Visibility On The Invisible: Intangible Asset Insurance - Part 3
This is the final part of a three-part series of “Visibility On The Invisible: Intangible Asset Insurance”.
What is IA Insurance?
IA insurance is a policy which covers the costs arising from IA related legal disputes. This typically provides cover for cases of IP infringement, relating to patents, trademarks, copyright and trade secrets, and cover for loss of profits stemming from a loss of rights such as loss of confidential information, for example, a large dataset of customer data. Companies purchase IA insurance to protect themselves from potential litigation costs associated with infringement allegations, loss of profits, and to leverage their positioning in negotiations. For example, enforcing a patent where the patent owner has insurance covering costs of litigation can serve as a strong negotiation position.
In the past, IA insurance packages lacked commercial interest due to limited awareness of their availability amongst IA holders. A Patent Litigation Study by PwC in 2015 revealed that the average cost of patent litigation in Australia was AU $2,000,000. For most SME’s, if they were to experience legal costs in this price range it could lead to bankruptcy, insolvency or agreement settlement. All undesirable outcomes.
The type of insurance coverage required depends on the IA risk profile. It may be that a company requires different types of coverage to protect different aspects of the company.
Table 1. Main types of IA Insurance Coverage
| Coverage Type | Events Covered |
|---|---|
| Defence Coverage | Legal cost for defending accusations of infringement of third-party IP rights. |
| Pursuit Coverage | Legal cost for enforcing IP rights against an alleged infringer. |
| Contractual Indemnity Coverage | Monetary payment for the loss of income incurred from a contractual termination. |
| Loss of IP Rights Coverage | Monetary payment for the loss of IP rights in the event the IP rights are invalidated. This policy may repay the insurer all accumulated costs incurred from gaining and maintaining IP rights. |
| Loss of IP Rights Coverage | Monetary payment for any loss of profits associated with an injunction imposed on IP rights. |
Table 2. Some notable patent litigation:
| Case | Summary |
|---|---|
| Marvell Technology v Carnegie Mellon University (2009-2016) | Marvell Technology Group, a manufacturer of consumer semiconductor products agreed to pay $750 million to end a 7-year IP infringement case with Carnegie Mellon University for the infringement of multiple hard drive disk patents owned by Carnegie. |
| Paice v Toyota Motor Corporation (2001-2007) | Paice, a company located in Baltimore, sued Toyota Motor Corporation after it allegedly infringed patents surrounding hybrid technology. The 6-year lawsuit led to Paice reaching a licensing agreement with Toyota Motors for 23 of Paice’s patents. Paice now licensees its hybrid technology to Ford, Toyota, and Hyundai. |
| Apple v Samsung (2011-2018) | Samsung settled a 7-year dispute with Apple after infringing on Apple’s design and utility patents. The lawsuit ended with Samsung’s final payment to Apple amounting to $539 million for damages. |
| Industry | Medium Award (in US$) |
|---|---|
| Biotech / Pharma | $21.4M |
| Telecommunications | $19.7M |
| Medical Devices | $19.4M |
| Electronics / Hardware | $9.5M |
| Business / Services | $6.2M |
| Software | $4.9M |
| Industrial / Construction | $2.8M |
| Automotive | $0.7M |
| Chemicals | $0.4M |
A PwC study in 2015 identified that the pharmaceutical, biotechnology, telecommunications and medical devices industry were linked to the highest medium damages awards in the United States for patent litigation. Overall medium damages awarded for all industries is approximately $5.4M. As risk premiums are calculated on a pro-rata basis, industries with an on average higher medium damages awarded will require greater premium payments to access the program. It is important to note that the study occurred in the United States, therefore the figures may be inclusive of punitive damages.
Risk Management
The ability to assess the likelihood of risk enables you to implement better risk management practices.
There is a broad misperception that infringement of IP can be easily avoided by changing the infringing activity by a small amount. Unfortunately, this is not always true. Further, even if a company secures IP rights, they may still be infringing third-party IP rights. For registered IP rights, the risk of infringement can be assessed using a freedom to operate search.
For non-registered IA, the risk is the loss of the asset, such as a trade secret being made public. Internal risk, therefore, generally stems from having correct employee contracts, systems, and protocols to prevent leakage of information.
