1. HIPLA/UH 20 th Annual Fall Institute 2004 Managing Intellectual Property Exposure Tough Market, Creative Solutions Joby Hughes Joby A. Hughes, P.C. Friday, 08 October 2004

2. Overview The Market For Patent Insurance Is A Tough Market With Few Insurance Solutions With Limited, Very Expensive Options, There Are A Few Creative Solutions Available Key Thoughts On How To Think About The Risk And Alternatives To Risk Transfer (Insurance)

3. Tough Markets, Few Products Why? Pick a reason(s): –Unforeseen events, e.g., 9/11 and Enron –Directors and Officers claims in wake of the Tech Bubble in 2000 –The exponential increase in IP malpractice claims and large settlements –The history of CGL policies’ claims history for IP losses under the advertising injury clause –Large claims and payouts under standalone IP Infringement policies –Successful, high profile litigants of patent positions –Patent bar attitudes towards insurance as a financial vehicle

4. Tough Markets, Few Products Underwriter Reaction –Adverse selection: moral hazard, i.e., “it’s a business risk.” –High rates on other business; outside of reinsurance treaties Insured Reaction –Too expensive –Smaller insurance budget to pay for more expensive core coverages Broker Reaction –Can make more money selling traditional lines –Huge perceived learning curve

5. Five Potential Exposures 5. Warranty to Title Issues

6. Types of IP Insurance Third Party Liability coverage –I.E., legal costs and damages First Party coverage –Transactional costs - e.g. licensing fees and R&D costs Enforcement coverage –Legal costs incurred in asserting the Insured’s patent rights

7. Tough Markets, Few Products What’s Left of Traditional Markets? –IPISC: enforcement and infringement ($3M/$3M) –AIG: very selective defensive coverage offered –Kiln (Lloyd’s): First party coverage for loss of an IP position –Specialty Groups: The Hartford, AIG, Ambridge Partners –Other Coverages: Cyber Liability Policies (e.g., Chubb)

8. Tough Markets, Few Products How To Keep Tabs On The Available Markets? –Annually: The Betterley Report –www.Betterely.comwww.Betterely.com Be Prepared For “Sticker Shock” & Coverage Limitations – “Rate On Line:” Can be as high as 10% to 15% –Beware: Coverage limitations can severely limit coverage in less expensive policies

9. Alternatives In The Marketplace Enforcement: Contingency Fee Attorneys & Hedge Funds Infringement: Risk Management Consulting & Self Insurance (or Captives) IP Value of Position: Hedge Funds Reps and Warranties Coverage? ???

10. Enforcement Alternatives Contingency Fee Attorneys –Partnering With Traditional Patent Firms –Good Relationships Can Be Tricky –Play To Strengths, Experience Hedge Funds & Investment Bankers –Turn-Key Solutions or Cash –Key Strategic Advisors or Cash –Litigation Management or Cash

11. Infringement Alternatives Self Insurance –Know Your #’s: Projected Probable Loss, Projected Maximum Loss, and Potential Frequency –Handicap the Known Claims Captives –Your own insurance company (sort of) –Group captives are being formed for industries attacked by certain types of claims

12. Other Alternatives Sell The Cash Flow Stream –Often Structured As Loans –Almost Always Requires The Use Of Special Purpose Entities Buy Yourself Out From Under A Known Claim –Expensive! –Read The Fine Print, e.g., subrogation and indemnity clauses, “hammer” clauses related to settlement and “loss of control” of litigation issues

13. Conclusion IP Insurance Markets Have Been “Hammered” A Few Brave Markets Continue On With Opportunistic Rates And Terms There Are Insurance And Non-Insurance Related Alternatives To Traditional Products The Risks Are Still Out There There Is No Such Thing As The Uninsured, Only The Insured And The “Self-Insured”