Joint Position Paper of CEA and RIAD on the Final Study on the Feasibility of Possible Insurance Schemes against Patent Litigation Risks

Brussels, 21 december 2006

Summary:

A mandatory scheme for Patent Litigation Insurance (PLI) should not be considered further: most importantly, from an insurance perspective it is not feasible to make such a scheme compulsory without allowing for the fundamental insurance techniques to be applied, e.g. the necessity to evaluate a risk before underwriting. Moreover, the data and figures on which the mandatory scheme together with the calculation of premiums are supposed to be founded do not meet actuarial standards and principles and are neither accurate nor reliable. If premiums were calculated according to prudential and actuarial rules costs for such an insurance cover would most likely be substantially higher than determined by the study. Further, due to the fact that the insurance would only cover litigation costs in a few selected European countries, while patents nowadays are realistically challenged and defended globally, the benefits and effectiveness of the proposed scheme are highly questionable. To conclude, the proposed compulsory insurance scheme would put small and medium sized enterprises (SMEs) at a competitive disadvantage and would deter them from registering patents since the substantial extra costs would be perceived as a stealth tax to no avail. Accordingly, instead of encouraging innovation and competition within the EU a mandatory PLI scheme would have the contrary effect.

In order to underpin the opinion of European insurers this position paper focuses on the most obvious reasons why the envisaged mandatory insurance scheme would not have the desired effects for Europe’s economy but, instead, would turn out to be an additional financial burden for SMEs.

1. No evidence for a need of PLI

The study does not provide any specific evidence for a need on part of SMEs for PLI cover. Page 8 para. 3.2.4 refers to a consultation with „a substantial number of SMEs“ who apparently expressed a desire to have insurance cover. These SMEs are neither identified in the 2003 study nor in the 2006 feasibility study. In particular it is unclear how many SMEs were asked, how many gave a favourable opinion and whether SMEs with experience of applying for patents and those who have experienced infringement or have been accused of infringements have actually contributed to the consultation exercise.

Furthermore, the SMEs might not have been aware of the proposed premium. Consequently, they were not capable of making a considered judgement concerning whether or not they would buy such a product.

2. No involvment of insurers in the course of the study

One of the most serious concerns is that in the process of elaborating the study hardly any insurers have been involved. A glance into the “acknowledgements” of the study does not list any insurance company familiar with legal expenses insurance. There are, however, quite a number of European insurance companies who have in the last years developed and offered legal expenses insurance products. Most of these products have not been successful and had to be withdrawn from the market within a short period of time. Nevertheless, the expertise gained in this business segment has to be included whenever a new insurance product is considered.

3. The proposed mandatory insurance scheme is not feasible

As European insurers have already pointed out in a letter sent in December 2005, a position paper of July 2006 and on the occasion of the public hearing on 12th July 2006, the model of a mandatory insurance scheme is not apt to solve the existing problems and will not encourage the development of demand-orientated insurance products. A mandatory insurance system needs to fix a flat-rate minimum standard. Thus, over- and underinsurance which do not correspond to the risk is accepted. Moreover, insurance practice is made subject to a multitude of restrictions which prevent the development of an efficient insurance market. In a field as complex and diverse as patent law, a mandatory insurance will not have sustained success and thus not help to achieve the Commission’s objectives.

The study is aware of the fact that under a mandatory scheme patents have to be covered which otherwise could not be insured in a free market due to uncalculable risk. Therefore, a pool solution is suggested (para. 15.16) the cost of which would be “spread over and added to the premiums of all patentees as a charge.”  Furthermore, companies which would be exempted from the mandatory insurance on account of the likelihood of globally orientated litigation are also supposed to contribute to the pool. We do not think  that a pool solution would be feasible and do not believe  that it could be successfully established.

Furthermore, we doubt the possibility - as suggested in para. 13.3.7. – to return to a voluntary scheme once a mandatory scheme is established. A mandatory scheme will prevent the insurance industry from developing individual products fulfilling the specific needs of patentees. As a consequence, innovation in this sector of insurance will be impeded in the long term.

