Patent litigation insurance

9.86 Patent litigation entails substantial costs and involves a degree of risk, both to the patent holder whose patent rights may be revoked and to the defendant who may be prevented from pursuing an aspect of its business if liability is found. In light of this, companies may consider investing in patent litigation insurance.

Types of patent litigation insurance

9.87 There are several types of insurance policies covering contingencies related to patent litigation.^[127]

• Patent enforcement litigation insurance provides coverage for the legal costs a patent holder incurs as a result of legal proceedings to protect and enforce its patent rights.^[128]

• Patent infringement liability insurance provides coverage for the legal costs involved in defending a patent infringement claim and, in some cases, may also cover damages awards if liability is found.^[129]

• Intellectual property litigation insurance covers the legal costs incurred in the enforcement of all intellectual property rights—for example, trademarks, copyrights and rights in computer software, as well as patents.^[130]

9.88 Commercial general liability insurance may also cover the cost of defending an intellectual property infringement claim, although this depends on the wording of the policy, many of which now expressly exclude coverage for such claims.^[131]

Prevalence of patent litigation insurance

9.89 Patent litigation insurance is a relatively new development. The ALRC understands that currently no Australian insurers offer such policies,^[132] although Australian companies may be able to obtain from overseas underwriters patent litigation insurance that covers patent infringement proceedings in foreign jurisdictions as well as Australia.^[133]

9.90 Patent litigation insurance is more widely available in the United States and Europe. However, even in these jurisdictions the number of insurers offering patent litigation policies is small,^[134] and the effectiveness of such policies is yet to be fully evaluated. A report on patent litigation insurance prepared for the European Commission in 2003 (EC Insurance Report) concluded that, to date, litigation insurance had not been particularly successful in any jurisdiction.^[135]

Advantages of patent litigation insurance

9.91 Patent litigation insurance may provide a number of advantages, particularly for SMEs. Patent litigation insurance assists SMEs in enforcing their patent portfolios against, or defending allegations of patent infringement by, larger companies without having to settle or license to avoid escalating costs. Further, it may strengthen a party’s bargaining power in any negotiations to settle an infringement claim. It has been suggested that, for patent holders, ‘publication of the existence of insurance in company literature and on websites acts as an effective deterrent to potential infringers’.^[136] For example, GTG (which has patents in many jurisdictions)^[137] has indicated that patent litigation insurance is an important part of its licensing and enforcement strategy, and has allowed the company to initiate proceedings against major biotechnology companies in the United States.^[138]

9.92 In licensing negotiations, litigation insurance may strengthen a patent holder’s ability to license its patents to corporate entities that want to commercialise aspects of the company’s patented technology.^[139] Potential licensees may indeed require a patent holder to obtain patent litigation insurance to ensure that the patent holder will be able to indemnify the licensee in the event that a patent infringement claim is made by a third party.^[140]

9.93 Patent litigation insurance may also provide indirect benefits to a company.^[141] A substantial portion of the value of many biotechnology companies is based on their intellectual property portfolio, making protection of their intellectual property rights paramount. Patent litigation insurance facilitates a company’s protection of its intellectual property. This, in turn, may attract investors. An insurance company’s assessment of the validity of a company’s patent portfolio, which is a prerequisite to any patent litigation policy being issued, may add credibility to claims that the company’s patents are both valid and valuable.^[142]

Limitations and criticisms of patent litigation insurance

9.94 Patent litigation insurance does, however, have a number of limitations. The costs involved in obtaining and maintaining patent insurance are significant and, in some cases, prohibitive.^[143] The EC Insurance Report concluded that, in the United States, Europe and Japan, ‘high costs have meant that insurance has only been of interest to the few’.^[144] Further, the report commented that ‘no insurance scheme [in Europe or the United States] has shown any capacity to provide adequate cover at premiums affordable to patentees in general’.^[145]

9.95 The coverage provided by a patent litigation insurance policy may be limited in a number of ways.^[146] In addition to co-payment provisions,^[147] the value of legal costs that an insurer will cover is generally limited to a predetermined indemnity level and may exclude coverage for certain costs. For example, in the case of patent infringement liability insurance, punitive or exemplary damages and fines are generally excluded. Territorial limitations may also apply, leaving the insured to pay all costs involved in patent litigation outside the designated countries covered by its policy. For patent enforcement litigation insurance, coverage may be limited to specific patents or may only cover a company’s patent portfolio at the date the policy was issued, with payments required to update the policy to cover new patents.