As an example, if a company has an R&D program that accounts for 60% of its IA, and if the employees of the company are not properly bound by confidentially and IP clauses in their employment contracts, there is a strong risk that the structure, knowledge, know-how and personnel could end up at a competitor. In this example, the risk can be reduced if an IA audit is performed to identify gaps in protection.
Assessing the risk of infringement and/or loss of IA is vital because it can help to reduce IA insurance premiums.
Managing IA risk is done in four steps:
- Identify the IA
- Assess the risk
- Manage the risk
- Transfer the risk
1. Identify IA
As simplistic as it sounds, the most important step towards managing any form of risk is identification. You cannot protect what you do not know you have. A company needs to identify its intangible assets including third-party commercial relationships such as licensing agreements. Until all intangible assets have been recognised and accounted for it is difficult to manage their vulnerability and risk exposure.
2. Assess the risks
The next step is to analyse the potential risks underlying each of the identified IAs. Understanding the financial implications for each asset if risks occur is crucial and the threat level of each risk should be quantified. Assessing the risks and hazards can assist organisational decisions on strategies to proactively approach risk management. Considering potential risks for each intangible asset, the probability of each risk, and the potential consequences enables an organisation to deeply consider how they will tackle each situation if it were to transpire.
3. Manage the risks
Knowledge of certain practices to minimise and manage risks effectively provides a competitive advantage. The following are ways an organisation can manage its risk exposure:
| Organisational Policies | It is crucial that employment contracts clarify any discrepancies regarding ownership of IA created during working periods. Having clearly defined terms and conditions on confidential information and the disclosure of information is critical to avoid issues at a later period. |
| IT Security | With the advancement of technology, cyber risk has become more relevant than ever. With hackers persistent in committing data theft, having strategies to protect your network and data is essential. Whether it’s segmented networks or multi-layered firewalls, organisations must be prepared to deal with potential cyber threats. |
| Training | Communicating the importance of and the different types of IA to employees enables them to proactively consider methods of IP protection, which can decrease the probability of employees unintentionally leaking IP. |
| Continuous Monitoring | An IA portfolio requires regular check-ups to assess their underlying health. When an IA portfolio is neglected it can threaten the health of the organisation. Regular reviews conducted internally or externally by professionals who specialise in IA identification and management can make a significant difference in preserving the value of the portfolio. |
4. Transfer the risks
Businesses should always look at ways to transfer risk wherever economically viable. When the cost of transferring the risk is cheaper than dealing with the consequences, it’s essential to seek ways to involve cost-effective third parties to mitigate and remove the risk.
Conclusion
This report discusses the different types of intangible assets, the risks threatening IA, the growing need for IA Insurance and IA risk management.
From our experience as IA specialists, we encounter many misconceptions about IA that need to be avoided.
Some of the common misconceptions include:
| We don’t have any IA | This is very wrong: all companies have IA. Even if you don’t hold registered intellectual property rights, things like know-how, client relationships, and reputation significantly influence the operations of your business and should never be underestimated. |
| The data we collect isn’t valuable | We live in the age of information. If you collect any data that is not publicly available, widely known, or free, your data is of value to someone. Just because you cannot see the value in your data doesn’t mean it isn’t valuable. |
| Our intangible assets can’t be valued or explained | It may be the case that your IAs can’t be valued or explained from your perspective, but IA specialists can see the unseen and are experts in identifying, protecting and leveraging IA value. |
Recognising these misconceptions can remove any hindrances affecting your businesses performance and enable you to value your IA. Organisations which actively identify the value of their IA portfolio and pursue ways to protect their IA differentiate themselves from their competitors.
IA related disputes are costly and can tarnish an unprepared company, potentially spiralling it into insolvency. With IA insurance you have the advantage of being able to defuse IA conflicts and fund expensive litigation costs. IA insurance will enable companies to commercialise their IA with a protective barrier, mitigating their risk exposure. This will lead to more R&D, greater technological advancements, and better commercial outcomes.
If you are serious about mitigating risk and transferring intangible asset risk off your balance sheet, you should strongly consider IA insurance.
ABOUT IAMC Group
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