Advantages of a Specialist Intellectual Property Insurance Policy

In today's competitive landscape, intellectual property (IP) has become one of the most valuable assets of UK tech companies. From innovative products and unique branding to proprietary technologies and creative works, protecting intellectual property is crucial for staying ahead. However, with the increasing prevalence of litigation surrounding intellectual rights, the risk of infringement claims and legal disputes poses a significant threat to a business's financial stability and reputation, and their confidence to innovate.

Recent intellectual property disputes in the UK

Last year, UK courts addressed the application of intellectual property law principles to cases involving emerging technologies and fair, reasonable and non-discriminatory (FRAND) disputes over the terms of a standard-essential patent (SEP) licence, among others.

The general trend in the UK and worldwide is: (i) the tech sector is increasingly concerned by the uptick in IP disputes; and (ii) IP litigation costs and damages awards are increasing. While IP represents the majority of the value of tech companies, many are unaware of the litigation risks associated with that IP and the steps they can take to transfer that risk off their balance sheets.

Professional indemnity cover may exclude patents and trade secrets

Many tech companies will have some intellectual property coverage in their professional indemnity insurance policies and so will conclude that the business’s IP is fully covered. A closer look frequently reveals standard exclusions in these policies, generally concerning patents and trade secrets, and narrower cover than would be available in a specific IP insurance policy. The consequences of these vulnerabilities could be financially devastating for a business if they face an allegation of infringement or if they suspect another party of infringing their IP.

An instance of trade secret infringement can occur when a business hires employees from competitors who may have proprietary knowledge or trade secrets from their former employers. In such cases, the previous employer may file a claim of infringement, thus necessitating a defence from the new company. It is essential to establish strong employment contracts when recruiting from competitors, explicitly stating that new hires are prohibited from bringing any trade secrets with them.

Meanwhile, patent litigation can also lead to significant legal costs, as it is complex and will require expert witnesses, as well as sophisticated defence counsel. A company facing patent litigation may have to remove products from the market, incurring related withdrawal expenses and loss of profit.

IP licensing is a key revenue stream, particularly for tech start-ups who wish to monetise their innovations without selling their IP, bring those innovations to the market more swiftly, increase brand recognition, and build strong strategic partnerships. If a patent is licensed to another party and a claim is made against them, the licensor may be contractually obliged to indemnify that party. These losses can also be covered under a standalone IP policy.

Moreover, owning patents is not a prerequisite for being sued for patent infringement; anyone can assert that another party is violating their rights. Regardless of the legitimacy of these claims, the costs associated with defending against them can be substantial. The rise of non-practicing entities (NPEs) otherwise known as “patent trolls," who acquire books of patents not to develop or market products but primarily to enforce their patent rights against alleged infringers, adds to this risk. These entities often file lawsuits or threaten legal action to extract licensing fees or settlements from companies they allege are infringing their patents.

How to mitigate intellectual property risk

Recent data shows that a high proportion of patent litigation occurs within the technology sector. Tech companies can implement several strategies to transfer their intellectual property risk, particularly that relating to patent lawsuits. They can either remove all intellectual property coverage from their other insurance policies and instead purchase a dedicated standalone intellectual property policy, which provides cover specifically designed to respond to all types of IP disputes. Alternatively, they can obtain a bespoke IP policy solely for patents and trade secrets to avoid any coverage overlap.

Before securing coverage, tech companies should review their insurance policies to check what, if any, intellectual property coverage is provided and to determine if trade secrets or patents are excluded.

Intellectual property is a significant source of potential litigation, and there are no indications that this trend will diminish. A dispute can be extremely costly and, for some companies, even catastrophic. All companies should quantify their potential intellectual property risks and consider transferring them through insurance.

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