IP Rights SIG/Insuring against Intellectual Property Risks
International Game Developers Association
Table of contents |
[edit] Insuring against Intellectual Property Risks
[edit] Overview
Have you ever considered how you would cover the costs of legal proceedings brought in relation to your or a third party's intellectual property (IP) or intellectual property rights (IPR)? IP litigation insurance covers legal expenses in the event of such legal proceedings. Specialist complementary IP insurance products are also available to cover different events involving IP.
IP litigation insurance covers reasonable expenses, fees and disbursements incurred by your approved legal representative(s) appointed to act in relation to your insurance claim, including legal expenses incurred in pre-court proceedings. This type of insurance may also cover any damages you are liable to pay as a result of IP litigation.
A wide range of standard and tailor made IP insurance products are available. However, at present the number of insurance companies offering each type of insurance is limited. Premiums for this coverage can be very high and the extent of coverage may be very limited. If you want this type of insurance, be sure it is budgeted when you bid on a project. Please note that normal commercial legal expenses insurance does not cover intellectual property related litigation. IP insurance can be obtained for claims relating to:
- Patents, petty patents, utility models, supplementary protection certificates,
- Registered trade marks, unregistered trade marks, passing off, brand names, devices, logos, get-up, domain names, unfair competition, injurious falsehood,
- Registered and unregistered designs
- Copyright works, semi-conductor topography rights, rights in relation to databases,
- Applications for a compulsory licence or licence of right,
- Trade secrets, confidential information, know how,
- Agreements relating to IP and IPR, including confidentiality and non-disclosure agreements, and licensing agreements,
- Technology transfers,
- Loss in revenue streams generated by your IP or IPR.
[edit] Types of IP Insurance
The following sections describe the main categories of coverage that can be obtained.
[edit] IP Enforcement
Covers legal expenses incurred when you pursue any legal proceedings or claim against a third party for infringement of your IPR, including legal costs for defending a counterclaim brought by the third party as an act of defence against your claim, for example, a counterclaim challenging the validity of the IPR in relation to which you brought your claim.
[edit] IP Defence
Covers legal expenses incurred when you defend any legal proceedings or claim brought against you by a third party for infringement of the third party's IPR, including legal costs for bringing a counterclaim as an act of defence against the third party's claim, for example, a counterclaim challenging the validity of the IPR in relation to which the third party brought the claim. May also cover damages if you are found to be infringing.
[edit] IP Protection
Covers legal expenses incurred when pursuing or defending any legal proceedings or claim, brought against you other than by way of a counterclaim, challenging your ownership or rights in your IPR, including challenges to the validity or scope of your IPR, your entitlement to your IPR, and applications for a compulsory license under your IPR.
[edit] IP after the Event
Intellectual property litigation insurance is not readily obtainable once a risk has a known "history", and there is no guarantee that insurance can be obtained after a problem has come to light. However, in some cases IP insurance may be offered following an "after the event" assessment of the circumstances.
[edit] IP Exploitation Agreement
Covers legal expenses incurred when pursuing or defending any legal proceedings or claim for breach of an agreement relating to the exploitation of IP or IPR, including licensing, confidentiality and distributor agreements, and warranty and indemnity clauses.
[edit] IP Asset protection
Covers against loss in revenue stream from your IP or IPR as a result of, for example, an unsuccessful defence of an infringement action preventing your marketing of a product, government action preventing exploitation of your IPR or adverse media. Cover includes reimbursement for R&D costs and loss of profits.
[edit] Applying for IP insurance
Insurance companies perform assessments, based on the information given in your insurance proposal form, prior to providing indicative premium quotes. Popular information requested by insurance companies relates to the nature of the IP, IPR or related aspects sought to be covered, the owner of the IP or IPR, the nature of any business activities relating to the IP or IPR, and any previous or potential disputes regarding the IP or IPR.
In addition to knowing what is to be covered by the IP insurance, the insurance company also needs to know what geographic area is to be covered by the insurance policy. Therefore, you need to consider in which territories IP insurance would be most beneficial.
Your IP agent/attorney should be able to advise you in relation to the IP insurance you are seeking, and assist you in completing requirements for an insurance proposal. An insurance company may want to discuss your IPR with your IP agent/attorney, as part of the assessment of your proposal form, therefore you are advised to inform your IP agent/attorney that you are seeking IP insurance.
Always ensure that you request and read a copy of any insurance policy you are considering, as policies vary greatly. If you have any questions regarding any part of a proposal form or insurance policy, ask for clarification from your insurance company contact. It is also advisable to ensure that your insurance provider is a member of a recognised insurance standards council and/or insurers trade association.
[edit] IP Due Diligence
Of course, the other aspect of avoiding IP risk is to ensure sufficient due diligence when dealing with IP acquisition or usage. In the specific field of Intellectual Property, due diligence traditionally involves verifying the existence and validity of intellectual property itself within the context of a financial negotiation. In short, what is the value of the intellectual property?
[edit] Inbound and Outbound Due Diligence
Inbound due diligence is a due diligence exercise carried upon the IP of your company by another company, investors, buyers, etc. The purpose is always to establish whether your IP exists, is valid and enforceable (if appropriate).
Outbound due diligence is a due diligence exercise carried upon the IP of another company, which your company is interested in acquiring/using/copying, with a view to an outright purchase, a usage license or simply check against potential infringement liability.
