Report of the UK Patent Office's Patent Enforcement Project Working Group - Includes Proposal to Set Up Mutual Insurance Association (link)

London, 30 Jul 2004

Full text of the report compiled by Michael Edwards & Associates acting as advisers to the Patent Enforcement Project Working Group.

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1. Executive Summary

1.1 Before examining the substantive issues it was necessary to determine whether there were any legal obstacles to the establishment of a Patent Enforcement Project (PEP), particularly if state funding was employed to assist small and medium sized enterprises (SMEs) to prevent infringement of their patents.

1.2 The two key issues were state aid, and maintenance & champerty (giving of assistance or encouragement to one of the parties to litigation by one who has no interest in the litigation).

1.3 Although steps will need to be taken to ensure compliance with the EU Treaty provisions relating to state aid, and care will need to be taken in the setting up and operation of the PEP, these issues will not constitute absolute barriers to the establishment of a PEP.

1.4 We considered case studies of the various alternative models that might be employed to achieve the aims of a PEP, namely mutual insurance societies; the current IP insurance market; and the establishment of commercial companies which would invest in a patent by funding the cost of enforcement in return for a share of any settlement or damages award.

1.5 We concluded that establishing a commercial litigation support company would involve a high level of risk and produce little impact on the problems of the majority of patentee SMEs.

1.6 We concluded that a mutual insurance association for patentees, broadly along the lines of the Medical Defence Union which provides indemnity insurance cover for its members, could be a viable means for achieving the PEP's aims provided:

• a sufficient number of low and medium risk members can be attracted to join, possibly through the provision of ancillary services,
• the means can be established of cheaply assessing the level of risk of a particular patent and patentee, in order to create the differential pricing of cover necessary to attract the low-risk to medium- risk patentees.

1.7 The cost of patent litigation is an obstacle preventing SMEs from enjoying the benefits of the patent system. Alternative dispute resolution (ADR) and particularly compulsory technical arbitration have been vigorously proposed to overcome this obstacle. The overwhelming majority of patentees interviewed were opposed to the idea of compulsory arbitration: any attempt to impose compulsory technical arbitration would meet with very strong opposition, seriously delaying or preventing the setting up of a PEP.

1.8 However there are signs that the use of ADR is growing in IP disputes, and more must be done to encourage this.

1.9 The PEP Working Group has concluded that a Patent Enforcement Project in the form of a mutual insurance association may well be feasible. A group of experts should be established with an adequate budget to carry out a feasibility study of the proposal and to deliver a comprehensive business plan.

1.10 The proposal, set out in Annex 1 calls for:

1.11 The establishment of a mutual, open to all patentees, owned by its members, limited by guarantee and governed by a board elected by members.

1.12 It would be funded by subscriptions, income from investments. Additional funding may be possible through recoupment of costs from patentees the mutual has successfully assisted to obtain a favourable settlement or damages.

1.13 Government funding would be required for an initial period while membership numbers grew to a level for the mutual to be self sustaining.

1.14 The mutual would provide cover to fund preliminary investigations to establish the scope and validity of the patent for any member who can show prima facie that their patent is being infringed.

1.15 The mutual will also purchase patent insurance to cover the litigation costs of any member whose preliminary investigation shows a strong case that its patent is valid and has been infringed.

1.16 The mutual should establish a panel of high quality lawyers in the United States who would be prepared to take on mutual- funded cases on a contingency basis.

1.17 Premiums, or member subscriptions, must be priced differentially, according to risk.

1.18 The government should ensure that reliable statistics are gathered which will enable insurance underwriters to properly assess risk.

1.19 The mutual will also administer discretionary funds which it can allocate to topping up insurance cover to enable litigation brought by SMEs to be pursued in appropriate cases where the insurance cover is insufficient.

1.20 The mutual will access the reinsurance market for cover against catastrophic loss such as the loss of a succession of cases, or a large number of costs orders against the mutual.

1.21 The mutual will not provide any cover against damages, and will not provide defensive cover against infringement proceedings.

1.22 All members of the mutual would pledge to explore the use of ADR in any dispute with another mutual member.

1.23 The litigation insurance policy should require the appointment of a mediator prior to litigation, except in cases where it is clearly inappropriate, e.g. where an urgent injunction should be sought first.

1.24 The government and a body such as the CBI should sponsor a pledge on ADR similar to that advanced by the CPRI in the USA (See 5.a.iii below), and explore international promotion of the pledge.

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