by Robert Fletcher
From dietary supplements to all-natural and organic foods and beverages, the nutrition industry has generally managed to avoid the pitfalls of the recent recession, as evidenced by its growth in 2010, which topped $101 billion in sales. Concerns over food safety, the increasingly high cost of health care, an aging population of Baby Boomers and numerous economic changes have all contributed to the solid growth experienced by the nutrition industry. This extremely competitive industry of researchers and developers is constantly on a quest for the next innovative product, aimed at improving overall nutrition and enhancing the quality of life. The industry recognizes these products must be protected by intellectual property (IP) rights, which will be their competitive advantage. IP rights take the form of patents, trademarks, copyrights and trade secrets, which, interestingly, may be needlessly at risk if the entrepreneur becomes engaged in IP litigation. The inability to protect IP is a leading cause of failure for companies vying to lead the nutrition industry.
Virtually all nutrition-based companies possess IP that, in many cases, may be critical to their bottom line. Recent studies have found up to 80 percent of a company’s value may reside in its IP. Companies can no longer afford to ignore the importance of insuring this asset. Although companies are becoming better educated regarding the lack of true IP coverage in other policies, many companies are simply unaware their commercial general liability (CGL) policy may not be providing coverage for their most valuable asset: IP.
If a company’s IP becomes involved in litigation, specialized IP insurance policies are risk transfer tools that can ensure the funds are available to pay legal expenses. Without specific IP insurance in place, companies are often left with less-than-favorable alternatives to cover the cost of litigation. These less-than-favorable alternatives include:
CGL Policy Coverage: CGL policies do not offer any meaningful IP coverage, since these policies are devoid of any IP enforcement coverage. The defensive coverage offered to an insured under a CGL policy is found in the “Advertising Injury” section of the policy, but is limited in scope. The accused infringing activity must be a direct result of the actual advertising itself.
Professional Liability Policies: Professional liability policies are designed to cover defects in design and performance, thus leaving a narrow opportunity for an insured to secure defensive coverage for IP infringement.
Credit and Working Capital Reserves: With litigation costs and damages reported in the millions of dollars, many companies may find themselves struggling to adequately fund IP litigation. Thus, it is wise for companies to evaluate their borrowing capacity. The only alternative may be accessing working capital reserves. Obtaining insurance specific to this exposure leaves working capital to be used to grow, capture market share and maintain profitability, which is always in a company’s best interest. Then, if a company finds itself in court, as a plaintiff or a defendant, the funds are available to thoroughly and vigorously litigate. Needless to say, the lack of IP insurance could lead to the company losing its IP rights, incurring burdensome royalty payments under licensing agreements, being forced to settle or going out of business.
Companies that are more successful or have more innovative IP are more likely to be involved, either offensively or defensively, in an IP lawsuit. According to the American Intellectual Property Law Association’s most recent survey, the average litigation expense incurred by each side (plaintiff and defendant) through trial, when the amount in controversy is between $1 million and $25 million, is $3.1 million. This number, most surprisingly, doesn’t even include damages, which could easily reach several millions of dollars.
