Community Patent Study - "The possible introduction of an insurance against costs for litigation in patent cases"

March 13, 2003

Brussels, 12 Mar 2003

The possible introduction of an insurance against costs for litigation in patent cases"
by CJA Consultants Ltd, European Policy Advisers, Britain and Brussels

[...] EXECUTIVE SUMMARY

1. No member state has any substantive law specifically on patent litigation insurance, nor has the USA, although there has been inconclusive discussion about the possibility of such legislation in some countries.

2. While schemes are marketed in the EU and the USA, including Patent, trade mark and copyright cover, it appears that in no part of the world has Patent Litigation Insurance (PLI) been particularly successful, and more to the point, particularly in relation to SMEs, no insurance scheme has shown any capacity to provide adequate cover at premiums affordable by patentees in general. This is partly because of high levels of premium and low levels of indemnity. Recent attempts by insurers in several countries to widen the market for PLI have not met with great success.

3. In France the state backed 'Brevetassur' scheme fifteen years ago did not succeed. In the USA and Japan, PLI is normally limited to defence only. The tacitly assumed successful and wide use of insurance in the USA proved to be illusory. No substantial guidance was found in the limited experience there. Everywhere high costs have meant that insurance has only been of interest to the few. In the EU, it has been estimated that under one thousand PLI policies in total have been taken up, a tiny figure in relation to the aggregate total of patents.

4. Contacts were made with patent lawyers and attorneys, insurance companies, and brokers and companies interested in patents, large and small, throughout the EU; and in the USA. The Insurance industry was contacted in Japan.

5. Of the substantial number of companies, predominantly SMEs, patent lawyers and attorneys consulted, an overwhelming proportion of companies desired insurance cover, but as much as defendants to infringement actions as patentees pursuing infringers. An equally large proportion desired cover for damages as well as for litigation costs. The patent lawyers and attorneys agreed on this although views were in some other respects different from their clients.

6. Few insurance companies offer patent litigation insurance in Europe and while there is considerable experience in Europe through Lloyd's, Allianz and some other insurance companies, the volume of such insurance has not been great. It could indeed be said that each insurance experience has been unique to its own circumstances. Only one insurance company stated a preference for compulsory insurance. However all companies were aware of possible beneficial aspects of a scheme covering all patentees, especially as to the costs and administrative aspects, and none were hostile to the possibility. In only five countries do brokers have significant experience of patent litigation insurance (Germany, Austria, Belgium, Sweden and the UK ).

7. A very high proportion of patent orientated companies, patent lawyers, and attorneys considered that the possibility of the European Commission taking steps to set up patent litigation insurance throughout Europe was of interest and would be beneficial.

8. They were almost unanimous in their written responses in opposing compulsion for the take-up of patent litigation insurance, but in all cases except one this was based on the general grounds that compulsion in an economic field such as this was repugnant, with a strong undertone of hostility to the extension of EU power. It is important to note that the questions as asked did not in the least associate the possibility of compulsion with reducing costs and administrative complexity and the answers undoubtedly did not link these with compulsion.

9. Re-consideration revealed a willingness to contemplate compulsion if the savings and benefits were great enough.

10. In Denmark and Finland there is no patent litigation insurance at present though there is active consideration of the possibility in Denmark. Italy and Portugal show some interest but have no experience: the Italian market in particular appears quite unprepared for this type of insurance.

11. Three EU countries appear to show little interest: France, Spain and the Netherlands, except at official level.

12. Outside the EU, Japan shows interest but has little experience except of defence. Contrary to received belief the extent of patent litigation insurance in the USA appears small in relation to the extent of litigation and is limited to defence including damages.

13. The economic effects of possible patent litigation insurance schemes are considered likely to be significant. The cost of any scheme to users will depend mainly on the level of premium, charges for risk assessment etc and whether or not the scheme is compulsory. The position of SMEs is important as they are currently falling behind larger firms in patenting inventions.

14. Insurers showed interest in and willingness to consider a European PLI scheme. However, insurers showed considerable trepidation at the risks involved since these could not be estimated without a much better statistical base than existed, and they knew of no way of obtaining the necessary figures. The final recommendation made, namely that the Commission should research these statistics, is of the greatest importance as without this information progress is unlikely to be made with insurers.

