A closer look at why SMEs need intellectual property insurance

Intellectual property (IP) represents major value to most businesses today. Patents, trademarks, trade secrets, copyright and registered designs are all valuable commodities, regardless of the industry sector involved. But with that value comes great challenges — particularly for smaller businesses.

For an owner of IP assets, one major challenge is the time taken to develop their own IP together with the cost of registration and maintenance of rights, which is significant. While the registration of an IP asset theoretically puts small and medium-sized enterprises (SMEs) on equal footing with a large corporation, this doesn’t often hold true when it comes to enforcing their rights against infringers. The cost, the time and the stress can be prohibitive.

Put yourself in the shoes of a small business owner. You’ve come up with something new or different and created a monopoly in an otherwise competitive world. This might sound great, but there is a downside. Not only might you need to defend yourself against allegations of infringement by a third party, you also may need to enforce your rights over your own IP. After all, what is the point of seeking the monopoly of an IP right if it cannot be enforced efficiently?

IP can present a classic David versus Goliath scenario. For the vast majority of SMEs, litigation financing is not available, which means having IP insurance in place is the only way that many can afford to enforce their rights.

To illustrate what I’m talking about, let’s take a closer look at the main reasons why an SME may need to enforce their IP rights with some claims examples, and how appropriate IP cover would respond.

No. 1: Pursuit infringement

Innovation means taking over market share, and that increases a company’s exposure. The majority of IP claims are spurious and without merit. But they are often undertaken by larger companies against SMEs simply to push innovation back; control the particular market space; or buy the new IP at a lower price after litigation.

An SME may have invested heavily in developing its new tech and may be reaping the rewards, but IP disputes are notoriously costly and many SMEs would struggle to afford to enforce those rights against a large competitor who many simply copy the concept to claw back market share.

In one claim that CFC managed, a small renewable energy company had developed and was selling energy-saving devices that incorporated machine learning for use in renewal energy enabled housing. They became aware of a competitor selling a similar kit and believed the competitor’s product likely infringed on one of their patents.

After issuing a cease-and-desist communication followed by notice of intent to issue legal proceedings, the competitor agreed to negotiate a license agreement that included compensatory payment to the renewable energy company and royalty payments on future sales of the competitor’s device.

Legal costs ran into six figures, which was the least the business would have had to pay had they not had IP insurance. Instead, they only paid a fraction of the costs while their coverage helped them meet the bulk of the cost and secure a future revenue stream.

No. 2: Contractual obligation

New innovation requires contracts that put an SME’s IP at risk and exposed. The contract value and indemnity request may be greater than the company can afford. This isn’t only to resolve incoming infringement allegations against a contract party, but also to enforce IP rights.

An SME can manage that exposure by transferring the risk under an IP policy, which can also enable them to accept a greater exposure and therefore get a better deal on the contract. Here’s a recent example of how an IP policy responded…

A $1 million-revenue financial software developer created AI-enabled software that links investors to fund managers. It had recently completed a successful funding round, which included strategic investment from a financial company on a joint venture basis.

Their new joint venture partner noticed a third-party competitor was infringing the IP. The joint venture partner was concerned that if they did not resolve this, the success of their recent investment was at risk.

The contract with their joint venture partner required the software developer to enforce IP rights once either party became aware of IP infringement.  The cover under their IP policy enabled them to pursue the competitor for infringement, with the successful outcome being the third party ceased trading and the software developer protected both their contract and their market share.

No. 3: Contract breach

In today’s world, most companies are part of a contract chain that provides services, products, designs and more. When a contract is initiated, both parties are obliged to respect the terms of the contract, including compensation and terms of use.

An SME may have put a contract in place to have a third party license/use their IP, but what would happen if that third party breached and intentionally infringed those rights?

As an example, a design company discovered a previous contract party using their designs without paying the contractually agreed royalty. The design company had developed designs for a unique bicycle suspension technology, but the contract party — a larger firm — originally chose not to use the designs and so royalty for derived revenue was not applied. However, the design company discovered the contract party later used an identical design in their latest bicycle range, generating revenue.

The commercial use of the designs by the contract party in areas outside the agreement and without paying applicable royalties represented patent infringement and trade secret misappropriation. Trade secrets belonging to the design company had been exposed and they had lost potential revenue.

The design contract was clear that the designs could be used for the agreed use and agreed royalties, but this didn’t stop the contract party from breaching the agreement.

With IP insurance in place, the design company was able to enforce their contract rights to remedy the IP infringement. The insurance covered the legal costs which helped to secure compensation from their contract party.

In each of the above, legal representation is required and unless they are a lawyer selection expert, it is unlikely that an SME would know where to start. SMEs are not well placed to assess whether a lawyer’s hourly rates are reasonable, whether their strategy and expertise is appropriate. The right IP insurance cover would provide them with access to a panel of expert IP law firms from which to make an informed choice. It’s a lesser known but hugely valuable benefit.

IP risk is very real and can disproportionately impact SMEs.

Businesses who seek coverage for product liability, product recall, E&O or those that operate in the technology, manufacturing, energy, media or life science sectors want to be able to enforce their IP rights as well as defend themselves against infringement allegations – but many insurance brokers and agents don’t realize they can source this valuable pursuit cover at the same time as sourcing an IP defense policy.

Rather than waiting for a client to ask about enforcement of IP, simply bringing up the topic can set a broker apart from their competitors.

With over 15 years’ experience of writing intellectual property insurance solutions, Madeleine Brown leads CFC’s IP team, the largest dedicated IP insurance underwriting team in the London market. She can be contacted by email at mbrown@cfcunderwriting.com or on +44 (0)207 220 8568.

Also by this contributor: Increased attention on intellectual property creates new exposures