The time for patent insurance has arrived

Patent infringement assertion is still a relatively new form of operating risk for companies. The rise of the internet and the explosive growth of the associated digital technologies (and patents on those technologies) has occurred in the past 30 years. ‘Patent trolls’, a sub group of non-practising entities (NPEs), have been buying and asserting technology patents as a serious business model for half that time.

As we’ve explored in this series of articles, patent risk is a steadily growing threat that has affected more than 10,000 companies since 2010 alone. Patent risk has gone mainstream and affected companies require a mainstream risk solution—they need insurance.

Early adopters

Whenever a new risk emerges in the marketplace—such as cyber attacks or personal legal liability for corporate directors and officers—the first solutions are often customised products designed to serve the specialist needs of the companies initially affected. For example, when hackers began to launch sophisticated attacks on corporate databases, their first victims were primarily the large technology companies that pioneered digital data storage.

As the technology became affordable and more companies embraced digital information and business processes, cyber attacks quickly became a threat for tens of thousands of companies.

A similar evolution has occurred with patent risk over the past decade. The patent trolls initially tested their licensing-for-profit business model on the largest technology companies with the broadest patent exposure and deepest pockets, but in recent years NPEs have cast their nets wider and begun to assert patents more frequently against smaller companies.

NPEs launch more than 300 new campaigns every year, and last year alone they embroiled more than 2,600 companies in litigation. These smaller companies face potentially catastrophic patent-related events (the cost of a single NPE litigation can easily run into the high six figures and beyond), and the only cost-effective way to mitigate this kind of intermittent operating risk is insurance.

Broad-based risk-sharing

Insurance, of course, can only be effective if insurers have sufficient data to accurately price a company’s patent risk, as well as negotiating leverage to control the cost of claims. Automotive insurance, for example, is affordable because insurers can predict the number of accidents and know the true costs of collision repair, medical expenses, or pain-and-suffering judgments.

This same dynamic is now at work in the patent market. After two years of underwriting policies and paying claims for small and medium-sized companies with intermittent patent risk, RPX Corporation has amassed sufficient data to price and underwrite patent insurance affordably for all at-risk companies (including larger companies that might benefit from excess liability coverage or a policy providing indemnity protection).

RPX can also go beyond traditional insurance coverage. As a leading acquirer of patents pre-litigation and out of active litigations, RPX can intervene pre-emptively on behalf of insureds, clearing the source of risk before it escalates into an expensive litigation.

This kind of active claims management allows companies to keep legal costs down and resolve infringement assertions more quickly and affordably. An RPX analysis of companies with average annual revenues of approximately $500 million shows that since 2012 per-claim costs for insureds are around 50% lower than the amounts uninsured companies are spending to resolve litigations on their own in the same time period.

Clearly, insurance can effectively manage patent risk. Smaller scale, bespoke risk-sharing models have an important role to play for systematic threats that affect only limited numbers of participants. But as operating risks go mainstream—whether it is cyber attacks, directors’ and officers’ liability or patent litigation—the only viable, broad-based solution is risk transfer via insurance.

In the history of business, patent trolls are a relatively new phenomenon and the risk they pose is still emerging, but the solution to this new operating risk is timeless. The time for patent insurance has arrived.

Paul Scola is head of RPX insurance services at RPX Corporation, which provides patent risk management solutions to more than 250 companies. RPX aims to reduce the cost and risk of NPE litigation through defensive patent acquisition, liability insurance, and market intelligence and strategic advisory services. He can be contacted at: pscola@rpxcorp.com