Arch Insurance International’s Carys Bickmore examines the evolution of the patent industry and what this means for take-up of intellectual property cover.
The growth in the value of intangible assets in recent years has been astronomical. The overall value of S&P 500 companies is now predominantly intangible in origin, having grown from 80% in 2005 to 90% by 2020* with expectations this figure will continue to rise.
Intellectual property (IP) in the form of patents represents a significant component of this asset class. In 2022 (the latest dataset available), patent filing applications hit another record high, with the WIPO’s annual world intellectual property indicators report putting the global figure at 3.46 million, with technology-related patents the primary application. Even higher numbers are expected to be reported for 2023.
Yet as the market increases exponentially, so too does the litigation potential it creates. Further, several regulatory developments throughout 2023 are creating upheaval and uncertainty in the patent arena. With increased volatility on the horizon, IP-related coverage will become a more prominent component of patent protection measures.
The litigation backdrop
The patent industry has long been a source of sizable litigation. In recent years, the prevalence of technology-related patents, the scale of digital integration across industries, and the rapid expansion of AI have made it ripe for infringement. Further, the patent sector has seen an increased focus from non-practising entities (NPEs), commonly known as ‘patent trolls’, acquiring patents from other companies, primarily to undertake enforcement action against potential infringers.
Patent litigation is big business. A report in January by Unified Patents showed that in 2023 US patent litigations totalled more than 4,660, with hi-tech representing over 55% of cases. Drilling deeper into the figures, the report showed that cases attributed to NPEs in district courts (which is where companies can secure either damages or injunctions) totalled over 1,700, the overwhelming majority of which were hi-tech-related.
A shifting regulatory stance
The last 12 months have been marked by a series of regulatory developments that could significantly alter the litigation landscape for patent infringement in 2024 and well beyond.
2023 saw a continuing shift towards greater protectionism around IP, especially in the US. This was evidenced by a change in approach by the current administration, which chose not to veto two landmark determinations by the United States International Trade Commission (ITC) on the grounds of public interest.
The instances in question related to separate high-profile cases brought by two medical technology providers – AliveCor and Masimo Corporation – against Apple. The ITC issued both a limited exclusion order and cease-and-desist order in both cases against Apple.
In the Masimo Corporation case, five US patents relating to a blood oxygen sensor feature were found to be infringed. This resulted in an exclusion order being given which prevented the importation of certain variants of the popular Apple Watch into the US.
The AliveCor case related to the electrocardiogram functionality of certain Apple Watches infringing three patents relating to methods of arrhythmia tracking and discordance monitoring. The claims of the asserted patents were eventually determined invalid in a separate legal proceeding at the Patent Trial and Appeal Board, but even so, it shows that the ITC was prepared to grant the exclusion orders.
In contrast, in the case of Samsung v Apple in 2013, which resulted in similar determinations by the ITC, the administration at the time chose to veto the decision reached.
Change is also occurring on the regulatory front in the US in relation to patent protection. The introduction of the US Patent Eligibility Restoration Act 2023 could result in a major surge in patent applications as it would significantly increase the scope of inventions and innovations eligible for patenting. This bill recognises the central role of the patent system in supporting technology-based innovation.
A European overhaul
2023 was also a landmark year in Europe for the patent market. The establishment of the long-awaited Unified Patent Court (UPC) now provides a single body responsible for deciding on the infringement and validity of patents across 17 EU Member States (with a further seven having signed the agreement, but yet to ratify the UPC). Whereas companies were previously required to litigate patents on a country-by-country basis, the UPC means a single patent litigation case (in the case of a European patent with unitary effect) or any European patents (dubbed ‘classical’) can now have an impact across all 17 countries.
Whilst some may say this results in a more efficient and effective patent system, it creates considerable implications for injunctions. Patent holders are now provided with simpler and centralised access to greater protection, however there are concerns that this could lead to a growth of NPEs within Europe exploiting the system. An injunction ruling by the UPC means a product could be prevented from sale or import across all countries represented by the body. If similar proceedings were undertaken in the US via the ITC in addition to in the UPC, a company could quickly find its products halted across multiple critical markets.
The UPC has certainly hit the ground running, with over 155 litigation cases handled between June and December 2023, and has already issued numerous injunctions.
The insurance implications
The array of regulatory developments in the patent space is elevating the value of patent-related insurance cover.
IP insurance coverage has expanded considerably in recent years and tends to focus on four key areas: IP infringement liability, IP rights protection, IP rights enforcement, and contractual disputes and obligations relating to the exploitation of IP rights.
Litigation-related costs can be significant. An IP policy can cover the costs for court attendance, professional fees and expenses, damages, withdrawal costs, adverse media costs, and investigation costs associated with establishing potential infringement.
In a more litigious environment and with the increase in NPE-related cases, it is likely we will continue to see more early-stage companies and tech start-ups keen to protect their cashflow with defence cover, as well as protecting their developing IP portfolios by seeking comprehensive enforcement cover.
Business interruption is also becoming a growing area of interest for coverage, with businesses increasingly recognising that the scope of possible losses extends beyond the legal department. The potential for two rulings by the UPC and ITC to stop the import and sale of products in some of the most consumer-intensive countries creates huge business interruption challenges. Having cover that can address costs relating to loss of business income or costs associated with recalling and altering products to overcome infringement issues is critical.
The lay of the patent land in 2024
2023 was certainly a seismic year for the patent industry, and in 2024 we’ll likely see what impact these regulatory developments will have on patent protection and enforcement moving forward in the US and Europe.
What is clear, however, is that the increased market uncertainty has amplified the need for companies to assess their IP-related cover and consider expanding its scope, as the threat of more injunctions looms ever larger.
Carys Bickmore is an intangible assets underwriter at Arch Insurance International