Another argument that must be brought forward against a mandatory scheme is the fact that the patent registration via EPC could be circumvented. To register a patent via EPC is only one among several possibilities to obtain international patent protection. If for the EPC registration PLI insurance cover (i.e. a policy for each Member State the patentee chooses for registration) were obligatory, patentees might choose alternative ways to register their patents, e.g. via the Patent Cooperation Treaty (PCT). As a consequence the number of European patents might even decline.

Finally, the feasibility of the proposed scheme has to be contested since neither the patent itself nor the content of the patent allow for a presumption where litigation matters may arise. Especially with regard to the innovation power of Asia and occuring counterfeiting activities in these markets it does not make sense to force patentees into a costly insurance scheme which does not cover litigation in the far east. Therefore, the suggested concept burdens patentees with high costs for insurance cover which is so limited in scope that there is less than a 50 % chance that infringements will occur within the countries covered by his policies.

4. Timing of the technical risk assessment 

It is true that technical risk assessment undertaken when cover is agreed is expensive and complex and therefore raises the premium for insurance. To reduce costs, the study suggests restricting an early technical risk assessment to one in a thousand patents, and to postpone it until a specific risk, i.e. “a circumstance which is likely to give rise to a claim under the policy” is known (14.4.1).

The study then suggests that “the strategic position to be taken up by the insured, and whether and how to fight or negotiate, have to be decided” (14.4.3).

For several reasons, these ideas are rejected by the European insurers. From a technical point of view it would be hazardous for an insurance company to defer the technical risk assessment. How should the insurer know when a technical risk assessment is due? Is he supposed to survey the business activities of his client in order to identify the “specific risk” when it arises? What happens in case litigation arises before the technical risk assessment is accomplished? And furthermore, if the insurer happens to find out about a specific risk, what would be the appropriate measures?

To adjust the premium during the term of validity of the insurance is not possible. And as far as it is suggested that “a strategy” has to be determined the study ignores that at least in Germany legal expenses insurers are still barred from supporting the insurance holders with legal advice.

Waiving an individual risk assessment thus is contrary to fundamental rules of the insurance business and actuarial principles, thus cannot be accepted by the insurance industry.

5. Assessment of the chances of success 

The 2006 study suggests that PLI will cover the costs of litigation unless the assessment of its chances was 51 % or better. We have doubts that this is a feasible approach. Moreover, due to the enormous liablity risk, patent experts will hesitate to give an opinion on the chances of success, especially in difficult cases.

6. Lack of accurate and reliable statistics

As the study states correctly, there is none of the information required in order to develop an insurance product available in sufficiently complete form (para. 4.1.5). Court statistics are not available in any Member State to obtain a profile of patent litigation activity or of costs and damages (para. 7.1.2). Furthermore the available court statistics do not distinguish between national patents and European patents, and are thus not of any use for the purpose of the study.

The study attempts to substitute the lack of data by calling up round tables in every Member States, handing out a questionnaire and discussing the results. However, the missing statistics can not this easily be substituted. We do not see how the national statistics attached as appendix 1, can be trusted for calculation purposes. For example the figures indicating the average costs for first instance proceedings in Germany (Appendix, p.4) are highly questionable. It is supposed that the average costs for each party for main litigation at first instance would double from the main hearing (75.000 €) to the judgement (150.000 €). On the basis of German scales of fees for lawyers (Rechtsanwaltsvergütungs-gesetz – RVG) and courts (Gerichtskostengesetz – GKG) this cannot be comprehended.

While recognising the efforts the study undertakes to gain the necessary figures, it remains doubtful whether in consultations with “patent practitioners” in round table sessions the necessary data can be collected. Taking into account how many patents are issued, the few persons involved cannot have a sufficient overview as far as average figures are concerned. Furthermore, patent lawyers are not a neutral party when asked for their opinion on litigation insurance: they would of course profit from any insured party as their fees are guaranteed when a cover note is given by the insurer.

