When Do You Need Intellectual Property Insurance?

Consider the shape of a Hershey’s Kiss or a Pringles chip; they’re all invaluable intellectual property. In modern business, intellectual property defines the legal rights of intangible assets. From a product to a process, from software to a customer database, intellectual property covers a wide range of creations.

It’s no surprise that small to midsize companies build the walls of their professional fortress higher with each new financial milestone. After all, protecting your brand is a surefire way to secure continued success and momentum. That said, in protecting your brand, intellectual property is one of the most vulnerable aspects of your business.

What’s more, intellectual property drives most business and shows up on a company’s accounting sheet more than anything else. In other words, it’s essential to your business. That’s why we’re explaining when and how a company should protect their intellectual property using intellectual property insurance.

What Is Intellectual Property?

More than the shape of a chocolate treat, intellectual property describes many things, including:

  • Trademark: An easily identifiable symbol—often a word, form, or name—distinguishing a particular product or service. Think of the bitten apple shape on Macintosh devices sold by Apple Inc.
  • Copyright: Protection for artistic creations, such as musical compositions, software code, architectural work, paintings, etc. It assigns exclusive rights for use and distribution to the creator. Although copyrights are reasonably straightforward, consider the music of Prince, who gained ownership over his music after a copyright battle with Warner Bros.[1]
  • Design right: In terms of creativity, design rights protect the aesthetic design of a product that has a practical purpose. Design rights and design patents typically coincide, protecting the design itself as well as the creative process. Take the iPhone design, and how Apple Inc. was awarded millions from Samsung in a highly publicized infringement case. 
  • Patent: A patent is a registered right protecting the innovative creation. In other words, the invention has to be new and unique for a patent to apply. A patent stops others from duplicating the invention. For example, chewing gum was patented in 1869.
  • Trade secrets: A single bit of information that sets a company apart from the competition or increases its specialness, such as a secret ingredients or sales method. Trade secrets are often the “secret sauce” (sometimes literally) when an entrepreneur generates the first business model. Think of the Colonel’s recipe for Kentucky Fried Chicken or Coca-Cola’s “secret” ingredient, both of which are well-known now.

Intellectual Property-Related Claims and Risks for Small Businesses

In years past, a company was only as stable as its most valuable assets, which were typically buildings, equipment, and other physical capital. Today, however, the assignment of value has changed significantly. We can thank the technical revolution for this particular shift. A building isn’t the “big deal” any longer. Instead, what a company (and its customers) value most is its intellectual property.

Nearly 70% to 80% of a company’s balance sheet concerns intellectual property.[2] So, when we’re talking about how valuable intellectual property is to an organization, the numbers could be through the roof. As a result, most companies opt to lock down these assets, securing the future of the business.

Although a company’s books may reflect the importance of intellectual property, the truth remains that it’s still not entirely safe up there on its pedestal. Risk can manifest in a variety of ways, some of which may surprise you. That said, let’s dive into the most unexpected (and significant) intellectual property risk and a few real-life examples of how quickly these cases can spiral into something massive. While we’re talking about risks, we’ll uncover some of the most devious players in the intellectual property business.

Intellectual Property Exposures

No matter the size of the company, all businesses face intellectual property exposures. Strangely enough, the most significant risk isn’t a direct threat. Instead, it’s a claim of infringement by another company. What’s more, most companies assume this claim isn’t possible because of their intellectual property rights.

The problem is that it genuinely doesn’t matter what rights exist; it’s still incredibly easy to infringe on another company’s intellectual property rights. That said, with the hundreds of rights circulating, some might say that it’s nearly impossible not to infringe at some point.

As a result, intellectual property disputes are increasing daily. However, many companies have resorted to the “warning shot” method of settling a dispute. For example, rather than a full-fledged court filing, cease and desist letters are on the rise. It’s not surprising, though, since a message is more cost-convenient for small to midsize companies. Plus, this specific tactic helps to avoid knock-down-drag-out fights amongst lawyers and executives.

Examples of Intellectual Property Lawsuits

  • In 2019, Athena Diagnostics and Mayo Collaborative Services went head-to-head in a patent case regarding a drug treatment regimen.[3] The situation grew to be so significant that several Federal Circuit judges believed the outcome had “jeopardized the patentability of diagnostic methods in the U.S.”
  • After penning a seemingly everyday line of lyrical slang in the song Shake It Off, Taylor Swift and fellow songwriters were accused of copying lyrics from the girl group 3LW.[4] In the end, they were freed from the charges since they didn’t claim to invent the phrases, nor were they the first to use them in a song.
  • Another court case concerning trademark and patent infringement, as well as unfair trade practices, was between Fossil and Romag Fasteners.[5] It all boiled down to magnetic fasteners on a particular line of Fossil handbags. The case was initially filed in Connecticut but was bumped up to the Supreme Court to settle.