15. The Round Table discussions with companies and patent professions in member states representing over 70% of the GDP of the EU showed substantial unanimity on the desirability of an insurance scheme covering patentees and defendants for costs and for damages for infringement.

16. While there remained an underlying hostility to compulsion, it was accepted that only a compulsory scheme could achieve the volume necessary to spread risk and permit low premiums.

17. As the study revealed no widely used schemes, it was agreed with the Commission that it would not be possible to put forward possible measures in detail. However recommendations designed to aid progress are clearly made.

18. As the base of experience is so small, there are dangers in extrapolation, but it seems highly likely that the existence of a widely used European Patent Litigation scheme would, by increasing the security and strength of a patent, encourage prospective patentees to patent their inventions. The Danish government study foresaw large potential economic benefits.

19. Round Table discussions confirmed that the expected effects of widely used PLI cover are that more patents will be applied for by small companies, because they will feel more confident of defending them. More patents will be actively exercised by the patentee approaching possible infringers, and more small and medium sized companies will respond intelligently to allegations of infringement, not simply giving in to implied threats of infringement by abandoning manufacture, as is often the case at present. It is thought likely that more licenses will be negotiated with a clearer and more accurate picture of the scope of the rights licensed. As an overall result, technological progress will be aided.

20. Wider use of PLI is thought likely to increase the amount of litigation, and this must be considered desirable as leading to greater effectiveness of the patent system. However any PLI scheme must also be designed to lead to quicker and fairer settlements, including more licensing in appropriate cases. It will be necessary to structure the policy to encourage out of court settlements. The average cost of proceedings in such a case would fall; though the aggregate costs of an increased number of proceedings would probably rise. If patents are regarded as more useful and more are taken out, then PLI will enhance the patent system's ability to advance technology in Europe.

21. It is possible alternatively that insurance will encourage more patent applications by lessening fear of the expense of litigation without actually increasing litigation. This would also be a favourable outcome.

22. The key practical conclusions of the study are that

· It is well worth continuing the investigation of a Patent Litigation Insurance Scheme to the EU
· PLI should be split into two parts where the first is used to cover initial investigations, at which stage most conflicts will be settled, and the second much more substantial amount becomes available only if the risk assessment by the insurer accords the patentee or defendant or both a reasonable chance of success.
· It is likely that any scheme will have to be compulsory (at least insofar as the basic requirements and cover of any scheme are concerned) because no voluntary scheme will attract the large number of patentees required to make the it viable with a low fixed premium
· Insurers will need better statistics to assess risk and these must be provided at an early stage

23. Companies and the patent professionals showed unanimous interest in and support for a low premium PLI scheme in which a moderate sum would be available to both sides for preliminary investigations. In the great majority of cases such preliminary investigation would settle the matter at relatively low cost.

24. Risk assessments, which are both expensive and complex, would be confined to the very small proportion of patents, roughly one in one thousand, where early settlement was found impossible. Both parties would be supported at this stage provided that the risk assessments on both sides showed a 50:50 or better chance for each. Even then, in a considerably proportion of cases the process of assessing risk is likely to result in a settlement without recourse to a full trial.

25. While a very wide range of possibilities was considered, it became clear that the range of practical possibilities was narrow and involved:

· Low premiums (say 300-600 Euros pa)
· Compulsion
· No initial risk assessment at the first stage
· A restricted amount for initial investigations (say 35,000 Euros)
· Cover for patentee and defendant
· Substantial encouragement for early settlement.

26. On this basis the study outlines a scheme and options( see Conclusions, section 14; Recommendation, Section 18 and a table of options for the scheme, Appendix D) that could be further developed by European Commission with insurers, companies and patent attorneys, and describes other schemes from which elements could be drawn. Further work is needed, with patent professionals, companies and insurers, to develop these basic ideas into a scheme that is viable and in which all sides could have justifiable confidence. Nonetheless this study seems to have begun a change in the attitude of certain prominent insurers, initially opposed, in favour of a compulsory scheme.

. There are considerable difficulties to be faced, notably ensuring the participation of major insurers, and getting a scheme started. No one should be in any doubt that this would be a major task. However, it appears that the elements of a practical scheme may have emerged.

The possible introduction of an insurance against costs for litigation in patent cases"
by CJA Consultants Ltd, European Policy Advisers, Britain and Brussels

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