How can startups and SMEs protect the value of their IP when litigation costs can be overwhelming? Joining us for this episode are Michael Huynh, General Counsel at Intellectual Property Ontario, and Shannon Shannon, a commercial insurance broker at Navacord, to explore how IP insurance can help businesses defend and enforce their IP rights. They discuss what is covered by IP insurance, how premiums are calculated and how this emerging tool may help innovators manage risk, attract investment and commercialize their ideas with greater confidence.
How can startups and SMEs protect the value of their IP when litigation costs can be overwhelming? Joining us for this episode are Michael Huynh, General Counsel at Intellectual Property Ontario, and Shannon Shannon, a commercial insurance broker at Navacord, to explore how IP insurance can help businesses defend and enforce their IP rights. They discuss what is covered by IP insurance, how premiums are calculated and how this emerging tool may help innovators manage risk, attract investment and commercialize their ideas with greater confidence.
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Lisa Desjardins: You're listening to Canadian IP Voices, a podcast where we talk intellectual property with a range of professionals and stakeholders across Canada and abroad. Whether you are an entrepreneur, artist, inventor or just curious, you will learn about some of the real problems and get real solutions for how trademarks, patents, copyrights, industrial designs and trade secrets work in real life. I'm Lisa Desjardins, and I'm your host. The views and opinions expressed in this podcast are those of the individual podcasters and do not necessarily reflect the official policy or position of the Canadian Intellectual Property Office. It's not unusual for small companies to question whether the investment into protecting IP is worth it. How would they defend their IP in a court in a world of tech giants, anyway? This David and Goliath argument is so symbolic of the IP challenge of a startup. At a systemic level, the challenge of defending your IP strikes our innovation systems from all angles. Companies decide not to protect their IP because of fear that they may be unable to enforce their IP rights because they simply can't afford it. But how can IP investments be protected? To learn more, I'm joined by Michael Huynh, who is a lawyer and General Counsel at IPON, IP Ontario. I'm also joined by Shannon Shannon, who works as a commercial insurance broker at Navacord, the insurance partner to the IPON IP liability insurance program. Michael and Shannon, it's a real privilege to have you join us today because you have a lot of experience not only from IP but also from IP insurance, which is the topic we're exploring today. Before we dive in, Michael, tell me about yourself and the work that you do at IPON.
Michael Huynh: Yeah, thank you, Lisa, for having me. As you mentioned, I am General Counsel at Intellectual Property Ontario, or IPON. I started working there 2 years ago, and it has been an incredibly exciting experience to be, you know, launching a number of programs that are supporting the Ontario innovation ecosystem, and especially this program that we're going to be talking about later today. Get into the details of what IPON's doing shortly, because I'm sure a number of your listeners have probably not heard about IPON. So we'll do that shortly, but why don't I pass over the mic to Shannon, who's also joining us, and I'm delighted she can because she's been working in the IP insurance space much longer than I have.
Shannon Shannon: Thanks, Michael, and thanks, Lisa. So my name is Shannon Shannon. That sounds like I'm speaking a typo, but it's not. My first and last name are the same. I am a commercial insurance broker at Navacord, and I've had a specific focus on intellectual property liability coverage for the last 5 years and am both fortunate and excited to partner with IPON on this new program that they've just launched.
Lisa: Nice to meet you both. So, yeah, Michael, you alluded to this a little bit, but let's talk a little bit more about IPON and why is IPON offering IP insurance and how are they doing that?
Michael: Yeah, you know what, Lisa, we were talking earlier before this call about this David and Goliath framing, and I think that's really helpful. It's the lens we use internally at Intellectual Property Ontario as well. So in our world, David is the Ontario innovator that has real rights but limited capital, and the Goliath in this case is the much bigger company, but not always. Sometimes it's a competitor, sometimes it's a non-practicing entity or what we call patent trolls, often. And sometimes it's just whoever has more appetite and capacity for litigation. And what they share is that they can outspend our clients into submission. So, like, who are our clients and, like, what is IPON? So IPON, or Intellectual Property Ontario, is a Crown agency of the province of Ontario, and we were stood up in 2022, so about 4 years ago. And our mandate is to help Ontario's innovators, mainly small-medium enterprises or SMEs, post-secondary institutions, meaning colleges and universities, and researchers. And we help them turn their intellectual property, or IP, into commercial success. And then I'll just briefly touch on why did we think about insurance? It started with our clients. A small Ontario company gets, you know, a demand letter from a much larger player, sometimes a competitor and, or a troll, as we mentioned, and then they fold because they just can't afford to test that claim and fight it on its merits. They just cave, either by settling or they may have to close up shop. In both cases, the IP system was technically working, but commercially not so much for our clients. So we started looking for tools. We looked at direct litigation funding, which has its place, but it's expensive and selective. We also looked at patent pools and defensive aggregators, which is great for some specific types of situations. We even started trying to build an in-house enforcement service, which was really limited, and we didn't think we could scale, and it wasn't practical to defend our Ontario clients, you know, SMEs worldwide. So what kept coming to the top of our list of solutions was this insurance idea. It's a mature financial product. It scales from company—small companies to large ones, and addresses both sides of this David-Goliath problem. And because there's an existing insurance market, we could really leverage that capacity instead of building from scratch. So that's how we got to the program. And then Shannon's team at Navacord is, and she'll mention that she's just moved from Paisley to Navacord, Navacord is a brokerage we work with to deliver IPON's IP insurance program.
