There is no way to completely eliminate risk when it comes to intellectual property. But there is a way to build risk management into your IP strategy. Knowing what kinds of risks you face will help you build an adequate response plan. When it comes to the risk of infringement claims, once you identify what your risk is, you need to prepare a response strategy. You can choose to either (1) avoid, (2) accept, (3) transfer, or (4) mitigate.
In the second of this two-part Risky Business blog post, we discuss risk associated with 3rd party infringement claims. If you missed it, click here to read Part One.
Risk of infringement claims
Arguably, the biggest risk that faces any IP owner is that of infringement. The whole concept of patent rights is built around protecting your innovation and securing your rights to your invention. But this is a two-way street.
You are equally responsible for ensuring that your innovation does not infringe upon the IP rights of another organization. How do you address this risk and ensure that you are protecting your investment from infringement claims and litigation by a third-party?
Who is accountable for your IP risk?
Business risks related to intellectual property (IP) include the risk of losing IP rights before they are adequately protected, and the risk of infringement claims. In this two-part blog we will discuss how to manage both risks using a well-known risk management approach from the Project Management Institute (PMI).
In our first blog post “If you’re not thinking about IP risk, you are putting yourself at risk“, we discussed how this model first considers risk identification, then an assessment of the probability and impact of the risks, and finally a plan to respond to the risk, for which a company has four choices: Avoid, Accept, Transfer or Mitigate the risk.
We advocate following the same three step process when approaching risk of infringement claims.
Risk identification
To identify the risk, patent searching can be done on the key elements of the product and/or service. Note that the patent search must cover ALL essential aspects of the product, not only the innovative or differentiated aspects. For example, if a product includes an MPEG player, to display videos that are part of the products, that MPEG player may be covered by patents.
The search should be done during product development when new features are added, just before public disclosure and during the following 18 months after the first public disclosure to cover anything that is being published with a priority date prior to the public disclosure. After that the product itself becomes prior art to anything that is published.
It is also important to perform searches before adopting a new brand or logo to identify the risk of using an already existing trademark. Searching for related domain names is also useful to identify risk.
Risk assessment
A review of the search results will provide good insights on the potential risk. The owners of the relevant patents and trademarks should be reviewed to assess how litigious they are. Some specialized searching tools can provide intelligence to that effect. For example, a non-practicing entity (patent troll) is more likely to bring an infringement claim as this is their business model.
If the product needs to comply with standards, it is important to review the bylaws of the relevant standards bodies and patent disclosures, if any, to assess the risk of litigation based on alleged standard essential patents.
The impact of an infringement claim may involve entering into a licensing agreement based on royalties or litigation that can lead to an injunction stopping the sale of the product as well as significant damages.
An infringement claim could impact the company’s position in front of their clients as it creates uncertainty about the availability of the products in the future. In addition, customers that use an infringing product could also be open to infringement claims.
A proper trademark search conducted before deciding on a new brand or logo can also avoid future issues. Having to change your brand or logo after the business is getting traction can have disastrous effects, resulting in significant expense and creating confusion among customers.
Risk response
In this case, there is no possibility to avoid the risk, unless your product has been on the market for over 20 years and does not include any new technologies. If Non-Practicing Entities (NPE) own IP that is included in your product (even unrelated to your product differentiator), it is very difficult to know whether they will claim any infringement at any point.
The company can choose to accept the risk and the possibility of an injunction and damages, or hope to rely on its IP portfolio for possible cross-licenses if needed. Note, however, that cross-licenses are not a solution to infringement claims by non-practicing entities.
If the product comprises modules provided by 3rd party suppliers, the risk can be transferred as it relates to these modules by having an IP indemnification clause in purchase agreements. Only the infringement risks relating to these modules, however, will be transferred but the overall risk will be reduced. Note that indemnification clauses in purchase orders are not sufficient.
The company can choose to purchase infringement insurance on an ongoing basis to transfer the risk of damages to the insurance company, but this option can be very expensive.
Finally, the company can choose to mitigate the risk with the appropriate proactive steps that address these risks directly and build them into the overall IP strategy.
Plan Ahead
A well rounded IP strategy will address risk management with mitigation strategies to lessen the potential impact of infringement claims. Proactive steps that you can take include:
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- building a solid defensive patent portfolio to use for cross-licensing.
- developing a contingency plan to work around key third party patents found during the assessment.
- building possible licensing fees in the business plan.
- selecting alternate backup suppliers that have licenses to avoid infringement.
- developing an infringement notice response plan.
- using indemnification clauses in purchase agreement whenever applicable.
- register trademarks covering the brand names and logos as soon as possible.
This risk mitigation strategy will reduce the risk and impact of infringement claims, but there will always be residual risk mainly due to the presence of NPEs.
Again, all options should be discussed with the company’s board, so everyone is aligned on the strategy.
About Natalie:
As President of Stratford Intellectual Property, Natalie Giroux leads a team of IP Strategy experts in delivering end-to-end IP strategy and implementation services which include a full service patent agency and IP consultancy to lean in as trusted strategic advisors. With over 25 years of experience, Natalie has helped numerous companies identify and navigate the risks of IP strategy, including managing patent litigations and providing vision and leadership to companies looking to establish a culture of innovation. In 2020, the team at Stratford launched the IP Strategy Academy as a resource for SMEs looking to increase their IP literacy and risk awareness.
You can get in touch with Natalie here.