Towards IP insurance: defensive patent aggregation

23rd February 2015

IP risk, the chance that an organisation may become the subject of patent litigation, is something that intrigues and confounds traditional insurance companies at the same time.

It is a risk class they want to engage with, have tried to engage with in limited ways, but is to date too impenetrable and too opaque to represent a viable insurance market. The issue is a lack of data, or at least a lack of accessible data on which to base underwriting decisions around levels of risk.

The greater accessibility of business intelligence related to patent data and risk, to which Cipher is a contributor, does bring this kind of insurance market closer to reality, but it remains some way off – not least because the insurance market has no need, yet, to view IP risk as anything other than a specialist risk.

In the meantime, however, some interesting developments are in the works; developments that may signal an altogether different route to IP insurance – and the organisations at the forefront of these developments bear some interesting hallmarks.

Anyone who has followed the news around IP and patents over the last few years will be aware of two pervasive stories – the endless smart phone wars, and the rise of the non-practicing entity (NPE), aka the ‘patent troll’.

Some NPEs can also be described as ‘aggressive patent aggregators’. They acquire and aggregate patent portfolios with the aim of monetising those patents through rights assertion – both licencing and litigation.

On the other side of this same coin, a new kind of patent aggregator is starting to emerge – the defensive patent aggregator (DPA) – and these entities are increasingly starting to resemble fledgling insurance companies of an entirely new variety.

In essence, these DPAs buy patents and then sell bulk licences in the form of membership fees to member organisations. The benefit to members is clear. DPAs take problematic patents off the market; by conferring licence rights they protect members from litigation and lower the cost of that protection by offering licences at a fixed fee.

As Raymond Millien put it in a post on the IPWatchdog blog, this kind of approach to lowering risk is akin to insurance: “Unlike NPEs, defensive patent pooling entities do not (at least initially) seek to generate revenues. Rather, they charge admission fees into the pool to fund IP acquisitions and the administrative costs to operate the pool. In sum, defensive patent pool aggregation is analogous to an insurance policy. But, where classic insurance lowers a company’s costs when accidents happen, patent pools are designed to reduce the likelihood of accidents (i.e. being sued for patent infringement) happening at all.

Perhaps the best-known and most developed example is RPX Corporation, which is entirely clear about its motives. RPX sees itself ultimately as an insurance company. In important ways it already acts like one, stepping in to negotiate with NPEs on behalf of members facing legal action – in much the same way as a traditional insurance company will act on behalf of clients facing general liability claims.

Speaking at a November 2013 conference organised by University College London’s Institute of Brand and Innovation Law, RPX senior vice president, Henri Linde signalled bigger plans: “If I’m really optimistic, in the next five years RPX is no longer a patent buying entity but an insurance company. We actually have an insurance division at the moment that insures against litigation, but at this point we only cover good drivers, not the drivers who have two accidents a week. We would like to insure them but they wouldn’t like our premiums.”

The barrier to insuring those ‘bad drivers’ was a familiar one – data. Just like a traditional insurance company, RPX at the time recognised that a lack of transparency was holding back the development of rational markets for IP, and therefore the development of it’s own insurance business.

Much has changed since then. RPX’ continued aggregation of patents, along with the acquisition of a patent data provider PatentFreedom, has provided it with the data and the insight required to take its insurance capabilities to a new level.

For example it “…recently launched a product geared to the unique needs of early-stage/venture-backed companies only just starting to face NPE risk. Low annual premiums start at $7,500+ for $1 million in coverage and the policy provides broad coverage to ensure start-ups can avoid a potentially damaging financial event and maintain uninterrupted operation.”

That sounds, to all intents and purposes, like a commoditised IP risk insurance product – it is certainly a significant step towards that goal.

So, maybe functioning insurance markets will evolve sooner than anyone might have imagined – driven by data, but also by a completely new breed of data rich insurance company. It will be interesting to see how this market develops, and how traditional insurance markets react.

Category: Publications