By: Phil Hargrove, Vice President, Intellectual Asset Management, GE Employers Reinsurance Company, Kansas City, MO

The inaugural issue of the Insurance IP Bulletin identifies and defines many of the concepts and milestone events that have made patents in the insurance industry a topic of importance. Since the State Street Bank decision upholding patents on business methods, the growth rate for issued patents and applications filed for USPTO class 705/4 (Insurance) has grown at a compounded annual rate of more than 30% since 1998--more than triple the overall growth rate for all classes of patents. On a pure numeric basis, the number of issued patents remains small compared to other classes; however, thousands of patents are both issued and pending in the broader class 705, which includes all of financial services and software.

Patents are big business and a big business issue. An entire multi-billion dollar industry has emerged around patents. We’re seeing the emergence of consultants to help craft a patent strategy and identify assets to protect, companies that specialize in searching for prior art or for clearance measures, firms to value and brokers to license patents as a source of revenue. We’re also seeing more books, magazines and conferences on the subject … and attorneys to draft and file patents … and attorneys to prosecute those who infringe. The Justice Department has recently commissioned a study of the patent industry because it has become such a visible and important part of our economy. The Department figures patents contribute 5% to the GDP.

And, speaking of attorneys, the number of them specializing in patents has grown at an annual rate that exceeds the growth in patents filed and issued. For the insurance industry, any topic that attracts that kind of attention from the legal community is usually a leading indicator of trouble, with a capital T and that rhymes with P and that stands for Patent.

Every hour of every business day a patent infringement lawsuit is filed somewhere in the United States. According to a recent edition of the Insurance Journal, the average legal cost to defend against a claim of infringement is $3 million, and that’s if the defendant can prove it hasn’t infringed. If there is willful infringement, treble damages can be awarded on top of whatever amount the court has assessed for the basic infringement. And that's all on top of the legal costs. To add insult to injury, the court may issue an injunction barring the continued use of the infringed patent claims and/or a company may have to negotiate a license fee to continue selling a product or performing a routine business process.

For an industry known for "me too" innovation, this is a trend that will have a major impact on the development of new products and services. Just ask Hartford Insurance. It recently paid $80 million to settle a patent infringement and theft of trade secret lawsuit brought by Bancorp Services. Met Life and Sun Life are now in the crosshairs for infringing the same patent.

The effect of patent infringements on our industry is not limited to just those patents issued in the insurance class. At a high level, the processes of banks are similar to our own. We underwrite risks; they underwrite loans. The process is similar and the use of patented technology to assist these processes is growing throughout financial services. How different is the processing of premium payments from the processing of loan payments? The insurance industry is part of the broader financial services industry and one familiar with the processes used can find many similarities.

The $520 million judgment against Microsoft for infringing a patent issued to the University of California and licensed to Eolas for certain features of a web browser may seem like a distant concern for the insurance industry. Software is typically protected by copyright and while cases of copyright infringement are growing primarily due to carelessness on the part of programmers, big software companies have had a tough time making their case. In the 80’s, Apple tried and failed in its suit against Microsoft for the graphic user interface and Lotus unsuccessfully pursued Microsoft and Borland for the look and feel of electronic spreadsheets.

What if those companies had patents on key components of their software? Amazon was successful against Barnes & Noble for the "one-click" method because it had a patent. MercExchange was successful in its case against eBay for the "Buy It Now" feature because it had a patent. The use of the Internet is growing within our industry, along with the risk of infringing on someone else’s patent. "Insure It Now" may seem like a great idea for your new customer website, but have you researched to make certain someone else doesn’t have a patent on it? Claiming ignorance is no defense against a claim of infringement.

Many would question how innovation, insurance, and patents could possibly be uttered in the same breath. The good news is that there is a great deal of patented innovation occurring that affects our industry. The bad news is that very little of it is coming from insurance companies themselves.

Mark Nowotarski and Tom Bakos estimate that fewer than 30% of the patents issued or pending in the insurance class belong to insurance companies. Of the 70% remaining, individuals or small companies own most of them. History from other classes of patents indicates that these individually held patents pose the greatest threat. If you have a call center, odds are that you know or soon will know the infamous Katz patents. Who are the next Katzes in our industry? They are definitely out there.

Insurance is all about understanding and quantifying risk. There are even insurance companies that provide insurance coverage for various intellectual property risks, yet this may be a case of the shoemaker’s kids going shoeless. There are very few within our industry that are fully aware of both the risks and opportunities for the industry itself with respect to patents and other forms of intellectual property.

There are a number of sources of information, such as this Insurance IP Bulletin that can help you learn about this important and growing trend in our industry. From the US Patent & Trademark Office website to search engines such as Google or Yahoo, there is a wealth of information available. While the sky may not be falling, there are definite signs of a brewing storm and now is the time to prepare.