Patent Trolls

Non-practicing entities (NPEs), otherwise known as patent trolls, flirt with the line of ethics according to many professionals. In short, these companies make a profit on patent-infringement lawsuits.

Although they search for bankrupt businesses from which to purchase cheap patents, they never produce anything. Instead, they troll for individuals or companies appearing to infringe on one of their newly acquired “discount patents.” Then, the patent troll exploits that particular company.

For example, a patent troll might demand licensing fees from the company. What’s worse is these trolls will intimidate the company by doling out lawsuit threats.

What Is Intellectual Property Insurance?

Intellectual property insurance provides capital for legal expenses if you find yourself involved in intellectual property litigation. Intellectual property insurance works to protect your company against infringement claims, covering legal and defense fees from companies making claims against you. Also, intellectual property insurance provides coverage for companies to protect their own patents, copyrights, and trademarks should another company infringe on them. These are the defensive and offensive benefits to intellectual property insurance, here’s how the policies work in practice:

Enforcement Coverage

Many reasons exist why you need intellectual property insurance. Perhaps you have intellectual property that needs safeguarding. Whether it’s a genius sales method or a new invention, your specific intellectual property is invaluable to your company. Should someone steal those original ideas, it could reduce your profitability immensely.

Intellectual property insurance provides enforcement coverage should anyone try to infringe upon your rights. Instead of a defensive stance, this type of coverage takes a more assertive pose. Enforcement policies allow you to enforce your patents, enabling you to sue the infringer. Plus, you can also expect reimbursement for your legal costs.

Defensive Coverage

You don’t always see lawsuits coming, especially when you don’t hold patents. Consider the Nintendo versus iLife case, for example.[6] In the Wii gaming system, Nintendo allegedly used iLife’s idea for motion-sensing accelerometer technology. Although iLife sued for $144 million in damages, only $10 million was awarded.

This case somewhat blindsided Nintendo, but the company defended itself flawlessly. Mainly because its defensive insurance stepped in to support Nintendo’s team, which ultimately secured the ruling.

Intellectual property insurance steps in when you need defensive coverage because of an infringement claim, helping to pay for any judgment rendered against you. It also helps to cover intellectual property litigation, as well, which is one of the most common claims in the modern business world. Some insurance carriers take their services a step further by offering regular risk assessments for your business.

Patent Insurance 

Often used interchangeably with intellectual property insurance, patent insurance is a type of intellectual property insurance, though it’s more specific. This coverage hones in on protecting the patent holder from financial loss. More specifically, patent insurance helps to protect from patent infringement lawsuits filed against your company.

How to Get Intellectual Property Insurance

Landing your company adequate intellectual property insurance requires a slightly different approach than purchasing any other commercial policy. Remember, it doesn’t matter if you hold patents or not. What matters is that other companies do, and those companies often keep a vigilant watch against others stepping on their toes.

As a result, underwriting for intellectual property insurance works differently (read: more thoroughly) than for other insurance policies.

But let’s back up; an excellent way to get this type of insurance is to work with a seasoned broker or knowledgeable insurance representative. Also, many carriers employ industry experts who conduct due diligence as a portion of the underwriting process. This method is merely to gauge your specific industry’s intellectual property risk.

Having a thorough understanding of the landscape and exposures your company faces will enable underwriters to assess your needs accurately. Plus, the insurance carrier can hand you a more precise quote. Of course, due diligence typically happens before you have a quote on-hand, so that you’re empowered to make a better decision.

By carefully examining the industry as well as your particular business, underwriters can fill you in on the risks you face from competitors and NPEs, as well. Often, these vulnerabilities can surprise business professionals who manage an emerging company.

Surprises in the form of intellectual property infringement claims aren’t exactly celebrated in any industry, let alone in your particular company. Finding an intellectual property lawyer is a savvy solution to staying up to date on industry trends and potential legal outcomes. They can clarify law reforms, content syndication, and how to navigate patent trolls.

Do You Need Intellectual Property Insurance?

For startups and small businesses alike, policies such as general liability or even errors and omissions insurance, often serve as go-to coverage. And for a good reason, too. After all, an emerging business with no general liability insurance is at severe risk of going out of business. Along those lines, few small companies can withstand the sophistication of modern cybercriminals without a robust safety net.

That said, intellectual property insurance isn’t for everyone as it can be expensive for small businesses. However, it’s coverage that is often vital for the longevity of your company. The determining factors typically lie within the details of your particular business.

Although no industry is free of intellectual property exposures, sectors that pose the most significant risk include:

  • Consumer goods
  • Software
  • Manufacturing
  • Media
  • Health care
  • Technology
  • Biotechnology (including pharmaceuticals)

Being new to the game of intellectual property can have a dizzying impact. From dodging patent trolls to navigating reformed laws, it’s a lot for a growing business to handle. Consulting an attorney that’s well-versed in your type of business can help you decide how best to protect your company, as well as your intellectual property.

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Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera.

Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.

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