How SMEs Can Help Protect Against Growing IP Litigation Risk

With the increasing prevalence of intangible assets and the existing affinity for litigation in the United States, many companies are seeing increased exposure to potential lawsuits. Small and medium-sized enterprises (SMEs) and startup-size companies (0-$30 million revenue) are more susceptible to being sued for intellectual property (IP) infringement. These litigation suits could potentially be the endgame for many SMEs, whose funds are more likely to be invested in growth initiatives, rather than put aside to deal with legal matters.

If faced with litigation, SMEs are pressed to either fight a potential multi-year lawsuit, which can cost millions of dollars, or settle for what might amount to large sums of money and be forced to license technology or stop producing their products and services. So, how can companies ensure they have an appropriate risk mitigation toolkit in place to help protect their IP? Consider the following industry trends and IP litigation insurance updates to guide you forward.

Industries Are Feeling the Impact of IP Litigation

Across the SME space, the industries experiencing the highest amounts of IP litigation among competitors are technology, finance and retail.

According to Aon’s research, SMEs in the technology industry see both the highest number of cases per year as well as some of the largest damages. Over the last 10 years, there have been an average 297 patent lawsuits filed per year against technology SMEs, with average damages of $4.4 million. Moreover, this space is heavily populated by non-practicing entities (NPEs), who are hard to predict and hard to defend against. 64 percent of cases filed against technology SMEs were filed by NPEs, compared to the baseline rate of 46 percent².

Within the technology space, some of the largest awards have been paid out by networking companies — averaging over $7 million in damages — and software companies — averaging over $6 million in damages. This is a loss of over 20 percent of these companies’ yearly revenue, in the best case².

The financial sector (including fintech companies) and the retail and services industry also face significant risks. Financial SMEs see 160 patent defenses per year on average, with damages of $3.5 million. Compared to other industries, the risk to the financial sector has remained a constant threat².

By contrast, the retail and service industry has seen wild swings in litigation risk: from as many as 406 cases per year down to as few as 110. The litigation landscape is volatile. Businesses across the retail and services industry could be at risk of a new surge in lawsuits at any point. Despite peaks and troughs in litigation activity, the damages are comparatively lower than other industries with the average damages award is less than $1 million². This may ultimately be a small comfort, however, as the majority of legal fees for cases of this size can still reach in excess of $675,000³.

Overall, among the 1,101 cases filed per year on average against SMEs, there are damages of $3.8 million. For companies within the $0-$30M revenue band, these damages are destructive, even before considering the costly impact of legal fees⁴.

On the whole, it is worth noting that the number of cases against SMEs has continued to decrease in recent years, mirroring a larger trend in patent litigation. However, as the total number of suits has declined, NPEs have taken up a greater share of the litigation pool. In looking ahead, SMEs can expect more unpredictable and hard to defend NPE lawsuits.

NPE Trends for SMEs Across Litigious Industries

Percentage of NPE Lawsuits⁵

With typical legal costs for IP litigation between $300,000 and $1 million, SMEs face the tough choice to either settle with a competitor or NPE or fight their lawsuit⁶. Any choice could be detrimental to business growth, especially for those with higher cash burns.

How SMEs Can Help Protect Their IP

For SMEs, IP liability insurance can be an effective solution to have in the risk management toolkit. However, it’s constantly evolving to best fit the market in need. New coverage elements have been incorporated into policy wording, benefitting SMEs more than any other enterprise. Here are the latest updates to keep in mind:

• Enforcement coverage is a new offering in the IP insurance space. It is typically only offered to SME buyers, because IP is often their most valuable asset. Under this enforcement coverage, the carrier may cover legal proceedings initially commenced or threatened by the insured against a third party during the policy period, which is usually twelve months.
• Contract enforcement is a new coverage element. This can cover legal costs and expenses incurred when the insured needs to enforce their rights under a contract that controls the exploitation of their IP. Some carriers offer a trade secret enforcement option if the insured pursues a third party that has misappropriated the trade secrets of the insured.

Why is this so important? These contracts, trade secrets, and respective IP comprise the value of an SME to its competitors, so it is key that they be protected in the appropriate way.

Take Action Now to Help Avoid Future IP Risk

As IP litigation becomes more relevant, SMEs are subject to increasing risk. Compared to IP insurance in the past — which was limited in coverage and too expensive — new offerings in the market are flexible and constantly progressing to fit changing market needs. Evolving data has provided visibility into which industries and revenue bands are most at-risk for IP litigation, yet not all companies face the same burden if hit with a lawsuit.

Consider your risk level and take the appropriate steps to safeguard your firm. To protect your SMEs’ intellectual property is part of protecting your whole business. Through policy wording improvements, enforcement enactment cover, and advancing technology that predicts risk trends, small businesses have more resources than ever to help defend their most valuable intangible asset.

Find out more: Intellectual Property (IP)

¹ Litigation data derived from Lex Machina. (2023). U.S. Federal Patent Litigation [Data File]. http://lexmachina.com. Corporate industry data derived from D&B (2023). Corporate Metadata [Data File]. https://www.dnb.com.
² NPE data derived from Aon’s proprietary review and Stanford Law School (2023). NPE Litigation Database [Data File]. https://npe.law.stanford.edu. Litigation data derived from Lex Machina. Corporate industry data derived from D&B.
³ “2021 Report of the Economic Survey,” American Intellectual Property Law Association, September 2021, https://www.aipla.org/detail/journal-issue/2021-report-of-the-economic-survey
⁴ Litigation data derived from Lex Machina. Corporate data derived from D&B.
⁵ Graph: NPE data derived from Aon’s proprietary review and Stanford Law School. Litigation data derived from Lex Machina. Corporate data derived from D&B.
⁶ AIPLA Report

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