Thursday, 27 August 2015

Thinking the unthinkable? Patent troll insurance of the other kind

From time to time one spots items in the news on what is sometimes termed "patent troll insurance". Without prejudice to the appropriateness of the derogatory term "troll", which can cover patent enforcement entities of all sorts from the purest of the pure to the most maliciously parasitic, this blogpost looks at just one small issue: whether insurance companies have missed a business opportunity.

In short, policies are offered which enable manufacturing and trading business to offset part or all of the risk of being sued for patent infringement by a patent proprietor which -- not manufacturing or selling anything itself -- typically has no commercial interest to protect though securing an injunction and is only interested in receiving damages from defendants that have refused to accept the terms of a royalty-bearing patent licence.

Insurers' favourite game?
While the cost of defending a patent infringement suit in such a situation can be unaffordably high even if the targeted non-licensee is successful, the cost of paying the licence fee demanded is much cheaper and, even if obtained by extortion, can be seen as a fixed cost that is not going to break the defendant's business, which is why so many threatened businesses simply pay up.  When "anti-troll" insurance is available, the choice facing a manufacturing business is theoretically simple, in financial terms: if the amount one is asked to pay by way of royalties by a troll is equal to the amount one is asked to pay for one's anti-troll insurance premium, a business can look at the spread of relevant patents in and adjacent to its own activities and then assess the 100% certainty of paying the insurance premium against the likelihood of receiving a demand from a troll, which may be lower or higher (where there are several trolls at play or a large number of potentially threatening patents). The more cost-effective insurance becomes for the policy-holder, the more insurance should drive down the amounts demanded by trolls if they are to tempt target companies to pay up without contesting their infringement claims. However, things are never so simple in reality, and the financially unquantifiable of the stress, the emotional toll and the disruption to a business's operation that are the natural by-products of patent litigation must also be factored in.

What is significant is that, so far as can be seen, there are no insurance policies that have been overtly tailored for and marketed to patent assertion entities. These entities too face litigation costs and risks too, and their business models depend upon the continued validity of the patents they assert.

Why is it that insurance companies are not devising and selling troll-friendly insurance policies so that patent assertion entities can guard against unsuccessful outcomes to their litigation? It surely cannot be that they do not face an insurable risk.  Given that, at least to the interested but non-involved layman, they appear to be fairly profitable -- maybe more so than businesses at large -- it can't be that insurance companies don't think they can afford to pay their premiums.  If however it is because the risk they face is so low that they could never be persuaded to part with any of their money in order to obtain the security that insurance provides, the asymmetry of risk between hunter and hunted is something at which we should take a pretty close and critical look.

1 comment:

  1. Why should NPEs bother with any insurance? If one of their patents goes under, that's just a minor inconvenience. They can always buy another.