Article from the California Apparel News explaining the insurance protection options pertaining to Intellectual Property claims

1. 12 CALIFORNIA APPAREL NEWS MARCH 16–22, 2007
Imagine the following scenario: You have
established a newly capitalized apparel de-
sign and distribution company with a
“unique,” cutting-edge product that has gen-
erated retail interest and orders. But soon
after your product is on shelves, you receive
a “cease and desist” order from an industry
conglomerate on a particular pattern, or
your mark, demanding you immediately
pull all product from stores.
You are certain your design is original—
yet your attorney informs you that holding
ground and defending an intellectual-
property lawsuit against an industry giant—
even if you are right—could be a business-
ending exercise.
Indeed, the biggest problem with litiga-
tion, no matter what kind, is the expense.
The American Intellectual Property Law
Association estimates the cost of a
trademark-infringement lawsuit to be in the
range of $700,000 to $1.25 million, just for
fees and expenses. The loser frequently also
pays damages, including royalties, lost prof-
its and even the opposing side’s legal fees. To
enforce intellectual property or defend
against accusations is often enough to force a
company out of business.
What are your options if you are involved
in defending an intellectual-property lawsuit
or going after an infringer of your intellec-
tual property?
Ask yourself:
•Do you have the funds to defend your-
self if you are sued for infringement?
•Do you have the funds to institute a law-
suit against an infringer without using op-
erating capital or personal cash?
In most cases, a company’s commercial
general liability insurance policy will not
cover intellectual property. As a result,
many well-established companies will at-
tempt to defeat new competitors by chal-
lenging their intellectual property, rather
than compete against them in the open mar-
ket. Fortunately, though, there is an insur-
ance solution.
Intellectual property–infringement insur-
ance provides funds to help pay the fees and
costs required to be successful in intellectual-
property litigation. There are two main types
of coverage available: One, called “abate-
ment” or “offensive” coverage, helps an in-
tellectual-property holder enforce its rights
against an infringer. The other, called “de-
fensive” coverage, helps defend a company
if it is accused of infringing someone else’s
copyright. The defense policy also will pay
for certain damages, if incurred.
Intellectual-property insurance is relative-
ly inexpensive—especially considering the
cost of a full-blown lawsuit. Individual poli-
cies covering minimum enforcement or de-
fense limits of $100,000 start below $10,000
in annual premiums. The policies can pro-
vide limits up to $5 million and offer protec-
tion for patents and copyrights, as well as
trademarks. Most growing firms choose lim-
its in the $2 million range, with premium
costs in the $25,000 to $50,000 range.
These types of coverage are of major im-
portance to companies in the start-up cate-
gory through the middle-market range of
$200 million in revenue. As organizations
grow beyond a couple hundred million, they
generally can afford litigation, so they
choose to “self insure” for the risk.
Other benefits of carrying intellectual-
property insurance are:
•Your investors will feel safer if you have
a policy to help protect their investment in
your company.
•You will be in a stronger position to ne-
gotiate licensing deals.
•The pressure to settle rather than incur
mounting legal expenses is reduced.
•You control the lawsuit and dictate set-
tlement terms rather than the insurance
company.
•Should the court award damages to your
adversary, the policy will pay those damages
up to the remaining policy limits. I
Insurance Against Copyright
Claims—and Copied Designs
Robert S. Mahl is vice president/apparel-
industry practice leader of Sander A. Kessler
& Associates Inc., a Santa Monica,
Calif.–based full-service insurance broker
catering to an apparel-industry clientele.
•Intellectual property refers to ideas—designs, brands, inventions, and the good-
will and reputation of a company. In the fashion industry, this translates to the compet-
itive niche of a company’s product or brand. Intellectual property is traditionally protect-
ed by—or granted rights through—the institutions of copyright, patent and trademark.
These established rights, however, are uncertain when applied to particular segments
of the fashion industry.
•A copyright is technically the right to copy. It is granted for creative, intellectual or
artistic forms (“works”). This is, by many legal opinions, in contrast to a “useful article.”
Apparel is usually deemed to be useful by nature. It covers the body and provides
warmth, protection and privacy. A distinctive neckline, unusual curve or ribbing, while
creative and eye-catching, rarely warrants protection under copyright law. Jewelry and
artistic patterns, which adorn clothes, and other “applied art,” are typically copy-
rightable.
•Patent law generally protects a new invention, process, machine or composition of
matter. There are two types of patents: utility patents, which cover the underlying idea
or function, and design patents, which protect its ornamental value. This “ornamental
design” is defined only by drawings. It protects the novelty of a design. Unfortunately,
in order to be patentable, both a utility and a design must be “novel” and “non-obvi-
ous.” This tends to limit the merits of patent protection for most apparel. One exception,
however, has been in the athletic-shoe industry, in which competitors have used patent
protection to their advantage. One of the biggest problems with a patent is the average
of two years required to obtain one from the U.S. Patent and Trademark Office.
•Trademarks may offer the most viable protection for intellectual property in the
fashion industry. A trademark is essentially the identifying factor of a product—a Guc-
ci bag or a Ralph Lauren polo shirt. In both cases, the name of the source of the
product is highly valuable. It conveys the reputation, goodwill and strength of the brand
and distinguishes the product from competition. Trademark rights can be used in litiga-
tion to accuse competition of using confusing logos or names on similar products or of
using the reputation of the accuser to increase sales.—R.S.M.
By Robert S. Mahl
CONTRIBUTINGWRITER
A Primer on Intellectual Property
AS SEEN IN CALIFORNIA APPAREL NEWS