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Patents: Risks and Rewards

By David A. Allgeyer, Lindquist & Vennum PLLP

Patents have been with us for quite some time. The United States Constitution provides the government the power to issue patents to “promote the Progress of science and useful Arts, by securing for limited Times to authors and Inventors the exclusive Right to their respective...Discoveries.” Virtually every country on earth issues patents.

The Patent Grant

A patent is a grant from the government of the right to allow the patent owner to exclude others from making, using, selling or offering for sale products, processes or designs embodying an invention that is described and claimed in the patent document issued by the government. Patents now last 20 years from the time they are applied for, except for patents on ornamental designs, which last for 14 years from the date of grant. Before a patent is issued, the United States Patent and Trademark Office performs an investigation, known as an examination, to determine if the claimed invention is really new and meets other criteria of patentability. If so, the patent is issued.

In the United States and much of the world, patents have become increasingly important in business matters. In recent years, the subjects of patent protection have expanded. For example, until fairly recently, there were very few software patents. Now they are routinely issued. The wisdom was once that business processes were not patentable. Now such processes are patentable, particularly if they involve computers to carry them out.

Increasing Patent Litigation

The courts’ approach to patents has also changed over the years. At one time, courts’ willingness to accept patents as valid and enforce them varied by jurisdiction. In some jurisdictions the courts were skeptical of patents and very often found they should not have been issued. Now the review of patent cases is primarily vested in one appellate court, and enforcement of patents has become more likely and uniform.

With the increasing importance and number of patents has come more patent litigation. Patent litigation is expensive. Legal fees to bring or defend against patent infringement actions are routinely hundreds of thousands of dollars and in large cases may be in the millions of dollars. Patent damages awards can be in the multi-million dollar range, and the number of extremely large verdicts in favor of patent owners is increasing. A party found to have infringed a patent could be liable for the profits the patent owner has lost because of the infringement and will be liable for not less than a “reasonable royalty.” A reasonable royalty is typically a percentage of the sales made by the infringer that the court or jury decides reasonable business people would have arrived at to allow the infringer to use the patented invention. Reasonable royalty awards can range from a few percent of sales to 30 percent or more, depending on the product and industry. If the court or jury finds the infringer acted willfully—that is knew of the patent and infringed it anyway—the court can multiply the damages up to three times and in a particularly blatant case can award the patent owner its attorneys fees.

Of course, to those owning patents, the increasing importance of patents can provide a significant competitive advantage by eliminating competitors for certain products or allowing a suit to recover profits lost to infringing competitors. But because of the high cost of patent litigation, smaller companies’ enforcement of patents can present a challenge.

To those competing with companies that have patents, patents can be a great source of risk. Imagine making and selling a product for years, being found guilty of patent infringement and being required to pay all the profits to a competitor. This is not a rare occurrence, but is instead a likely outcome of many patent infringement cases.

Patent Strategies to Reduce Risk

A number of strategies are available to deal with the risks and the opportunities afforded by the increasing importance of patents and patent litigation. Three key strategies are: patent clearance, building a patent portfolio, and procuring insurance.

Patent Clearance

Imagine your company has a great new product it plans to develop and market. The company spends thousands of dollars on research and development, test marketing and is ready to go. The product is launched and on the shelves. After the product is successful, your company is served with a patent infringement lawsuit by an unfamiliar person or company. You check and, sure enough, they have a patent that your lawyer tells you appears to cover your product. You are now facing paying at least a royalty on the products your company has already sold and perhaps a court order requiring your company to stop selling the product. How could you have avoided all this?

While it isn’t foolproof, you could have—and should have—done a patent clearance search for the new product. A patent lawyer with experience in the area of your technology would be able to search other patents and patent applications in the area to see if there are patents that could cover your planned product. If there are, your company would have an opportunity to change the product to avoid the patent, or even approach the inventor for a license. Now that your company has product on the shelf and in distribution, it is too late to change it and your only alternative is to try to prove in court that the patent is invalid or not infringed or reach some sort of settlement with the inventor that will likely require you to pay damages to the inventor.

