Intellectual Property – A Growing Legal Concern for Startups

In August 2011, a prospective client approached our company seeking Intellectual Property Coverage.  They did not fully understand the coverage but were adamant that a policy be issued as quickly as possible. 

Upon further discussions, it was noted that this software company was being sued for copyright infringement from a company based out of the United States.  Since there was a pending litigation in place, we were unable to assist in providing coverage and advised they contact law firms that specialize in Intellectual property disputes.

This unfortunate incident could have been avoided if the insurance broker and client took the necessary time to fully understand the business model and possible exposures outside Canada.  The policy issued to this client was a standard commercial general liability covering premises liability and specifically excluded trademark, patent and copyright infringement.  Since there was no coverage or endorsements in place, the entire legal costs amounting to thousands of dollars was now the sole responsibility of the software company.

Intellectual Property can be broken down into 2 categories:

Industrial property – includes inventions (patents), trademarks & industrial designs

  • Patents – Cover new inventions including process, machine, manufacture or any new and useful improvement of an existing invention.
  • Trade-marks– Provide exclusive rights to word(s), symbols and designs to distinguish goods or services from others in similar marketplace.

Copyright – includes literary & artistic works such as articles, novels, drawings, paintings, designs.  Only the copyright owner, often the creator of the work, can produce, reproduce, or grant permission to others to do so.

These exclusive legal rights allow the owners of intellectual property to prosper from the property they have created, thus allowing a financial incentive for the creation and investment in their intellectual property.  However, many new startups do not fully understand their Intellectual Property benefits or potential implications. These organizations may have very valuable rights but are unable to use them effectively while others are unintentionally violating intellectual property rights of others without being aware of costly legal ramifications.

As technology moves ahead at lightning speed, it has made it increasingly easy to reproduce countless types of materials that are subject to copyright. Companies must be very careful not to infringe on the rights of others. Penalties for trademark, patent and copyright infringement have become very costly and will damage the reputation of these companies on a world wide scale. Up until the mid 1990’s, the primary assets of most companies was their building, equipment, stock etc.

Not anymore. Although these items still are very valuable, intellectual property, computer data, customer information are just as valuable and could lead to financial hardship if they are not protected. 

When dealing with the various forms of intellectual property, it is advisable to seek out a lawyer that specializes in copyright, patents, trademarks, or trade secrets. They should fully understand your business model and your technology while being able to explain the legal issues in this complex field in clear, practical language that you can understand. In today’s fast paced & uncertain economic environment,  intellectual property suits involving infringement of trademark, copyright and patents are being filed and litigated at alarming rates with crippling costs to both parties involved.

Another important way to protect Intellectual Property is to obtain Intellectual Property Insurance. This coverage protects companies for copyright, trademark or patent infringement claims arising out of the company’s operation. An Intellectual Property policy will pay the costs to defend you if someone tries to claim the rights to the same business model, process, or application. As long as the company is not aware of any pending litigation, infringements or violations, one can apply for insurance to protect your trademark or patent. Very few standard insurance policies protect businesses from loss or damage to their intellectual property.

Similar to seeking out a prudent lawyer, it is just as important to seek out a company that specializes in intellectual property insurance. Make sure the policy is not limited to your specific province or state but rather on a worldwide basis. With more and more insurance companies entering this market, it should be rather easy to obtain a policy that fits your exposure.