Catch 22: intellectual property for SMEs

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Legal battles over trademarks, patents and copyright can be crippling. How can small businesses navigate this killer risk?

When it comes to intellectual property (IP), due diligence is critical to a small business in order to avoid protracted legal battles. An IP dispute can come as a bolt from the blue with the potential to hobble a company, whether due to business interruption or through the crippling costs of litigation. But what if, despite a company’s best efforts, they find themselves at the centre of such a dispute?

“Companies face IP risk every day, without ever intentionally infringing on another entity’s IP,” says Carlo Ramadoro, assistant vice president for Cyber and Technology at Lockton. “This could be through lack of adequate research on competitors or registered trademarks, or other things unintentionally missed in the due diligence process.”

Companies face IP risk every day, without ever intentionally infringing on another entity’s IP

In 2012 a trademark dispute arose between two luxury shoe brands, when Christian Louboutin sued rival Yves Saint Laurent for infringing the famous red soles on its high-heeled shoes. In that case, Yves Saint Laurent lost, and paid the damages. A smaller firm might not have had the means to fight such a case. Small and medium-sized enterprises (SMEs) can be caught in a catch-22 situation of being unable to avoid a legal battle to stay in business, but also unable to sustain the costly legal fees to win such a fight. In this context, insurance can play a vital role in transferring the risk of IP disputes.

“Big companies have the budget to sue smaller firms, and if you don’t have the budget to defend yourself, you could go out of business. It’s about how insurers can help mitigate the risk,” says Ramadoro. “What I’d call ‘defensive’ cover should be in place in case your company is accused of infringing on someone else’s IP and they sue. Such a suit can entail paying royalties or damages, or an injunction to make you stop doing what you’re doing. The insurance is there to protect you from such allegations.”

Protection is available for both sides of an IP dispute, not just for defence but in case it becomes necessary to pursue a larger competitor for IP infringement, to cover a potentially costly litigation burden. Without such cover, an SME would perhaps be unable to afford to protect its own IP in court, Ramadoro warns.

Companies expanding into new markets may find themselves at particular risk of an IP dispute. Some of the biggest and booming markets are also among the most litigious.

“Your company may have a patent approved in Europe, but it could still be infringing somebody’s patent in the US or China. The US and China are definitely among the toughest, most litigious markets for IP risk. People are keen to sue, and the higher risk in these regions is reflected in the cost of insurance,” Ramadoro says.

Ramadoro suggests IP policies in the US and UK could go up to a $100m limit, with the average around $5-10m, depending on the size of the insured.

“The cost of legal defence is increasing in the US, UK and Europe,” says Ramadoro. “You have to judge the cost of an IP policy against the cost of a lawsuit. Simply put, small firms need to take into consideration the potential impact on their balance sheet of a lawsuit from a bigger company that could put them out of business.”

For more information, please contact Carlo Ramadoro on:

T  +44 (0) 20 7933 2431