Recent ResearchInsuring Patents to Fend Off Predators

Can patent insurance protect innovations from predators? Yes, particularly if innovators insure their innovation before rivals enter the market, according to Financing and the Protection of Innovators, a discussion paper by Gerard Llobet and Javier Suarez from the Centre for Economic Policy Research.

According to Llobet and Suarez, patents offer limited protection if the innovators cannot demonstrate a willingness and ability to litigate patent predation. Competitors appear to avoid preying upon innovations from large companies that have litigated past patent infractions. However, rivals may view innovators without a history of legal action as easy prey unless they can demonstrate additional protection for their intellectual property.

Using game theory, Llobet and Suarez examine the likely behavior of innovators and rivals using internal financing, securing external financing via patent litigation insurance, and securing a loan to cover litigation costs. The authors test the effect of insuring before and after a rival enters the market. The authors also explore the impact of insurance deductibles, out of court settlement, an American court system, a noncompetitive credit market, and both symmetric and asymmetric information on the model.

Using their model, Llobet and Suarez determined the following:

• External financing (either insurance or loan) prior to rival entry offers the best deterrent to predation – a preferred outcome over litigation for the innovators.
• External financing might benefit a broader set of users in the U.S. where parties share the cost of litigation than in Europe where the loser pays the total cost.
• Patent litigation insurance encourages innovators to defend patents more aggressively whether secured before or after a rival appears.
• Innovators secure insurance when it covers the cost of litigation and when the premiums cost less than the potential pay-off.
• Internal financing provided innovators with the lowest willingness and effectiveness with litigation offering little deterrent to potential predation.

Llobet and Suarez note that patent insurance can be structured with positive deductibles to discourage wasteful litigation – an advantage over other forms of external financing. The authors also suggest that insurance might include infringement defense and litigation protection to ward off challenges by rivals seeking to drive competitors from the market with litigation.

The authors urge governments to keep patent insurance market-driven and nurture the private insurance market, rather than make patent insurance compulsory, as considered by the European Union. The authors note that private insurers can tailor coverage for innovators with appropriate deductibles and premiums based on the characteristics of the innovation.

The best situation occurs when laws prevent any predation of intellectual property; however, external financing provides the second-best situation for innovators, deterring predators from patent infringement.

Financing and the Protection of Innovators is available at ftp://ftp.cemfi.es/wp/05/0502.pdf. Links to the paper and morethan 1,000 additional TBED-related research reports, strategic plans and other papers are available through the TBED Resource Center, developed in partnership with the Technology Administration and SSTI: http://www.tbedresourcecenter.org/