Patent risk for business owners: common, costly — and insurable

The threat of patent litigation intimidates would-be entrepreneurs like your client, stifling innovation and impacting the economy at large. But most importantly for our fictional app developer, patent litigation can distract him from launching his product, resulting in costly delays and racking up millions of dollars in fees and settlements — which can be the death knell for a smaller company. What's more, a company sued for patent infringement just once is even more vulnerable to additional legal action in the future, possibly weakening its operations over time.

As an insurance professional, you're charged with protecting your clients against all types of risk, and these days, patent infringement is one that's worth covering.

What Is Patent Risk and How Are Your Clients Exposed?

Patent risk affects more than just those who own technology patents; any company is vulnerable if it makes, uses or sells products containing patented technology. The patent landscape is so broad and complex that it is nearly impossible for any company to understand all potentially relevant patents and the likelihood of infringement.

Companies may encounter patent risk in a number of ways — sometimes even before they're sued. Often, a company will receive a letter inviting them to license patents to avoid being sued. It's important to know what to do with this letter. The right insurance partner can provide your client with the tools necessary to understand this type of risk and take appropriate, cost-effective action.

When a company does find itself entangled in a patent infringement suit, the litigation can be complicated and take a long time to resolve. The parties involved will pursue a multitude of paths and strategies to achieve favorable outcomes. Further, the risk of litigation is not limited to your client. Your client's customers may also be implicated, leaving your client with additional burden, responsibilities and unwanted expense.

What Patent Risk Can Cost Your Client

A single patent infringement lawsuit can cost millions of dollars — and there have been a few big ones recently.

In 2015, Finjan won $39.5 million in its suit over six anti-malware patents against Blue Coat Systems, a web security company that reported $600 million in revenue in 2016. Finjan, a publicly traded patent troll, sued more than a dozen other companies over the same technology.

And as of March 2017, $399 million hangs in the balance in the ongoing case of Apple v. Samsung, in which Samsung is accused of copying the iPhone design for its Galaxy smartphone.

Both of these headline-grabbing cases illustrate the high stakes of patent infringement litigation. Not only are the expenses daunting, but these cases can drag on for some time: Some of the Finjan cases have lasted more than six years.

Headline cases like these, though, can distract from reality. In practice, the overwhelming majority of patent suits settle rather than proceeding to trial. The reality, however, is still harsh for many companies. According to recent estimates, a single patent suit can cost millions to resolve. Your clients face very few risks that are this common — or severe.

The attorney fees alone in these suits can reach hundreds of thousands of dollars, even in those cases that settle quickly. Many times, a company will pay just as much in legal fees as they will to settle the case. Sadly, smaller companies on the hook for patent infringement can wither and die under such financial distress.

How to Protect Against Patent Risk

So how can companies protect against patent risk? While many companies have resigned themselves to hiring an attorney and paying up, that's not the only choice. Insurance brokers and agents, in fact, are in an ideal position to help by introducing the safety net of patent litigation insurance.

This coverage helps cap financial losses and offers the predictability of an annual premium. In the end, it can give a company an expert to call and save them millions of dollars in unanticipated legal fees and settlement costs — and even save the company itself.

Patent litigation insurance can reduce per-case costs by up to 60 percent and simplify case management. Several levels of risk can be insured — everything from early-stage companies just beginning to face this risk to portfolio protection for venture capital and private equity portfolios to indemnification for companies looking to protect their interests and those of their clients.

Unfortunately, patent risk is a dark shadow over companies looking to innovate, prosper and succeed. Luckily, this risk, like others, is insurable. By counseling your business customers about this risk and the products that can help mitigate it, the insurance field can better deliver the protection companies need to operate freely in today's world.

Paul Scola is head of Insurance Services at RPX Corporation, which provides patent risk management solutions to nearly 350 companies. RPX (Nasdaq: RPXC) has saved its clients more than $3.4 billion to date in avoided legal and settlement costs through liability insurance, defensive patent acquisition, market intelligence, and strategic advisory services. He can be reached at pscola@rpxcorp.com.