Every day thousands of insurance organizations in the U.S. underwrite risks, pay claims, collect premium, and engage in a variety of activities that are critical to their ability to conduct business. Many of these same organizations have invested millions of dollars in new systems that theyve either built themselves or licensed through vendors to improve their processes and give them a competitive edge.
What if one day there came a knock at the door and someone else claimed to own that core process or expensive new system? What if that party could force a company to pay for the right to use that system or business processor worse, file an infringement suit and collect millions of dollars in damages?
A few years ago, the Supreme Court issued a landmark decision to uphold business methods patents that include computer software as the embodiment of business methods. That combined with the dot-com frenzy of the late 90s led to the filing and granting of patents that impact the processes and technologies of the insurance industry. In fact, on a percentage basis, the insurance segment is one of the faster-growing classes for patent applications and issued patents.
For nearly 200 years, from the opening of the U.S. Patent & Trademark Office (USPTO) in the late 1700s until 1990, only 10 patents were issued in the insurance classification, with another 21 granted between 1990 and 1996. Since 1996, the USPTO has granted 156 additional patents with nearly 300 patent applications currently pending review.
A patent application is not published for 18 months from the filing date, so the total number of pending applications is not known, but the growth in activity would indicate a substantial number yet to be reviewed. Today, the USPTO can take up to four years to review and issue a patent because of the backlog created by the tremendous growth in filing for business method patents.
These numbers dont include other classifications for financial services businesses, with patents and pending applications numbering in the thousands. With similar processes and methods as those for insurance, the broader implications are clear. While there may not have been a knock at the door yet, given the cost to file and maintain a patent, its obvious patents are not filed purely for bragging rights at cocktail parties.
A patent grants a 20-year monopoly to the inventor, who legally can prevent anyone or any organization from utilizing the invention, or the inventor can collect fees from anyone willing to pay for the use of the invention. For example, one pending insurance-related application is for a process described as electronically exchanging data between an agent and a company for the purpose of underwriting, rating, quoting, and issuing an insurance contract.
The ACORD XML initiative is aimed at enabling such a solution for the entire industry. If you consider multiple companies might be implementing similar processes today, what would it mean if this company is issued a patent? The possibility exists this company could gain a 20-year monopoly on the process.
Does this sound farfetched for the insurance industry? If you consider the lessons learned from other industries, the risk to the insurance industry is real. Patents can and have been granted on types of insurance coverage and insurance products as well as on processes and systems. In an industry known for me too innovation, this practice soon may be a distant memory.
Ironically, insurance companies them- selves represent a small percentage of the patent activity, with most initiated by technology vendors and individuals. As in other industries, many individuals expend their time and their own money to create intellectual property to generate income from licenses or infringement judgments, even though they may have no direct involvement in the business or industry.
About 10 patent infringement suits are filed in the U.S. each business day with an average cost of $1 million each to defend. Infringement awards are significant, as an almost daily review of business media will attest. A small company recently was awarded $30 million from eBay for the Buy Now feature of its online auction system. Microsoft was the subject of a $500 million patent infringement case, which is on appeal with another multimillion-dollar case pending final judgment.
If sued, a company must prove with hard evidence the product or method was in use by it or someone else prior to the claimed invention date to avoid a judgment of infringement and the legal fees and penalties that go with it. In the absence of its own proof, the company must bear the cost to find someone elses prior arta time-consuming and costly process with no guarantee of success. Small wonder the cost to defend the average suit is in the million-dollar range. While that may pale in comparison to a judgment of infringement, its real money, nonetheless. And that doesnt take into account the costs and other damages if a company must cease a practice that is core to its business.
Intellectual property (IP) includes not only patents but trademarks, copyrights, and trade secrets, as well. Protecting IP and avoiding infringement on that of others is critically important in todays business climate. Companies that understand this apply the same rigor to their IP as they do for other compliance issues such as rate and form filing, agent licensing and appointment, records management, etc.
Any company that ignores this trend and is without an IP strategy and a clearly articulated policy is definitely at risk. There are a number of strategies that can be adopted, such as a defensive tactic that includes patents, registered copyrights, proper use of trade secrets, and defensive publishing. The latter is useful as a means of avoiding the costs of other methods while preventing someone else from acquiring legal protection for a core process or technology.
Any defensive strategy requires an analysis of each asset to determine the appropriate course of action. Patents, registered copyrights, and defensive publishing be-come a matter of public record, and a company may not want to reveal its secret sauce, such as the famous formula for Coca Cola. However, it is not simply a matter of marking an innovation as a trade secret. Specific steps and procedures must be followed to ensure it remains a secret. Employees must be trained and understand the process required to maintain a trade secret, or a company risks losing that status and the protection it affords.
A portfolio of patents and other intellectual property can be a valuable tool to avoid infringement charges from others through cross-licensing. Industrial and high-tech businesses use this regularly as a way to avoid infringement claims and ensure their ability to continue innovating. However, a company must have a portfolio to engage in this activity, and it can take years to build one.
More sophisticated companies are implementing offensive strategies that include aggressive enforcement of their intellectual property rights as well as initiatives for licensing their innovations to others. Many corporations have created significant new sources of revenue from licensing their intellectual property. IBM often is cited as an example, but many others such as Proctor & Gamble, Bell South, Caterpillar, and Delphi have profited from this strategy. In many cases, this licensing activity includes business methods as well as tangible assets. Proctor & Gamble actively is licensing its know-how in managing manufacturing facilities, for example.
On the plus side, patents and other forms of intellectual property grant the owners a unique opportunity to extract additional value from their innovations. In a day when ROI is king, the ability to create value both internally and externally could make the difference between a project getting funded or not.
Few companies today would invest the cost and time to build major applications such as policy or claims administration systems, yet there are plenty of gaps in off-the-shelf solutions that provide fertile ground for innovation. In a business such as insurance where basic processes differ little from company to company, a problem solved by one company is likely a problem solved for many. In the long run, there is little competitive advantage gained from most home-grown solutions, yet there is a substantial opportunity to profit from them if they are wisely and properly protected.
Regardless of the intellectual property strategy adopted, it is important to have one. Others do and are actively pursuing them. Whether it is ultimately to their advantage or yours depends on the steps you take now to protect your business and its valuable assets. A knock will come at the door. Which side of it will you be on?
Phil Hargrove is vice president of business development at GEs Employers Reinsurance Corporation.
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