7. Table 6 “indicative premiums in Euro”: no reliable figures

The calculation of premiums in an efficient market is the exclusive right of the insurers who were not asked to contribute to the research for the study. By asking third parties to estimate the likely premiums, the calculation of premiums is predetermined and the free competition is infringed. Furthermore, even if mentioned premiums were only meant as a hint to what could be the possible premiums, they are misleading as they only give the possible premium for a patent applied for in one Member State. The average European patent is however applied for in six or seven Member States (see below, 8.). 

8. The cost impact of PLI

The idea of a patent litigation insurance would be  to encourage especially SMEs to patent inventions and by doing so to contribute to the economic development and innovation in Europe. It has to be feared, however, that a compulsory insurance scheme may lead to an adverse effect and could deter SMEs from registering patents.

As it has been proposed that larger companies will be exempt, SMEs are at an even bigger competitive disadvantage in relation to the cost of developing products compared to large exempt patentees. This exacerbates the commercial disadvantage of small companies.

In contradiction to the aim of the project, to make Europe a more attractive place for placement of patents and to advance technology, inventers could be detered from filing their patents in Europe, especially when the aim of the patent registration is not to exploit it but to sell it. A compulsory litigation insurance could work like a stealth tax with no other effect than to raise the costs of the patent registration procedure.

While it is likely that the premiums estimated by the authors of the 2006 study are not sufficient to cover the possible risk, the premiums could be an intolerable burden for SMEs. A UK premium of £600 has been suggested yet many SMEs pay less than £50 for standard commercial legal protection. It is unlikely that the legal expenses insurance market will  tolerate a premium of £ 600 for PLI cover.

It is true that the risk levels and thus the premiums due vary from Member State to Member State. However, if PLI is meant to make sense for the patentee he should be able to pursuit infringements wherever they occur. The average European patent is validated in 6 to 8 countries, functioning like a bundel of national patents. While the German customary legal expenses insurance covers litigation in foreign countries only up to a certain ceiling and only in case the litigation originates during a stay of not more than six weeks, the PLI would cover litigation in foreign countries on a larger scale. Consequently, different policies have to be issued for each country and different premiums have to be calculated. This necessity is also recognised by the study (see para. 14.10.2), but without pointing out clearly what this means for the patentee. The legal expenses market in the individual Member States is not characterised by large multi-national groups but by rather smaller specialised insurers and therefore a substantial number of insurance companies will not be able to cover different national jurisdictions. The patentee will have to identify and compare insurance companies in several countries and negotiate his insurance contracts with them. Even if he were supported by brokers, the time and effort alone he had to invest could easlily deter him from going through the whole registration procedure for his invention. Furthermore, the final premium will be the sum of the premiums in each country. For the average patentee, who wants to validate his patent in at least six countries (and of course therefore chooses the main industrial nations of Europe), this means that the likely burden is far higher than the study suggest. Also for these reasons a mandatory scheme, as the study suggests it, is not feasible.

Therefore, we are particularly concerned about the figures in table 14: if the preliminary estimate is that the costs for PLI will amount to app. 20 % of all costs and up to 28 % of the validation and renewal costs, the costs will be soaring if premiums turn out to be much higher than the authors presume.

9. Increasing the volume of litigation

The full effect of a mandatory scheme, i.e. an increase in the volume of litigation has not been considered. While the study recognises that the number of litigations is likely to rise they nevertheless presume that  licensing and out-of-court settlement would be appropriate measures to go against rising premiums. However, out-of-court settlements as such do not necessarily reduce costs, at least when lawyers and technical experts are involved like in arbitration proceedings.  In this kind of procedure costs will remain more or less the same and only the small proportion of court fees (which e.g. amount to only 13 % of total litigation costs in German legal expenses insurance for example) would be avoided.

10. Abuse of PLI

This kind of LPI scheme can easily be abused when patents are only registered in order to pursue alleged infringements after a period of time. Since the 1980s a new strategy on how to use patents has become popular. The aim of holding a patent in these cases is not to exploit an industrial property right, but  - after a certain period of time – to prosecute alleged infringements. This „technique“ is even supported by software products showing the likelihood of an infringement by scanning international patent database. PLI in this context would only help those who regard a patent as a means to make money on the costs of others and are not interested in any technological progress.