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Sharing risk: Why Intellectual Property Insurance is a must for modern business

Cyber Data Risk Ma...

Jun 12, 2020
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In July 2019, almost four years after the filing of the first infringement suit, a nine-member jury rendered its verdict in favor of Marcus Gray’s claim that Katy Perry, a pop megastar, had improperly copied Gray’s song ‘Joyful Noise’ in their hit ‘Dark Horse’.

The price tag of this legal battle between Marus Gray and Katy Perry, which also involved their respective teams, by far exceeded the awarded damages and the blight on the artists’ reputations. According to the AIPLA, the average cost of an infringement suit of this caliber would amount, for each party, to $US3.9m for both discovery and trial. Even for a smaller suit with potential damages of up to $1m, parties should count on paying on average $250,000 for discovery and $700,000 in trial costs.

IP infringement is an international issue

In recent years, Australian businesses of all sizes have faced serious challenges stemming from either accidental or willful infringement of their IP.

For instance, a US fashion label Deckers has, on more than one occasion, successfully sued Australian manufacturers for their use of the copyrighted term “UGG” within the United States. Similarly, IKEA has forced a Gold Coast business to change its name, which was similar to that of the Swedish giant’s brand, on the grounds that this similarity could deceive or cause confusion among customers. Conversely, Penfolds, an Australian wine producer, has successfully fought against “copycat” wine labels in China who were deceiving customers.

In another relevant case, Australian family-run business Lucas Mills has successfully won its case against a Chinese manufacturer after it was discovered that the Chinese company copied not only a patented saw mill, but also its instruction manual. Likewise, Australian companies have fought to protect their registered designs. For example, Hunter Pacific International has succeeded in proving that Martec infringed upon the design of a ceiling fan.

With the continuous growth of export, international sales, and the development of valuable patents by Australian businesses, the number of IP infringement cases brought to court has been steadily growing. The fact that locally placed design clusters form a part of the global supply chain entails that designs pass through many different hands and countries, and each new partner increases the risk of an infringement claim and a contractual indemnification dispute.

Mitigating risk through insurance

Considering the high legal and representation costs, businesses must assess their capacity to easily and quickly respond to an intellectual property claim or proceedings in terms of both defense and enforcement of their IP rights. An adequate IP strategy for such protection of intellectual property is Intellectual Property Insurance (IP Insurance).

IP Insurance is available from specialized brokers and covers all intellectual property aspects—including, but not limited to, trademarks, patents, designs, copyright, and trade secrets. An example of typical policy cover may include the following:

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Policy coverage: An example

Infringement Liability Infringement Assertion Counterclaims
Adverse Costs and/or Damages and/or Defense Costs Extensions may include Obligations to Contractual Parties/ Product Infringement Recall Adverse Costs and/or Assertion Costs and/or Extensions may include Contractual Disputes Cost of Counterclaims

Costs

Compared to the costs of defense in court or taking forth a legal challenge, IP Insurance is a relatively more accessible option. Some policies start from approximately $3,800 for the limit of $500,000 and, in some cases, go up to $25,000. The factors that determine the IP Insurance cost include the given risk profile, previous ownership dispute history, due diligence undertaken, as well as whether or not the insured is an importer or exporter of IP. The cost of IP Insurance can also be affected by past history of ownership disputes, which requires further assessment from an IP insurer company.

Who should consider IP Insurance

At present, businesses that adopt digital supply chains and online channels for reaching new customers face considerable challenges regarding their ownership rights’ protection. The factors that make these businesses vulnerable to IP ownership claims are as follows:

Online sales with more prominent digital trademarks;
International export through retailers and distributors;
Designing or manufacturing some or all products outside of Australia through multiple supply chain partners;
Registering trademarks in countries with local systems for IP registration in local languages;
Distributing products with pending patents while trying to capture the market share.

Finding the best cover

Similarly to other types of insurance, navigating the policies for IP Insurance is fraught with some risks. One reliable indication of a well-constructed policy is that it clearly and unambiguously specifies, even to an inexpert party, what is covered. In the remainder of this article, we outline several key elements that a high-quality policy should include.

Worldwide cover

The first essential element of a well-constructed IP Insurance policy is worldwide coverage. As highlighted by the example of Penfolds, IP infringement can occur anywhere in the world. Cross-national differences in legislation and companies’ ability to trademark certain words and terms —as was the case in Deckers’ filing suits against Australian companies over the use of the term “UGG”—result in that a business can (unknowingly) infringe an internationally renowned trademark. For that reason, any IP Insurance policy must include cover for claim both in Australia and in any other country.

Choice of representation

The second pivotal aspect is the possibility to choose legal representation, which guarantees that owners and managers can non-problematically work with the existing legal teams. This is particularly relevant for the companies that have gone through the process of obtaining patents and trademarks and have established strong working relationships with IP law experts.

Upfront cover of costs

The third essential element of a high-quality IP insurance policy is upfront cost coverage. As discussed in the beginning of this article, for many businesses, engaging legal representation to enforce IP infringement or defend a claim can be cost-prohibitive. A high-quality IP insurance policy should allow legal firms to directly bill the insurer, thereby eliminating the risk of the policy holder’s financial burden or having to take out loans to cover costs.

Inclusion of contractual liability

Fourth, a reliable IP insurance policy should also include contractual liability. International growth almost inevitably means entering agreements with third parties who may help with retailing, distribution, manufacturing, or licensing. Under these circumstances, a high-quality IP insurance policy can, and should, extend to the parties who have contracts with the policy holder. This will reassure companies that they are covered and not liable in case of a claim and open to doing business with the policy holder.

Domain expertise

The fifth and final essential element of a well-structured IP Insurance policy is domain expertise. Similarly to the undeniable importance of working with a lawyer who has IP expertise, the best IP Insurance policies are underwritten and brokered by domain experts. This expertise ensures that the insurance policies not only cover the current IP landscape, but also factor in potential future trends. A specialized broker with an in-depth knowledge of IP is also essential in helping businesses to find the most appropriate policy for their size, industry, and type(s) of IP.

In summary, IP Insurance, which is still a relatively new development in the insurance domain, should become an intrinsic component of any business’ risk management strategy. For a comparatively low cost, an IP Insurance policy is able to not only protect the company against and share the risk of these costs, but also—and more importantly—provide business owners and senior managers with the peace of mind that they will be covered in case of a claim.

intellectual property

General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.

All information above has been provided by the author.

Meena Wahi, Cyber Data Risk Managers, ABN 34 161 961 422