revenue from investments in research and development. Since the middle of 2020, we’ve seen an increase in IP litigation as the economy has continued to recover from the global shutdowns related to COVID-19.
Another factor driving IP litigation is the push for companies to enhance their technological capabilities by increasing their investments in software and technology. This has the unintentional consequences of increasing exposure in two of the most litigious areas of intellectual property, especially when enlisting vendors to help with enhancing these capabilities.
Lawsuit details
More broadly, suits filed by non-practicing entities (NPEs) — companies that own patents but don’t produce products of their own — has been the major driver of litigation trends historically and continues to increase, suggesting an ongoing upward trend. At least 58% of all patent cases were filed by NPEs in the first three quarters of 2021, according to a recent report conducted by global professional services firm Aon.
The report also found that in the first three quarters of 2021, there were 37 damages awarded, including a massive $2.175 billion award. The number of awards was slightly above the previous five-year average over the same first three-quarter period (37 vs. 34.4).
While 37 damages awarded may seem small relative to 3,000-plus cases filed, most cases do not progress through an entire trial and end with a damage award. In fact, 73% of cases settle outright and only 1.6% of cases end following trial.
Nevertheless, most cases involve significant costs in businesses time and financial resources, even when their settlements are not publicly revealed.
Furthermore, the few damages publicly awarded are an important indicator for the overall severity of the patent litigation space. It is noteworthy that the number of large damage awards has been steadily increasing, with eight awards above $50 million in the first three quarters of 2021, which is more than double the five-year average of 3.8 awards.
Affected industries
All industries but one (Agriculture, Mining, Construction and Shipping) have seen an increase in activity against NPEs since 2018, with the technology industries (software, electronics, networking) continuing to have the lion’s share of litigations and lawsuits. It is also worth keeping an eye on the finance industry, which has seen a growing amount of NPE activity, and the auto industry, which seems to be undergoing a dramatic increase in risk across the board.
Aon is helping clients address this risk by offering capabilities that can more accurately value and protect IP assets. A critical component of this approach is securing intellectual property liability insurance, which guards against potential liability stemming from an acquisition of infringement.
Global capacity for IP liability insurance has grown in the last few years from $50 million to more than $200 million, making the product viable and essential for all types and sizes of IP rich organizations, from start-ups to Fortune 500 companies. Another important component is ensuring that your vendors also maintain insurance to cover their indemnification obligations, as a significant number of IP suites brought against companies are based on components supplied by vendors to those companies.
Applicable coverage
During a time when litigation is becoming more common, IP liability insurance helps clients make better decisions to protect them against threats or charges of IP infringement. Coverage to insure a client’s contractual indemnities related to third-party IP infringement can also provide added leverage in contractual negotiations with customers.
As organizations of all stages, industry and sizes continue to explore how to unlock the value of intangible assets, we are in the early stages of establishing a more functioning marketplace with more accurate pricing of IP assets.
Lewis Lee (lewis.c.lee@aon.com) is the CEO of Aon’s Intellectual Property Solutions team. This article is published with permission from the author as well as Aon and cannot be reproduced.
Aon’s Intellectual Property Solutions team helps clients identify, protect and maximize value from their assets, including intellectual property (IP), while also mitigating risk, aligning business strategy and capitalizing on investments.
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