IP Indemnification for Small Companies

I am “too small” to get sued for patent infringement.

Many small companies believe, falsely, that they are too small to be sued.  Very small companies can be targets for patent trolls, but what happens when their customers are sued?

One of my friends had a small startup that had an automated bot for a website.  They had gone through a startup accelerator, raised some angel investment, and had a working product.

A big breakthrough came when they got NBC/Universal to put their automated bot on one of NBC’s web pages.  NBC did this as an experiment, with plans to roll it out to other web properties if it was successful.

The startup was ecstatic that they landed such a big and important customer.  The big brand name helped them sell their product to other websites and they were off to the races.

NBC is a very big name and, accordingly, a target for lawsuits. 

NBC received a lawsuit from a patent owner, who asserted that their patent was infringed by the bot they were operating on their website.

Since the bot came from by friend’s startup company, NBC simply sent a copy of the lawsuit to the startup and told them: “You handle this.”

As a supplier to a bigger customer, the startup was responsible for their product.  The startup needed to indemnify their customer for any lawsuits caused by their product.

The startup was faced with defending a giant corporation from a patent enforcement lawsuit, but they had no insurance and very little money.  They were, quite literally, three people and a dog in a garage.

What happened? They could not afford to defend NBC against a well-funded patent owner. The startup had to shut down, declare bankruptcy, and liquidate their assets. 

Every investor lost 100% of their investment. Every founder lost their time, sweat, and hard work.

If the startup had patent insurance, they could have indemnified their customer and, hopefully, lived to see another day.  This startup had no patents, but was subject to an inbound patent lawsuit.

Most companies have product liability insurance, which protects them if a customer is physically (or economically) when using their product.  But few companies have IP insurance that protects them and their customers from any IP-related litigation. Why is this?

What IP Insurance Means for Companies

Throughout this blog, we discuss all sorts of issues, tools, techniques, and strategies relating to patents, but there is always one unspoken assumption:

You must be able to survive a patent lawsuit.

Patent lawsuits come in two directions: outbound lawsuits where you assert or enforce your patent against a competitor, and inbound lawsuits where someone sues you.

In the case above, my friend was subject to an inbound lawsuit. A patent owner initiated a lawsuit and the startup company was required to defend it.

In either case, you must be able to survive.

Having all the patents in the world with no financial ability to enforce those patents is pointless. The patents are worthless if competitors can steal from you with impunity.

Landing a big, strategic customer and getting your product in the marketplace opens you up to inbound lawsuits. A simple, nuisance lawsuit from a patent troll can be enough to force you into bankruptcy, let alone a well-financed competitor who is intent on shutting you down.

You must be able to survive.

The point of IP insurance is to keep your company running when a disaster strikes. Don’t be the person who tries to buy fire insurance after their house is burning.

Patent insurance is very affordable. 

A typical annual premium will be about 1-3% of the policy limits.  For example, $2M of patent enforcement or patent defense might cost between $20-40K/year. It is not cheap, but it is far less expensive than losing your company.

There is no excuse for not getting IP insurance.  It is affordable, it is available, and it gives you a way to implement the strategies in this book.  If you do not have IP insurance, why get any IP protection at all?