All companies have some level of intellectual property (IP) infringement exposure just by making, using, selling or offering products or services for sale. Today's sophisticated technology and business practices have prompted a rise in costly patent infringement lawsuits. The number of patent lawsuits has increased dramatically, with 5,189 patent actions filed in 2012, an increase of 29% over 2011. This is the highest number of patent actions ever recorded, and 2013 may beat it.
Many companies are unaware of the real IP infringement liability they take on every day, especially the liability inherent in indemnification agreements, where companies may end up taking on more financial responsibility than they intend or can ultimately pay.
In recent years, infringement allegations have been exacerbated by Patent Assertion Entities (PAEs), a.k.a. "Patent Trolls," which have gained notoriety for suing companies for the sole purpose of extracting licensing fees, frequently without merit. In fact, IP-related lawsuits brought by PAEs have tripled in the past two years, from 29% to 62% of all IP infringement lawsuits filed.
A recent example of an IP lawsuit involved a manufacturer and developer of gaming software, including apps, games, and interactive products and game platforms. The manufacturer was sued by a competitor alleging the manufacturer had infringed on their competing software patents. The manufacturer denied the charges and moved to dismiss the case. After a two-year battle, the competitor eventually agreed to dismiss the case against the manufacturer, but not before $595,000 had been spent on defense costs.
LITIGATION, NOT INFRINGEMENT: A WIDESPREAD RISK
Countless companies are unaware of the significant infringement liability they take on by just operating their businesses. A common misconception is that companies that don't "own" patents are immune to charges of infringement. As a result, many businesses operate under the mistaken belief that proper IP due diligence is enough to protect their operations. This is an unwise assumption, as any company that makes, uses, sells, imports, or offers products for sale can be charged with infringement.
As it stands, suppliers are currently being asked to take more responsibility for IP risks, which has led to an increase in requests for IP-specific insurance policies. The risk of being saddled with the cost of defending an IP infringement lawsuit can be alleviated by creating the proper indemnification agreements, and securing the risk with an IP Defense insurance policy.
CONSTRUCT THE PROPER INDEMNIFICATION AGREEMENT
Following are some important provisions to consider when constructing agreements to take on financial responsibility:
- Be aware of the intended scope of indemnification
- Limit the timeframe for which you are financially responsible
- Set a maximum dollar figure on how much financial responsibility your company will take on
- Consider if defense costs should be included
- Include any insurance deductibles in indemnification agreements
- Include co-payments for claims
- Require IP Defense Insurance
IP-specific Defense Insurance will ensure that money will be available to support the financial requirement of these contracts. Not only will the policy help pay to defend against charges of IP infringement, the policy often deters accusations of infringement brought by NPEs and competitors alike. Remember, whether the charges are frivolous or not, companies must have the financial ability to fund a successful defense.