Wondering about coverage for copyright infringement?

1. AS SEEN IN CALIFORNIA APPAREL NEWS
Insurance Against Copyright
Claims—and Copied Designs
By Robert S. Mahl
CONTRIBUTING WRITER
Imagine the following scenario: You have property litigation. There are two main types
established a newly capitalized apparel de- of coverage available: One, called “abate-
sign and distribution company with a ment” or “offensive” coverage, helps an in-
“unique,” cutting-edge product that has gen- tellectual-property holder enforce its rights
erated retail interest and orders. But soon against an infringer. The other, called “de-
after your product is on shelves, you receive fensive” coverage, helps defend a company
a “cease and desist” order from an industry if it is accused of infringing someone else’s
conglomerate on a particular pattern, or copyright. The defense policy also will pay
your mark, demanding you immediately for certain damages, if incurred.
pull all product from stores. Intellectual-property insurance is relative-
You are certain your design is original— ly inexpensive—especially considering the
yet your attorney informs you that holding cost of a full-blown lawsuit. Individual poli-
ground and defending an intellectual- cies covering minimum enforcement or de-
property lawsuit against an industry giant— fense limits of $100,000 start below $10,000
even if you are right—could be a business- in annual premiums. The policies can pro-
ending exercise. vide limits up to $5 million and offer protec-
Indeed, the biggest problem with litiga- tion for patents and copyrights, as well as
tion, no matter what kind, is the expense. trademarks. Most growing firms choose lim-
The American Intellectual Property Law its in the $2 million range, with premium
Association estimates the cost of a costs in the $25,000 to $50,000 range.
trademark-infringement lawsuit to be in the These types of coverage are of major im-
range of $700,000 to $1.25 million, just for portance to companies in the start-up cate-
fees and expenses. The loser frequently also gor y through the middle-market range of
pays damages, including royalties, lost prof- $200 million in revenue. As organizations
its and even the opposing side’s legal fees. To grow beyond a couple hundred million, they
enforce intellectual property or defend generally can afford litigation, so they
against accusations is often enough to force a choose to “self insure” for the risk.
company out of business. Other benefits of carr ying intellectual-
What are your options if you are involved property insurance are:
in defending an intellectual-property lawsuit •Your investors will feel safer if you have
or going after an infringer of your intellec- a policy to help protect their investment in
tual property? your company.
Ask yourself: •You will be in a stronger position to ne-
•Do you have the funds to defend your- gotiate licensing deals.
self if you are sued for infringement? •The pressure to settle rather than incur
•Do you have the funds to institute a law- mounting legal expenses is reduced.
suit against an infringer without using op- •You control the lawsuit and dictate set-
erating capital or personal cash? tlement terms rather than the insurance
In most cases, a company’s commercial company.
general liability insurance policy will not •Should the court award damages to your
cover intellectual property. As a result, adversary, the policy will pay those damages
many well-established companies will at- up to the remaining policy limits. I
tempt to defeat new competitors by chal-
lenging their intellectual property, rather Robert S. Mahl is vice president/apparel-
than compete against them in the open mar- industry practice leader of Sander A. Kessler
ket. Fortunately, though, there is an insur- & Associates Inc., a Santa Monica,
ance solution. Calif.–based full-service insurance broker
Intellectual property–infringement insur- catering to an apparel-industry clientele.
ance provides funds to help pay the fees and
costs required to be successful in intellectual-
A Primer on Intellectual Property
•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.
12 CALIFORNIA APPAREL NEWS MARCH 16–22, 2007