Insurance
Patent Royalty Trust
Ocean Tomo Risk Management, LLC (“Ocean Tomo” or “OT”) has developed and is actively working to bring to market a “Patent Royalty Trust” insurance product that, through various novel mechanisms and insurance, aims to sharply reduce the risk of patent infringement claims and shareholder litigation to operating companies.
Historically, the vast majority of patent infringement claims were brought by actual competitors wherein an infringement action could often be resolved through cross-licensing or deterred by the threat of a countersuit. Today, however, companies as well as their officers and directors face potential claimants including non-operating patent owners such as Patent Licensing and Enforcement Companies (“P-LECs”, sometimes not so fondly referred to as “Patent Trolls”) as well as shareholders asserting a lack of process and control over Intellectual Property (“IP”) management. This risk is exacerbated by a growing IP mesh-network where multiple patents – perhaps hundreds – may cover a single product.
Establishing the Trust
The Patent Royalty Trust (“PRT”) provides a dramatically more efficient and risk-mitigating alternative. Below is an outline of how the product would work:
Patent Royalty Trust
The Company is then presented with the Fairness Opinion including some general indication of the number of third party, non-licensed patents which may apply to the product. The specific patents or their owners would not be disclosed.1 Management is then given the option to create a PRT and pay the total royalty amount set forth by the Fairness Opinion to the Trust.
Second, if the Company elects to do so, a Trust is then formed and a Manager (likely Ocean Tomo or the original Appraiser) is appointed and an Engagement Letter (with related fee agreement and insurance premiums) is completed. The Trust would execute the applicable insurance coverage and the Company would begin to pay the royalty to the Trust.
Third, the Manager would then allocate a fair portion of the total royalty to each identified patent holder.2 Depending on the terms of the Engagement Letter, the Manger may provide public notice to all third-party patent owners identified in the Fairness Opinion through an advertisement (e.g., an advertisement in the Wall Street Journal), inviting them to present their technology for license (essentially, participate in the functional equivalent of an “interpleader” action or one action involving all claimants). Patent owners that choose to participate are paid their allocated royalty by the Trust. The Trust then pays the Insurer the full balance of the estimated royalties, which the Insurer receives as further premium in exchange for covering later claims. The methodology for setting the royalties to be paid by the Trust would be standardized and would be continuously offered to further patent owners but would likely not change during the term. Creation of an actual “trust” may not be required. Coverage for injunctive relief would be excluded.
Disputes
It is likely that not all patent owners will respond to the notice or that some which meet with the Manager will not agree to the offered terms. In the event that such owners initiate an action for patent infringement against the Company, the case would be handled in the usual manner. Only in the event the patents are held not invalid and infringed would the Trust be relevant to the proceedings. As part of the Company’s normal course, the Fairness Opinion and Trust would likely be part of the record of the case, and presented by the Company’s experts during the damages trial. Indeed, the Appraiser may testify as well explaining that their work was prepared just prior to the likely first infringement and utilizing the same methods frequently recognized by the Courts. Such testimony may be compelling evidence that the patent holder should receive an amount for damages equal to what would have been paid by the Trust. In the event that the court awards a greater amount, the increment would also be paid by the Insurer up to the policy limit.
Benefits
The benefits of the Patent Royalty Trust to the Company are:
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Non-Disclosure Bonds
In the face of inadequate safeguards, many recipients of others’ trade secrets are not sufficiently deterred from disclosing the secrets and otherwise damaging intellectual property. As a result, many potential disclosing parties are reluctant to share their information despite that such sharing of information may be critical to their business.
Just as a surety bond protects parties when they hire a contractor to remodel their home or office, Ocean Tomo’s proprietary Non-Disclosure Bond™ (patent pending) protects parties in transactions involving intellectual property. Advantages over reliance on confidentiality agreements or traditional insurance policies are that Non-Disclosure Bonds:
Captive Insurer
Although captive insurance companies are well-known for environmental and other risks, Ocean Tomo may be the first to apply a “captive” model to IP risks.
Ocean Tomo’s Captive provides many benefits, including:
Risk Management Professionals
Patent Royalty Trust
Ocean Tomo Risk Management, LLC (“Ocean Tomo” or “OT”) has developed and is actively working to bring to market a “Patent Royalty Trust” insurance product that, through various novel mechanisms and insurance, aims to sharply reduce the risk of patent infringement claims and shareholder litigation to operating companies.
Historically, the vast majority of patent infringement claims were brought by actual competitors wherein an infringement action could often be resolved through cross-licensing or deterred by the threat of a countersuit. Today, however, companies as well as their officers and directors face potential claimants including non-operating patent owners such as Patent Licensing and Enforcement Companies (“P-LECs”, sometimes not so fondly referred to as “Patent Trolls”) as well as shareholders asserting a lack of process and control over Intellectual Property (“IP”) management. This risk is exacerbated by a growing IP mesh-network where multiple patents – perhaps hundreds – may cover a single product.
