Patent Litigation is an Insurable (and Affordable) Business Risk
by Paul Scola, Head of Insurance Services, RPX Corporation
Thousands of companies, from startups to Fortune 100 companies, have been sued for infringing patents that they didn’t even know existed. It’s a multibillion-dollar annual problem and more than 20,000 companies since 2010 have found themselves unexpectedly paying huge legal fees and (more often than not) outsized settlements that more reflect avoidance costs rather than the actual value of the patent.
These companies—approximately 4,000 of them every year—have learned the hard way that patent litigation has become a common business risk, on par with D&O liability and cyber risk. Like other risks, patent litigation is hard to predict and can be devastating when it occurs. But also like those other risks, claims of patent infringement can be insured.
This kind of insurance policy is the ideal complement to the risk mitigation tactics that my colleague Mallun explored in the previous two posts. Step one is to get as smart as you can about the infringement claim, including the patent, its provenance and prior art, and the suing entity whether it is a patent troll or an operating company. Step two is to build collaborative relationships to share risk, expense, and information—it is very rare to be a sole defendant in a patent infringement litigation. When at-risk companies join forces, the resulting efficiency and leverage make it much easier to confront predatory license demands.
Step three is insurance. And this step is particularly useful for smaller companies, companies in at-risk sectors, or companies that are only now starting to experience a regular cadence of infringement assertions.
When patent attacks are frequent and expected, companies can devote the necessary resources to more expensive tactics like mutual legal defense and collaborative patent acquisition networks. The regular high cost of fighting litigations makes the investment in such approaches economically logical.
For companies that might only see two or three patent assertion letters every two or three years, a more cost-effective approach is insurance. Premiums are affordable—as little as a few thousand dollars of year for most Series A companies. The comprehensive protection of insurance gives smaller companies the assurance that an unexpected, highly complex legal matter won’t be financially devastating.
Insurers have tried to cover patent insurance in the past, but it has been a difficult risk to predict and price (the nature of litigation means that legal costs and settlements usually remain secret). RPX has surmounted this particular obstacle because of our work with the hundreds of companies in our defensive network. As a result, we have access to the actual costs of patent risk—something no other insurer has. That data has allowed us to build an actuarial model that enables us to accurately assess the frequency and cost of the patent litigations any company is likely to face.
Like any business risk, patent litigation isn’t 100% predictable. But in the same way that certain companies have attributes making them more or less susceptible to shareholder lawsuits, cyber breaches, or workplace accidents, we know that there are specific characteristics that translate into higher or lower propensity for being sued for infringement.
With that actuarial information we can provide a traditional insurance policy with deductibles and coverage limits for individual incidents and/or composite annual risk. Importantly, our coverage not only reimburses up to policy limits; it also helps policyholders limit any costs they might incur. In particular, we have a “panel counsel” of leading patent law firms that collaborate with us to defend RPX policyholders for below-market rates (they do this because our proprietary litigation data and insight help them organize and execute their defense strategies).
For example, one of our insureds facing an infringement lawsuit was advised by their outside counsel to fight hard against the claim and budget up to $2 million for a protracted court battle. They turned to our claims team and our panel counsel law firm negotiated a defense budget capped at $5,000. This firm—which knew the plaintiff, patent, and presiding judge from past experience—then proceeded to negotiate a quick, low-cost settlement in only 95 days.
The savings our approach delivered were clearly significant, but it’s worth noting, that while RPX policies provide this kind of traditional reactive coverage, they are also able to give our policyholders an added level of risk mitigation that is more proactive in nature.
For example, RPX’s broad involvement in the patent market on behalf of our defensive network members means that we often preemptively acquire or license patents from the open market or out of existing litigations. Doing so often removes the patent that is a source of business risk for our insurance policyholders. In other words, RPX can often limit the impact of an insurable event or avoid it altogether. That is a unique form of insurance.
And it is proving effective. Companies that have insurance with RPX often save as much as 60% on their overall litigation costs, and spend half as much time in litigation as those who don’t have coverage.
Insurance, then, is a highly effective solution, especially for companies with emerging risk. Combined with the two other basics of patent risk mitigation— information and collaboration—it enables these at-risk companies to identify, manage, and limit this increasingly common challenge. I strongly urge leaders of SaaS-model companies to come up the learning curve on patent risk. As leaders in other sectors have discovered, waiting to respond can have unfortunate and costly consequences.
Paul Scola is Head of Insurance Services at RPX Corporation, which provides patent risk management solutions to more than 325 companies. RPX (Nasdaq: RPXC) has saved its clients more than $3.5 billion to date in avoided legal and settlement costs through liability insurance, defensive patent acquisition, market intelligence, and strategic advisory services. To start protecting your company against patent risk, click here.