Patent Litigation Insurance Summary: Risk Reward Ratio?

Following the publication of the Gowers Review of Intellectual Property (The Gowers Review) the issue of a workable patent litigation insurance scheme has returned to the legal and political agenda. The desire to encourage more successful patent applications ensures that it will not shift until the situation is addressed.

In the aftermath of the publication of the report of the European Commission on, "The feasibility of possible insurance schemes against patent litigation risks" (The 2006 report) a number of patent insurance experts and analysts felt compelled to address the proposals. The 2006 report was the latest report since the first European Commission report was published in 2001 and followed by the more specific, "Patent litigation insurance" (The 2003 Report).

Along the way several nations, including the Welsh, "Intellectual property and legal expense insurance" (The Welsh report) in 2003 and the Danish, "Economic consequences of legal expense insurance for patents" (The Danish report) in 2001 have raised points for consideration, which many feel the Commission has failed to address fully. As the analysts form their next responses due shortly we take a look at the main proposals and assess the latest thoughts.

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Current Position

According to both the 2006 report and the Danish report, only a few European countries, including the United Kingdom, France, Germany and Sweden, have any experience with patent insurance. Nevertheless, both reports have found that none of the schemes offered in these countries can be said to have proven successful. The main reason for their failure seems to be, generally speaking, that the insurance companies offering them were unable to operate them at a profit or with a reasonable prospect of future profits.

"Bespoke" patent insurance is reported to be available in some European countries. But according to the 2006 report, the disadvantages of this type of insurance include high expenses for the required detailed pre-screening for risk assessment, which are usually borne by the person wishing to obtain insurance, high premiums to compensate for remaining uncertainties about the risk insured and limited coverage.

The proposal for a European patent litigation insurance scheme

Taking into account the opinions of insurance companies, brokers, patent attorneys, lawyers, and patentees, the first Commission report has come up with a proposal for the basic elements of a possible future European patent litigation insurance scheme, which it recommends for further intensive study:

• Since the report concludes that no scheme will be able to attract the number of insured that would be necessary to make such a scheme viable with a low premium, it concludes that the scheme should be compulsory. Based on certain figures, the report estimates that requiring it would make it possible to offer coverage as outlined below for premiums ranging from 300 euros to 600 euros p.a., but assumes that such a scheme would almost certainly require public funding in the beginning. However, the report also proposes considering an "opt-out" scheme.

• Patentees should be insured both as plaintiffs and as defendants in patent insurance litigation.

• Coverage should be offered based on a two-stage model: In the first stage, without any risk assessment, the policy should cover a limited amount for a so-called "preliminary investigation" into the validity of a patent and whether the patent has been infringed. It is believed that such a "preliminary investigation" will often lead to settlement. Based on certain figures, the report proposes that an amount of up to 35,000 euros should be available to cover preliminary investigation costs. In the second stage, the policy should cover expenses incurred in each country in which litigation involving a national patent or a bundle of national rights that makes up a European patent takes place for an amount up to 1.5 million euros, as well as damages for infringement and costs of complying with injunctions, also in an amount up to 1.5 million euros. This coverage should be provided only to insured parties that have been advised "honestly" and "professionally" that they have a reasonable chance of not less than 50 per cent of winning their case.

Most of this was from the original 2003 report. The 2006 report adds:

• Only a "widespread insurance scheme" would bring the beneficial effects to the patent system and such a scheme must avoid the costs of an initial technical risk assessment,

• Compulsion is a necessary feature of the scheme without which no currently envisaged schemes are likely to be successful (however, the main conditions for a voluntary scheme were identified and considered). However it is careful to underline that the compulsory scheme should only be employed if benefits outweigh the disadvantages.

• Patentees would be interested in insuring their patents if the premium and the conditions are reasonable,

• Certain minimum co-insurance could be required, involving both the patentee and insurer sharing the risk.

The Intellectual Property Law Institute see the reality of a Europe wide patent insurance as a long way off.

Here are their comments:

• The proposals only include recommendations for some basic elements of a future patent insurance scheme and for possible EU support, leaving many important questions unanswered and many details to be worked out.

• The recommendation to make a European patent insurance scheme compulsory is certainly the most controversial aspect of the proposal in the 2006 report. From the insurers' point of view, a compulsory scheme is probably the best option. It avoids Patentees focusing on poor patents. However, insurers would not be able to weed out the bad or high risks.

At the moment a number of insurers, particularly in England and Germany, think the scheme is impractical. The main problem is that most insurers find it difficult to rationalise that assets of wildly different values and complexities can be covered by a single fixed premium. The argument is that if the scheme comes into force the worst insureds would be subsidised by the good ones. Additionally if the maximum payout for legal fees is predetermined there is a real danger that litigation could be prolonged to the extent that the fund provided for it is exhausted and the litigation fails due to lack of financial support.

The 2006 report fails to even mention the practical considerations of pan-European legislation. The variance in national insurance laws & the variation in taxation applying to policies must be considered. The additional cost to every application must be considered and is all the more relevant, as the cost of an application at the moment is already considered prohibitive for many. Would adding another fee to this make it more or less likely to encourage more applications?

The market itself is currently very small and there is a feeling that market forces rather than legislation should guide the IP insurance market. The rationale comes from The Welsh report which points to a lack of understanding about IP insurance. The report found that if businesses were more aware of risk then demand for IP insurance would go up naturally and the market would find its own level.

A possible solution may be to act upon the recommendations of the Gowers Review on copyright and set a ceiling for costs in IP litigation. This is a more practical solution as it would involve pre-determined costs but again it faces the problem of marrying very complex, technical patent litigation alongside more basic litigation under the same policy.

As it stands insurers would need to see how the system would work in practice before committing to anything. In the format proposed by the Commission there is concern that the scheme would be unworkable.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 23/04/2007.