9.96 Other conditions contained in patent litigation insurance policies may limit the insured’s discretion in formulating a litigation strategy. Policies typically make coverage conditional on the insurer’s approval of the patent holder’s legal counsel and litigation budget.^[148] In some cases, an insurer may also require control of the litigation.

9.97 A number of submissions to the Inquiry expressed concern that patent litigation insurance may make the cost of challenging and litigating patent rights prohibitively expensive,^[149] or at least deter challenges to patent rights.^[150] This view seems to assume that, if a party to a patent suit is insured, it will refuse to settle proceedings, or will engage in tactics requiring the other party to spend large amounts of time and resources to participate in the suit.

Government consideration of patent insurance schemes

9.98 Currently, patent litigation insurance is available only from private sector insurers. However, reports in Australia and Europe have addressed the possibility of a patent insurance scheme being administered by the government as part of the patent system.^[151]

9.99 In 1999, ACIP considered whether a levy should be imposed on all granted patents to fund insurance coverage for infringement litigation and validity challenges.^[152] ACIP concluded that such insurance should be left to the private sector and that involvement by government would be inconsistent with the government’s policy that ‘its primary role in the IP area is to ensure Australia has effective IP and legal systems’.^[153] Nonetheless, ACIP suggested that industry associations, education institutions and IP Australia might wish to include intellectual property litigation insurance as a topic in future awareness programs.^[154]

9.100 In Europe, the EC Insurance Report was commissioned to examine the feasibility of implementing a patent litigation insurance scheme for widespread use in the European Union. The report is based on a preliminary empirical and analytical study of the patent litigation insurance market in Europe, the United States and Japan. It concludes that the European Commission should continue its efforts to develop a patent litigation insurance scheme.^[155] The EC Insurance Report also makes recommendations about the structure of any such scheme, including that it should be compulsory and that premiums should be collected annually through the patent system and might be varied according to the size of the patent portfolio.^[156] The European Commission does not appear to have taken any action on the report to date.

ALRC’s views

9.101 In the ALRC’s view, intervention either to encourage or further limit the availability of patent litigation insurance in Australia is not appropriate at this stage. The decision to purchase patent litigation insurance is a commercial one to be made by an inventor, research organisation, biotechnology company or other entity, having regard to its own commercial needs and business strategy. Those with limited resources may be willing to risk involvement in litigation without the cushion of insurance, and to invest the amount that would have been spent in insurance premiums in further research and development, or marketing efforts.

9.102 Patent litigation insurance may be beneficial to the operation of the patent system as a whole. As outlined earlier in this chapter, the cost of challenging or enforcing patent rights and the complexity of such matters may be prohibitive for certain entities or individuals. Patent litigation insurance may provide the financial resources necessary to participate in such suits and could encourage challenges to gene patents that are of questionable validity.

9.103 The ALRC agrees with ACIP that information about patent litigation insurance should be more readily available to Australian patent holders. As a practical matter, the availability of patent litigation insurance to Australian inventors, research organisations and biotechnology companies is limited. However, such entities would benefit from a greater understanding of the benefits and the limitations of patent litigation insurance. This would assist in decisions about whether to invest in patent litigation insurance, and how to deal with a third party who has such insurance in licence negotiations or litigation. In Chapter 22, the ALRC recommends that Biotechnology Australia, in conjunction with its member departments, develop various programs to assist research organisations and biotechnology companies.^[157] Patent litigation insurance should be included as a topic in such programs.