Establishing the Trust
The Patent Royalty Trust (“PRT”) provides a dramatically more efficient and risk-mitigating alternative. Below is an outline of how the product would work:
Patent Royalty Trust
- Fairness Opinion
- Trust Management
- Insurance
- Notice/Negotiation
The Company is then presented with the Fairness Opinion including some general indication of the number of third party, non-licensed patents which may apply to the product. The specific patents or their owners would not be disclosed.1 Management is then given the option to create a PRT and pay the total royalty amount set forth by the Fairness Opinion to the Trust.
Second, if the Company elects to do so, a Trust is then formed and a Manager (likely Ocean Tomo or the original Appraiser) is appointed and an Engagement Letter (with related fee agreement and insurance premiums) is completed. The Trust would execute the applicable insurance coverage and the Company would begin to pay the royalty to the Trust.
Third, the Manager would then allocate a fair portion of the total royalty to each identified patent holder.2 Depending on the terms of the Engagement Letter, the Manger may provide public notice to all third-party patent owners identified in the Fairness Opinion through an advertisement (e.g., an advertisement in the Wall Street Journal), inviting them to present their technology for license (essentially, participate in the functional equivalent of an “interpleader” action or one action involving all claimants). Patent owners that choose to participate are paid their allocated royalty by the Trust. The Trust then pays the Insurer the full balance of the estimated royalties, which the Insurer receives as further premium in exchange for covering later claims. The methodology for setting the royalties to be paid by the Trust would be standardized and would be continuously offered to further patent owners but would likely not change during the term. Creation of an actual “trust” may not be required. Coverage for injunctive relief would be excluded.
Disputes
It is likely that not all patent owners will respond to the notice or that some which meet with the Manager will not agree to the offered terms. In the event that such owners initiate an action for patent infringement against the Company, the case would be handled in the usual manner. Only in the event the patents are held not invalid and infringed would the Trust be relevant to the proceedings. As part of the Company’s normal course, the Fairness Opinion and Trust would likely be part of the record of the case, and presented by the Company’s experts during the damages trial. Indeed, the Appraiser may testify as well explaining that their work was prepared just prior to the likely first infringement and utilizing the same methods frequently recognized by the Courts. Such testimony may be compelling evidence that the patent holder should receive an amount for damages equal to what would have been paid by the Trust. In the event that the court awards a greater amount, the increment would also be paid by the Insurer up to the policy limit.
Benefits
The benefits of the Patent Royalty Trust to the Company are:
- The PRT allows the Company to manage the IP risk associated with new product introduction in a way that would add substantial process and control elements, substantially benefiting shareholders.
- Payments for use of third-party technology would be accounted for throughout the product life cycle offering a better matching of revenues and costs.
- The P-LEC considering litigation against a number of industry players may be motivated to litigate first against firms without a PRT, opening the potential for a verdict of invalidity further reducing the Company’s exposure.
- OT’s proprietary review and evaluation process provides the Insurer with superior knowledge regarding claims exposure.
- The early interpleader action would create or help create an “established rate” that defines or otherwise limits the damages available to later claimants.
- Reducing the availability of injunctions to circumstances where the equities justify them (i.e., making the holding of eBay statutory). This would be an enormous boon to the PRT, because (as noted above) the PRT coverages would not extend to injunctions.
- Reducing exposure to liability for willfulness (and associated treble damages). This would help the PRT because, depending on how the limits take effect, it would expand the circumstance in which the Company could be told who holds potentially competing patents.
- Creating a post-grant and streamlined opposition procedure. Particularly if it is expanded to include the notice and interpleader actions discussed above, this procedure would bring much greater efficiencies and certainties to the PRT process.
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Non-Disclosure Bonds
In the face of inadequate safeguards, many recipients of others’ trade secrets are not sufficiently deterred from disclosing the secrets and otherwise damaging intellectual property. As a result, many potential disclosing parties are reluctant to share their information despite that such sharing of information may be critical to their business.
Just as a surety bond protects parties when they hire a contractor to remodel their home or office, Ocean Tomo’s proprietary Non-Disclosure Bond™ (patent pending) protects parties in transactions involving intellectual property. Advantages over reliance on confidentiality agreements or traditional insurance policies are that Non-Disclosure Bonds:
- Do not rely on the Recipient’s business ethics or financial solvency;
- Do not require expensive and time-consuming underwriting, which may itself present disclosure and other risks;
- Place the secured funds in the hands of a neutral third-party (the surety);
- Are enforceable by the Disclosing Party as well as the Recipient;
- Use relatively efficient and inexpensive arbitration as opposed to litigation;
- Are relatively inexpensive with premiums far lower than those required for liability insurance.
Captive Insurer
Although captive insurance companies are well-known for environmental and other risks, Ocean Tomo may be the first to apply a “captive” model to IP risks.
Ocean Tomo’s Captive provides many benefits, including:
- Coverage obtained that is generally unavailable in the traditional marketplace;
- Direct access to the reinsurance market;
- Lower administrative costs than with traditional insurers;
- Premiums that are generally tax deductible;
- Appreciating assets yet deferred taxed on that growth;
- Enhanced financial reporting through greater transparency and valuation.
Risk Management Professionals
| Andrew W. Carter | 312-327-4420 PH | 312-327-4401 FX |
| Managing Director | acarter@oceantomo.com | Download v-card | Biography |