When a Patent’s Not Enough

Do the math and it’s easy to see why companies such as Pencil Grip Inc. in Santa Monica are increasingly turning to insurance to level the playing field in the high-priced, high-stakes game of patent protection.

The company sells about $1 million worth of its colorful synthetic-rubber pencil grips each year, according to Vice President Paul Ewin. By comparison, a patent infringement lawsuit in California typically costs $1.75 million, before trial. If the suit makes it to trial--which most don’t--and through the appeals process, the cost could balloon to $3.5 million, according to a new survey by the American Intellectual Property Law Assn.

“There is no way a company of our size could ever afford litigation to protect our patent,” said Ewin, who with company President Asher Provda was making a final decision among three patent insurance providers.

Patent insurance has been available for a decade or so, but few insurance companies offered it, coverage was limited and costs were high. That has begun to change, and awareness of patent insurance has begun to grow.

“This is becoming so huge, and nobody recognizes it,” said Joby A. Hughes, founder and president of Litigation Risk Management in Houston. Business has doubled this year at the company, which provides risk-management consulting primarily for larger companies that want to apply to its underwriters at Lloyd’s of London for patent insurance.

At Louisville, Ky.-based Intellectual Property Insurance Services Corp., a longtime patent insurance provider that specializes in small and medium-size companies, the number of customers has been growing 30% to 60% a year for the last five years, according to President Bob Fletcher.

Inventor Rod Walz was an early believer. The software designer invented a paper form that streamlined the process of sending certified mail. It had been an expensive chore for banks, insurance companies, law firms and other companies that prepare hundreds or thousands of pieces of certified mail by hand each year.

In the early days of Walz Postal Solutions of Fallbrook, Calif., Walz received a postcard from Intellectual Property Insurance Services touting patent enforcement insurance. He signed up immediately.

Within a year he stumbled across a knockoff of his form at a trade show. He could tell it was his because he had embedded secret codes throughout the multi-page form.

“It really opened my eyes that, yes, this can happen,” Walz said. And it happened again. Eight times in fact. Each time Walz was able to stop the infringement without a lawsuit once he notified the offenders, because they knew he had access to deep pockets and thus the legal firepower to come after them.

The company now spends $14,000 a year to cover five patents. It’s a bargain compared with the $20 million in sales his forms have rung up over the last 12 years, according to Walz.

“Having a patent is nice and you can put a plaque up on the wall, but the fact is, if someone infringes, you have to spend money to go after them,” said Walz, who now designs package-tracking software for clients such as Disney Studios and Bank of America.

In fact, a company doesn’t have the luxury of ignoring an infringement of its patent. If it does, it risks losing the right to enforce the patent in the future, rendering it useless.

That is a rude awakening for many independent inventors and smaller companies.

“People have realized that when they get a patent it’s kind of like an unloaded gun,” said patent attorney Bob Lauson of Cislo & Thomas in Santa Monica.

“If someone infringing your patent says, ‘Take a long hike off a short pier,’ ” you don’t have much choice unless you have the funds to enforce it, said attorney Bart Kessel, a partner at Arter & Hadden in Los Angeles. And many law firms won’t take a patent infringement case on a full contingency-fee basis because patent litigation is so expensive, even for them, he said.

Patent enforcement insurance is meant to address that problem. It is one of essentially two kinds of patent insurance. The other is called defensive insurance.

Enforcement or offensive insurance covers the legal costs of enforcing your patent against those who infringe. An insurance company may or may not cover preexisting infringement.

Defensive insurance, on the other hand, pays the legal costs of defending against a charge of infringement. Some defensive policies also cover damages incurred as a result of infringement.

There are variations and custom packages available in each type.

The cost depends on the number of patents covered, the commercial value of the patents, the risk of patent infringement and, of course, the amount of insurance being bought.

Costs vary, but Intellectual Property Insurance Services, an industry veteran, estimated a company with normal risk could buy its minimum coverage--$100,000 worth of enforcement insurance for one patent--at an annual cost of $1,447. That means you have access to $100,000 from the insurer to spend on legal fees to enforce a patent. Typically, you would be responsible for a 20% co-payment.

Enforcement insurance is usually bought by companies that don’t have the money to go after those suspected of infringement. Once a company tops $200 million or so in revenue, it might decide it can afford to self-insure, according to Hughes of Litigation Risk Management.

His company tends to work with larger firms with portfolios of patents that have a high value in the marketplace. His company charges a one-time evaluation fee of about $25,000, which covers the cost of an economic assessment of the patent portfolio by Deloitte & Touche. To buy $1 million to $3 million in coverage for a family of patents costs an estimated $25,000 to $75,000 a year, according to the company.

Many companies are surprised to learn that their general liability insurance policy may not protect them against patent infringement lawsuits. Burned by catastrophic losses in legal fees and settlements, general liability insurance companies are leaning away from such defensive coverage.

“Patent insurance is becoming more popular partly because the general liability underwriters are being more active about specifically excluding intellectual property risks under general liability policies,” said Diane Kooken, senior vice president at Marsh Inc., the world’s largest insurance brokerage.

Check your policy carefully and talk to your insurance broker to make sure there are no intellectual property exclusions, Hughes said. If there are, make sure you understand how they affect your business, particularly your advertising. Small businesses, because they often buy cheaper general liability policies, may be “bare” when it comes to defensive insurance coverage, he said.

“We see huge gaps all the time,” Hughes said.

Fletcher of Intellectual Property Insurance Services isn’t taking any chances. He has applied for a patent for his patent enforcement insurance program. The first thing he plans to do when the patent is issued? Buy insurance for it.

“By all means,” Fletcher said. “Patent litigation is so expensive. We could never afford it.”

Have you received a provisional patent? We’d like to hear about your experience. Write to Mind to Market, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or send e-mail to cyndia.zwahlen@latimes.com.