Protecting Your Insurance Patent,
Or, Millions Of Dollars For Your Thoughts
By Tom Bakos and Mark Nowotarski
Remember when new ideas in the insurance industry were a dime a dozen? If someone offered you a penny for your thoughts, you were getting a tremendous deal. Thats no longer true. Now, you might be able to get a couple million dollars.
The first significant challenge to an insurance patent has just been overturned. Bancorp Services, LLC won a significant victory in the U.S. Court of Appeals for the Federal Circuit involving its patent, US 5,926,792, “System for Managing a Stable Value Protected Investment Plan.”
On March 1, 2004, the Court of Appeals reversed a lower court ruling that held its patent was invalid. As a result, Bancorps prior settlement with the Hartford Financial Services Group for alleged misappropriation of trade secret and patent infringement was bumped up another $10 million to almost $80 million dollars (pretax).
The Court of Appeals ruling revives Bancorps patent lawsuits involving MetLife and Sun Life Financial (Canada). And, if these cases result in settlement or judgment, the value of their ideas could go well beyond $100 million.
Fed Chairman Alan Greenspan has noted that the fraction of the total output of the U.S. economy that is conceptual rather than physical has been rising. This is due, in part, to the fact that miniaturization has reduced the demand for materials in the goods we manufacture. However, whatever the reason, there has been an accelerating shift to ideas as a major contributor to value creation. With this shift a greater emphasis has been placed on the need to protect intellectual rather than physical property rights.
And, if that is true in general, it is true to the nth degree in the insurance industry where our products are created out of at least 99% idea and less than 1% paper. Insurance is a business that provides financial instruments for dealing with the cost of risk. Its products and services involve finding ways to manage the financial impact of risk, first, through quantification and, then, through the introduction of pooling, offset, or transfer mechanisms designed to minimize the financial uncertainty of a risk event on any single entity. If it were easy or obvious, everyone would be doing it. But it is hard, often not so obvious and requires the application of specialized skills.
The application of these skills to research and develop risk solutions in the insurance industry quite often results in invention. An “invention” is an idea that has a practical, technological implementation. Invention in the insurance industry, for the most part, had been freely shared with others in the past. But competition has become more spirited and margins have become tighter so that insurance companies need every advantage they can get to remain profitable.
An individual inventor or a small group of entrepreneurs are more likely to recognize the value in what they create and take steps to protect their intellectual property, as Bancorp did, with a patent. But no one can really afford to continue to throw open their vaults. Thats effectively what you would be doing when you convert your cash dollars invested in R&D into potentially successful ideas and then just give those ideas away.
Enterprise risk management (ERM) has become a hot topic in the insurance and other industries. ERM focuses on all risks to which an enterprise is exposed–financial, accidental, operational or otherwise. The recognized need to address this issue in a unified and organized fashion has resulted in the creation of a new position, Chief Risk Officer, in many companies. Some guidance may be taken from how the issue of risk is being addressed within corporations on an enterprise level and applied to protecting the value in intellectual property.
Companies in industries where invention is an essential ingredient for success have long recognized the need to protect their R&D investment with copyrights, trademarks, patents or by effective use of trade secrets. Insurers are now also beginning to recognize a need to protect and safeguard their R&D investment that produces new innovative products or enables new services.
Additionally, there is another aspect of raising this awareness levelinsurers must recognize that their marketplace is no longer a cafeteria of ideas. Taking a dessert off someone elses plate is no longer good manners. As the Bancorp case illustrates, misappropriating trade secrets or infringing patents, even if it is unintentional, can have a heavy price.
So, what are insurers doing? Many are creating executive positions within their organizations with overall responsibility for monitoring the intellectual property landscape both internally and externally. Swiss Re, GE and Allstate are examples of insurance companies that have created these new positions. The mission for these new positions is threefold:
1. Defense through a patent watch function that minimizes the risk the company will inadvertently infringe anothers patent. This avoids wasting resources discovering what others may have already discovered. It may also lead to the implementation of business solutions involving the licensing or cross-licensing of patents.
2. Actively protect the intellectual property created within the company. This can be done by creating an intellectual property awareness within the company through education of inventors and the establishment of workflow processes designed to identify and capture invention. Through these processes companies can avoid the inadvertent disclosure of patentable subject matter and loss of intellectual property value through premature publication, disclosure at conferences, in discussions with clients or brokers, or offering for sale. The ultimate follow-up is, of course, the application for a patent or use of some other more appropriate protective measure.
3. Establish a company as an industry leader in intellectual property with a full range of expertise in the area.
The people filling these positions are at the forefront of the new insurance industry. They are creating the corporate culture required for effective innovation and substantial value creation for stakeholders.
The ideas your organization creates by R&D expenditures are valuable, often way more valuable in the market than the cost of their development. Patents provide an opportunity to capture and protect that value. But, this wont happen all by itself. If you want to retain this value, you had better make sure someone is in charge of locking the vault at night.
Tom Bakos, FSA, MAAA, is a consulting actuary with Tom Bakos Consulting Inc., Ridgway, Colo. He can be reached via e-mail at [email protected].
Mark Nowotarski is with Markets, Patents & Alliances, Stamford, Conn. He can be reached at [email protected].
Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.