HIPLA/UH 20 th Annual Fall Institute 2004 Managing Intellectual Property Exposure Tough Market, Creative Solutions

1. HIPLA/UH 20th Annual Fall Institute 2004Managing Intellectual Property Exposure Tough Market, Creative Solutions Joby Hughes Joby A. Hughes, P.C. Friday, 08 October 2004

2. Overview • The Market For Patent Insurance Is A Tough Market With Few Insurance Solutions • With Limited, Very Expensive Options, There Are A Few Creative Solutions Available • Key Thoughts On How To Think About The Risk And Alternatives To Risk Transfer (Insurance)

3. Tough Markets, Few Products • Why? Pick a reason(s): • Unforeseen events, e.g., 9/11 and Enron • Directors and Officers claims in wake of the Tech Bubble in 2000 • The exponential increase in IP malpractice claims and large settlements • The history of CGL policies’ claims history for IP losses under the advertising injury clause • Large claims and payouts under standalone IP Infringement policies • Successful, high profile litigants of patent positions • Patent bar attitudes towards insurance as a financial vehicle

4. Tough Markets, Few Products • Underwriter Reaction • Adverse selection: moral hazard, i.e., “it’s a business risk.” • High rates on other business; outside of reinsurance treaties • Insured Reaction • Too expensive • Smaller insurance budget to pay for more expensive core coverages • Broker Reaction • Can make more money selling traditional lines • Huge perceived learning curve

5. Five Potential Exposures 5. Warranty to Title Issues

6. Types of IP Insurance • Third Party Liability coverage • I.E., legal costs and damages • First Party coverage • Transactional costs - e.g. licensing fees and R&D costs • Enforcement coverage • Legal costs incurred in asserting the Insured’s patent rights

7. Tough Markets, Few Products • What’s Left of Traditional Markets? • IPISC: enforcement and infringement ($3M/$3M) • AIG: very selective defensive coverage offered • Kiln (Lloyd’s): First party coverage for loss of an IP position • Specialty Groups: The Hartford, AIG, Ambridge Partners • Other Coverages: Cyber Liability Policies (e.g., Chubb)

8. Tough Markets, Few Products • How To Keep Tabs On The Available Markets? • Annually: The Betterley Report • www.Betterely.com • Be Prepared For “Sticker Shock” & Coverage Limitations • “Rate On Line:” Can be as high as 10% to 15% • Beware: Coverage limitations can severely limit coverage in less expensive policies

9. Alternatives In The Marketplace • Enforcement: Contingency Fee Attorneys & Hedge Funds • Infringement: Risk Management Consulting & Self Insurance (or Captives) • IP Value of Position: Hedge Funds • Reps and Warranties Coverage? ???

10. Enforcement Alternatives • Contingency Fee Attorneys • Partnering With Traditional Patent Firms • Good Relationships Can Be Tricky • Play To Strengths, Experience • Hedge Funds & Investment Bankers • Turn-Key Solutions or Cash • Key Strategic Advisors or Cash • Litigation Management or Cash

11. Infringement Alternatives • Self Insurance • Know Your #’s: Projected Probable Loss, Projected Maximum Loss, and Potential Frequency • Handicap the Known Claims • Captives • Your own insurance company (sort of) • Group captives are being formed for industries attacked by certain types of claims

12. Other Alternatives • Sell The Cash Flow Stream • Often Structured As Loans • Almost Always Requires The Use Of Special Purpose Entities • Buy Yourself Out From Under A Known Claim • Expensive! • Read The Fine Print, e.g., subrogation and indemnity clauses, “hammer” clauses related to settlement and “loss of control” of litigation issues

13. Conclusion • IP Insurance Markets Have Been “Hammered” • A Few Brave Markets Continue On With Opportunistic Rates And Terms • There Are Insurance And Non-Insurance Related Alternatives To Traditional Products • The Risks Are Still Out There • There Is No Such Thing As The Uninsured, Only The Insured And The “Self-Insured”