Attacking Patent Litigation with Data: Insuring the uninsurable by knowing the unknowable

Imagine this underwriting scenario: you are asked to provide a quote for an auto policy, but are unable to obtain information about the age, education, work history and driving record of the person to be insured. You don’t know where his or her car will be garaged and operated, or how many miles it will be driven every year. You also have severely limited (and largely unreliable) historical data on automobile repair costs, medical costs and auto-related liability lawsuits.

In short, you have been asked to price and reserve prudently for a risk about which you know nothing. Clearly, it’s an impossible task, but this has long been the challenge facing risk managers and intellectual property professionals seeking to quantify and insure the risk of patent infringement by non-practicing entities (NPEs), also known as "patent trolls."

IP-Driven Business Risk

The lack of visibility on the cost drivers of NPE litigation only underscores the seriousness of the problem. "Patent troll" attacks are a huge, persistent source of risk for thousands of companies. According to RPX research, in 2015 alone there were nearly 1,400 active NPE campaigns with more than 2,500 separate companies defending themselves against claims of patent infringement (with some companies embroiled in as many as 60 litigations during the year).

The total cost associated with fighting and settling NPE lawsuits is annually multiple billions of dollars – the research showed NPEs cast a wide net, and any company that makes, sells, or uses technology risks being accused of patent infringement.

It is possible to mitigate that risk, but there are challenges. Eight years ago, for example, RPX Corporation began building a network of at-risk companies that pre-emptively removes problematic patents before they become costly NPE lawsuits. It has proved to be very effective for the many companies that face a relatively consistent level of patent troll assertions.

But for the thousands of other companies for which the NPE problem is still irregular and unpredictable, this kind of risk sharing may be less economically efficient. They may be better served with the guaranteed protection of risk transfer. In a word, insurance.

Making NPE Insurance Viable

This is not a new idea. Companies have tried to deliver NPE insurance for years, but the products have invariably fallen short. The reason, as noted above, is lack of visibility into the drivers of the risk. In most ways, NPE litigation is like any other business risk, but it differs in one important way: those most affected by it don’t talk about it.

Given the nature of the problem, this makes complete sense. Companies don’t want to disclose sensitive information about their IP status and the technological details of their products. Nor do they want their competitors knowing what they pay to license a particular technology (or what that technology is), let alone how much they had to pay their lawyers to fight and/or negotiate a settlement.

With no actuarial data to draw on, insurers could either underwrite based on educated guesses or play it safe with policies that had significant limitations. To date, most issuers chose the latter path and "patent insurance" has actually excluded troll-related risk entirely from policy offerings.

Data Make the Difference

The good news is that this information gap on NPE litigation has been bridged. After eight years playing a central, trusted role in the patent market, RPX has compiled a critical mass of data on the cost of patents, litigation, settlements, and more. With it we have built a highly accurate actuarial model that can now predict the frequency and cost of NPE litigation on a company-by-company basis.

What was once an obscure and largely indefinable risk is becoming transparent, quantifiable, and most of all, insurable.