Asserting a patent in court can be expensive and seeking injunctive relief in Germany (where many of these cases are held because of Germany’s particular laws and practice) to stop the alleged infringer continuing to sell their products, can have a negative impact on cash-flow. But using the credit insurance market offers patent holders an attractive financing solution.
Following an alleged patent infringement, US chipmaker Qualcomm sought to enforce a court order last year that would effectively stop the sale of some iPhone models in Germany. The case illustrated the growing importance in this increasingly technology-driven and connected world that companies place on the protection of their patents and how they forum-shop to take action wherever most suits their needs and desired outcomes but, given Qualcomm were required by the German court to post a bond (similar to a cross-undertaking on costs in England) of $1.5 billion, it also reveals the negative cash-flow impact (on top of the legal cost) that comes with litigation when seeking an injunction, even in the most suitable jurisdictions.
With patent infringement likely to be on the rise following the arrival of 5G technology and its role as an enabler of the much-heralded internet of things (IoT), the challenge for many businesses will be around how to assert their patents given the huge financial bonds that the German courts ask for when pursuing a legal action for patent infringement against another business, and when seeking an injunction to force the infringer to stop (using processes or technology described by the patent claims).
One answer is to turn to the credit insurance markets and surety bonds for an interesting lower-cost alternative.
Patents drive revenue
Representing a key part of a company’s intellectual property (IP), patents are exclusionary monopoly rights which allow the patent holder to build a barrier to entry and exclude competitors from making, selling or distributing products or services implementing the patented invention. In sectors where research and development investment can be very high, such as the telecoms sector for example, licensing patents has become a core revenue driver. This revenue is likely to continue to grow as 5G and wireless telecom technology sees many objects such as white goods, heating and security systems connected to the internet. In particular, the ‘connected car’ with the eventual arrival of the autonomous vehicle, is seen as a significant application of IoT in terms of business value for the automotive industry.
As a standard-based technology, patent holders who have developed technologies contributing to the technical standard for 5G declare them as essential to the Standard Setting Organisations. Holders of these Standard Essential Patents (SEP) are then compelled to license them to implementers such as smartphone and car companies for example, on a Fair Reasonable and Non-Discriminatory (FRAND) basis. The implementers are meant to take a licence and pay royalties if they use the standard-based technology in their products.
Disputes arise between patent holders and implementers centering around which patents should be licensed and on how the royalty rate should be calculated. Some take the position that it should be a percentage of the end-product which can have a high value in the case of a car, while opponents of that view believe it should be calculated on the smallest components embedding the technology. One of the most significant and disruptive consequences of such disagreements can be a legal dispute based on patent infringement which focuses on two key aspects: is the patent infringed and is the patent valid? Given the global deployment of wireless telecommunications, patent holders file patents in most countries and litigation can take place in any jurisdiction where they may have the best chance to reach their objectives. Germany is an attractive venue for patent holders to initiate litigation given the ruling on infringement is taken months before ruling on the actual validity of the patent. The jurisdiction also crucially allows the patent holder to seek an injunction to force the alleged infringer to take their product off the market.
Sounds straightforward, but – as mentioned previously -the patent holder must deposit significant bond if it wants to seek an injunction. Qualcomm’s case with Apple’s iPhone is one example but another even more recent high-profile case involves Daimler’s use of Nokia’s technology for areas like navigation systems and vehicle communication. In this case, Daimler’s lawyers are alleged to have demanded a security deposit of €4.5 billion from Nokia.
Getting a bank guarantee to cover such vast sums can be very costly for patent holders, especially if their financial situation is not strong or if they need to direct their cash flow into further investment. Typically, a bank will require security over the company’s assets and cash as collateral. It’s an expensive option for patent holders who, after all, are simply trying to assert their own IP. One solution however comes from the credit insurance markets in the form of surety bonds.
Aon's latest C Suite Series report on the credit insurance market – Driving growth through uncertain times – details how surety bonds, which have traditionally been used in relation to construction contracts, are being used as an alternative to letters of credit and bank guarantees “thus reducing security costs and freeing up significant amounts of working capital.” As a guarantee from an insurance company, a surety bond provides a cost-effective form of financial credit which usually does not require security over the company’s assets, , and could be available at a competitive rate.
Surety bonds could be structured as a potential substitute for the more common financial guarantees in patent litigation cases. A major advantage is that such surety bonds enable the company, the patent holder in this case, to free up funds to inject into the business and reduce debt that would otherwise be tied up with their patent litigation.
Capacity will grow
The use of surety bonds in this area is a new concept and it will take time to build the insurance capacity needed but given that patent infringement cases generally settle before the case goes to court, insurer interest is expected to grow alongside that of those businesses interested in more cost-effective ways of protecting their patents.
Download a copy of Aon’s latest C-Suite Series report ‘Driving growth through uncertain times’