Regardless of whether you are looking to acquire or using IP, whereby you would carry an outbound due diligence exercise, or looking to gather capital, whereby your VCs would carry an inbound due diligence exercise, most of the information below applies and therefore, just substitute 'Investors' therein as appropriate to your situation
[edit] Due Diligence 101, applicable to Inbound and Outbound
Within the context of a financial-type negotiation, a due diligence exercise aims to find out whether the price tag you have put on your IP or a portion thereof as a license, assignment or portion of company share price is warranted. Alternatively, it maybe carried out by your competition to check whether an infringement liability may arise out of their tweaking some or all of your IP without the safety net of a license, ie without your consent, express or implied.
Thus, when your investors or suitors or competitors consider your portfolio of patents and/or trademarks and/or registered designs, the three overriding questions are:
- What is protected;
- here is it protected; and
- Have renewal fees (if applicable) been paid, ie is the patent, trademark and/or design registration still in force?
In matters of software-based businesses, of which most game companies are, answering 'plenty' to (1) and (2) above, as well as 'yes' to (3), guarantees your investors you are a worthy and serious business, and your competitors that they better come sit to the table to do a deal. Answering 'nothing' to (1) guarantees you will never, ever even get a look in from anybody to make a deal!
[edit] Patents
Investors most favour registered rights, such as patents which, as a result of the Web bubble blowing up in their faces not so long back, have become a commodity of sorts: potentially, the only cash-generating assets when it has unfortunately all gone south. Alternatively, investors see patents as an attractive and effective market tool to generate licensing revenue and block competitive products through the use of cease-and-desist orders (which inform the recipient that you suspect they've infringed on your patents, and that you intend to enforce your rights). It is therefore important to maintain existing patents in your IP portfolio by paying appropriate renewal fees (depending upon the jurisdiction) throughout their enforceable life.
[edit] Registered Trademarks
Investors next favour trademarks, even if those may be relatively new and have comparatively little 'pull' in the market-place. They are registered and may for instance suit a new start-up or a division of the acquirers, with no need to incur the costs of a new concept, search based upon it and registration thereof. Similarly, they are registered, therefore there is an element of certainty for the mark which may help the acquirers hinder the competition in some situations.
[edit] Registered Designs
Investors are still lukewarm with regard to registered designs, because in some jurisdictions these have a very short lifespan. They are also 'too' certain, in that the design protected is the representation filed and there is little room available for considering nearly-but-not-quite copies, unlike patents (the claims of which are 'stretched' for the infringement to fall therein) or trademarks (which are similarly 'stretched' for the risk of confusion to fall therein). Their value in an IP portfolio tend to remain under-estimated, but this situation is slowly changing, especially in the field of registered GUI designs.
[edit] Copyright
Investors least favour situations wherein your IP portfolio only includes copyright, because of its inherent non-registrability in some jurisdictions and, regardless of whether it is registered or not, fairly complex issues related to jurisdictional differences between countries in terms of who owns it or (worse) which portion is owned by whom, etc. As opposed to patents, trademarks and registered designs above, there is no 'certainty' in copyright, other than the form in which it is expressed – whereas any of the above registered IP rights have a registered owner and can thus be traded within a chain of ownership.
The existence of copyright is paradoxically much easier to check in a due diligence exercise (but note that it depends entirely upon your in-house documentation systems) than patents and trademarks what protection copyright confers but, irrespective of the longevity of the right, which some may expect to be an important valuation factor, copyright only ever attracts value if it covers a work that competitors will want to copy, and the value will thus depend upon how badly they want to copy it: how badly do you want to include a copyrighted, world-famous mouse in your next game?
The question of substantiality of what is copied is covered elsewhere in this paper but, as a brief reminder, it involves estimating whether the copied portion of the copyrighted work is a substantial portion or not, if only a portion was appropriated (e.g. the AI algorithm, not the whole engine/game). Within the context of a due diligence exercise, the issue of substantiality does arise if your copyrighted code includes licensed copyrighted works (characters, music, samples, engine code, etc.), but putting a value on it or advising upon potential infringement then becomes elaborate guesstimating at best.
[edit] Indemnification
Intellectual property indemnification is just another way of talking about one party "insuring" another party for loss due to an intellectual property problem. Intellectual property problems come in a variety of forms, normally lumped into infringement actions, and they are often expensive.
The following is an example of how intellectual property indemnification might work in a contract between a developer and a publisher. The example can easily be extended to a developer and other parties. Please see the licensing section of this document and your attorney for more information.
1. A developer signs a deal with a publisher. The publisher may ask the developer to guarantee/warrant that the developer either:
A. Has created the IP in the game originally, therefore they have the right to permit its use/license it etc.
B. Has negotiated the appropriate permissions/licenses for the IP they use in the development of the game.
This may be useful later against the developer if there is an IP dispute. The publisher is attempting to shield themselves from the risk of infringement losses.
The actual indemnification clause may come in at least two forms. If the publisher has an IP dispute with a third party then:
A. The developer agrees to pay the cost of defending the dispute. B. The developer agrees to pay any damages that result from the dispute.
Of course there is always the option of both A and B. There are also other details including what level of cooperation (in addition to money paid) the developer would be obligated to in the case of an IP dispute and who selects the law firm to defend the dispute etc.
It is always the case with any licensing or contract negotiation that nothing is standard. Every deal is different and it pays off to have your attorney thoroughly discuss these matters with you. Use the above example merely as a guide to what types of agreements are possible and what a developer might be asked.
Because of these clauses, if you are acquiring or licensing any IP for the game from a third party, your company naturally also needs a similar indemnification from that third party in the associated work for hire agreement. Without this assurance, be very wary of giving this type of protection to the publisher as you would then be assuming liability for any infringement by that third party even if you were not aware of it.