Of course, it is always possible that a patent was in process in the patent office that could not have been discovered sooner and issued just after your product was hitting the market. A clearance search would not have caught that. But much of the general risk that a patent that covers your company’s products has issued or will issue will be eliminated by a clearance search.

Building a Patent Portfolio

Some companies have begun to deal with the risk of competitors’ patents by building their own patent portfolio. In some industries this can work well. Assume that your company manufactures fairly sophisticated electronic products. In developing those products, your company may have developed new and patentable features for circuits, controls, software or the like. Some of these features may be included in your products and some have not or never will be, but you patent them all. Now assume that a competitor accuses your company of patent infringement by selling your company’s new product. If you are fortunate, you may find that your competitor is using some of your company’s patented technology in its products or would like to use some of it. This gives you a good chance to settle the case by agreeing that they can use your inventions if you can use theirs. The larger your patent portfolio, the more likely you are to have something of value to trade.

Developing a patent portfolio is a large and fairly expensive undertaking. Your company needs a program in place to identify technology eligible for patenting and must undertake the expense of following through with patent counsel to seek patents. You must remember that the time in which your company can apply for patents is limited. Rights to a patent are no longer available if you wait more than a year after the invention was first offered for sale or publicly used. In some foreign countries there is no year grace period. Although building a patent portfolio is expensive, in the right circumstance the right portfolio can be extremely valuable. One added and very significant benefit is that your company will also have protection for its technology and an opportunity to make money by licensing it to others.

Insurance

Assume your company is sued for patent infringement. Will you have any insurance coverage available? Probably not, but it depends. Some courts in some jurisdictions have found coverage under old forms of comprehensive general liability (CGL) policies. For example, some advertising injury provisions included “piracy” as a covered offense. Some courts found piracy included patent infringement. Other policies included, “misappropriation of a style of doing business” in advertising injury provisions, and some courts found that this included patent infringement. Other courts noted that the injury claimed must arise from the advertising activity itself, and that patent infringement is distinct from advertising, so they have denied coverage. In general, most recent cases have declined to find that patent insurance claims are covered under CGL policies.

A new possibility has come with a change in the statute that defines patent infringement to include an “offer for sale” of infringing devices or processes. Thus, the argument is available and has been accepted by some courts that a claim of patent infringement based on an “offer for sale” of an infringing device can trigger a duty to defend and cover. Advertising is often defined as making an offer for sale, thus triggering coverage under advertising injury provisions of CGL policies. Other courts have rejected this approach. The issue is still evolving. In the meantime, numerous CGL policies now specifically exclude any coverage for patent infringement.

Thus, while in limited circumstances coverage for patent infringement claims may be available in some jurisdictions, it is generally unlikely there will be coverage. Still, it is always worth carefully checking the policies for all the years in question and the law in the applicable jurisdiction.

The insurance industry has now begun to offer patent infringement insurance as part of special intellectual property defense insurance policies. These policies provide specific coverage for defense of patent suits, including costs of defense and judgments. Prior acts are an issue that must be carefully considered. Many policies exclude them, but they are available as standard or an option with some carriers. These types of policies are certainly worth considering, particularly for companies that have reason to believe that the high cost of patent litigation brought by a larger competitor could cripple or defeat them in the market.

Another insurance product addresses the high cost of bringing lawsuits to enforce intellectual property rights, including patents. This enforcement coverage typically covers the cost of suits brought against patent infringers, the cost of defending counterclaims asserting that the insured’s patent is invalid, and costs of proceedings in the patent office that arise from issues in such lawsuits.

Whether a specialized insurance policy for patent defense or enforcement coverage is right for your company will require careful analysis of your company’ situation and risk. Because this is a relatively new type of insurance, the costs and coverage vary significantly, requiring your company to research them carefully.

Plan Ahead

Patent infringement suits can provide both significant risks and significant opportunities for your company. Now is the time to assess and take action concerning those risks and opportunities. You may be too late if you wait until you are served with a patent infringement suit.

ABOUT THE AUTHOR

David Allgeyer is a partner in the Minneapolis law firm of Lindquist & Vennum and practices in the areas of intellectual property litigation, arbitration and commercial litigation. He can be contacted at 612-371-3216; dallgeyer@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
January 2004