The system is in danger of collapsing

• With the growth in patent numbers, risk management will become vital to IP exploitation
• IP providers need to provide actionable intelligence to clients
• Better data on patent strength and value will make IP insurance more viable

Risk management is increasingly at the forefront of how businesses and in-house patent counsel view IP strategy. This is due to the sheer number of patent rights worldwide (estimated to be over 100 million), the complexity of technology, the abundance of prior art in many languages and increasingly complex relationships between companies based on technology licences, standards, open source licensing and other contracts. As one interviewee puts it: “The system is in danger of collapsing. Everyone is going to struggle to manage that.”

This environment is likely to become more challenging, as all the signs indicate that patent volumes are growing further and licensing relationships are becoming more sophisticated. In the world of the fourth industrial revolution and the Internet of Things, IP rights will become more central to business strategy, but there will be much more complexity around liability.

As one service provider notes, the “axis of risk” is changing: “Where there were few competitors, there are now many. And they are in new sectors and regions. Risk used to be a freedom-to-operate opinion on a single patent. Now IP risk advice needs to be judged across everything.”

Attend a conference with in-house counsel today and the questions they will be discussing are not just about what patents they are filing, or where, or who is suing whom. They are more likely to be framed like this:

• What is your appetite for risk?
• How do you identify business risk?
• What risk control systems do you have in place?
• How is your risk landscape changing?
• How can you transfer risk?
• Who is responsible for it?

In this context, IP advisers need to understand the business strategy, learn how to talk to the board about risk and provide “actionable intelligence”, as one interviewee explains. Service providers have a vital role to play in this process, not least because there is a gap where law firms do not engage.

The availability of data is making it easier to analyse and calculate a company’s exposure in the IP area and that, above all, will change the way risk is managed in the patent world. An in-house lawyer at a growing technology company provides a simple example: “If you’re doing a freedom-to-operate search and you find one million patents, it’s almost impossible to calculate the risk. But if you can narrow that down to, say, 98 then it’s doable.”

A number of new businesses are developing around compiling data on patents, other IP assets and litigation and using AI tools to analyse risk. But it’s one of the oldest of industries that may be most likely to benefit: insurance.

Insurance has long been available in the IP field, but take-up has generally been low: one experienced insurance broker estimates that less than 1% of insurable IP assets are covered. This is largely due to the difficulty of assessing reasonable premiums given the uncertainty over valuations. But there are signs that this is changing. In May 2018 Aon (one of the world’s largest insurance brokers) launched an IP Solutions group with some 50 people. It is led by Lewis Lee, co-founder of 601West, which Aon has acquired. Brian Hinman, formerly chief IP officer of Philips, has also joined the group as chief innovation officer.

Initiatives such as Aon’s are likely to make more funding available for IP insurance. Indeed, in July 2018 Tokio Marine Kiln launched a $100 million IP facility with Aon and other Lloyd’s syndicates to meet growing demand for IP cover. Announcing the facility, Lee said it brought a “holistic” approach to intellectual property: “It utilises patent litigation analytics, predictive modelling techniques, risk mitigation and innovative distribution strategies to help clients build and protect a valuable IP portfolio while minimising risks.”

One former in-house counsel predicts: “We will see a lot more of those insurance products to cover the risks that are out there.” These could include insurance covering patent validity, trade secrets theft or licence agreements, for example.

What is crucial to all of these is a reliable valuation, says one broker: “We need to find a standardised way of valuing intellectual property. There is now pressure on corporates to report IP quarterly, which is a start.” But finding ways to value “the whole gamut of IP rights” including patents, patent applications, other registered rights and trade secrets is challenging: “We’re doing machine learning, looking beyond the three traditional valuation methods, taking account of product information, litigation data and trade secrets data.”