Lisa: Thank you. It's interesting to hear that you went through so many different iterations before finally deciding on offering the IP insurance. I think a company probably goes through many of the same questions that you've been going through. So let's now zoom in specifically on IP insurance. Many people have insurance. We can have insurance for our cars, our homes, accidents insurance, but IP is kind of different. So tell me, what exactly is IP insurance? What do I need to get IP insurance?
Michael: You mentioned car insurance, and I found that that's actually the easiest way to explain this product by analogizing it to car insurance. And there's really 2 main parallels I want to walk through, and there's actually a third one, but maybe we'll come back to that later. So the first parallel is liability coverage in car insurance. That maps to what we call defense coverage in IP insurance. So that's protection when you're accused of doing something wrong. So imagine you're driving and someone claims you hit their car. Maybe you did, maybe you didn't. It's maybe not your fault, but either way, you'll need a lawyer, and you might need to go to court, and there could be damages that you have to pay out. Your liability insurance covers your legal defense and any settlement or judgment for the car accident. You don't have to pay out of pocket because you've already paid your premiums for that. Now, the IP parallel in the IP insurance context is imagine you're a company, and a competitor or a patent troll claims you're infringing their patent. Maybe you are, maybe you aren't, but there's an accusation, and you'll need lawyers, you'll likely potentially even go all the way to litigation, and there could be damages. The IP defense coverage works exactly like liability insurance for cars. It covers the client's legal costs and any settlement or judgment. So this is usually the first coverage people think about because it protects you when you're accused, whether or not you actually did anything wrong. And then the second parallel is the enforcement coverage, and this is closer to what we typically call collision coverage. Someone hits your car and damages it and you want it fixed, you want to be made whole, you want your car back to what it was, and the insurance protects your property. So here's the intellectual property parallel: someone infringes your patent, they're using your technology without your permission, damaging your market position, and you want them stopped. Unlike a car repair, you can't just take it to a body shop, you have to take legal action. You have to sue, and that can be incredibly expensive. Most startups simply just can't afford to enforce their IP. So the IP enforcement coverage funds that type of action, so the client isn't out of pocket for enforcement costs. It pays for them to go after the infringers and stop them. And this is the coverage that surprises people, I think. Most people don't realize IP insurance doesn't just defend you, it also funds you to be offensive, to enforce your rights. In IP, if you don't enforce, your rights lose value, it just turns into pieces of paper. So I find that this matters a great deal for our clients. IP litigation is like expensive in ways most of our founders just don't appreciate until they're in it. And a full-blown U.S. patent case runs in the millions, and even a Canadian case routinely runs into the high 6 figures. So what the insurance does is it changes the math. It allows you to kind of think through your business strategy differently. You're no longer asking, "Can I afford this fight? And if not, then I'm going to fold.” You're asking, "Okay, how should we manage this to get the best commercial outcome?" Because you have this support, you have this coverage in the background. And I think that leads to a very different conversation. So yeah, Shannon, I want to turn it over to you and maybe, you know, ask your thoughts. How often are you hearing from people and small companies, you know. We just don't fight infringers because we can't afford to do that. Yeah, curious your thoughts.
Shannon: Yeah, well, as you rightly pointed out, first of all, I loved your analogies, but second of all, litigation is something that especially really early-stage companies simply can't afford, they don't have a budget for. Defending a claim can be incredibly expensive, as you pointed out. So without insurance, they're making intellectual property decisions based on cost pressure rather than what's strategically right for the business. And as more and more company value sits in intangible assets, IP insurance really is becoming relevant across the board, not just for large organizations, but for startups and growing companies as well.
Lisa: I'm thinking at CIPO, our main responsibility is to issue quality rights so that we have something that is defensible. Let's say I am a company. I just wanted to test this, what you've just told us. If you take me through the typical steps of signing up for an IP insurance./ Like imagine that I'm a startup company and let's say I have one patent pending and I've got a registered trademark, but I don't have any sales. What are the prerequisites and what do you assess in order for me to sign up?
Shannon: Right. So in that scenario, an early-stage company, pre-commercialization with little and/or pending IP, the process is actually much more straightforward than most people expect. So it usually starts with a short application that looks at what IP you own or are developing, what jurisdictions you care about, what your company revenues and company employee count are, whether you're aware of any existing disputes. And from there, the insurer may do a light underwriting review just to assess the strength and defensibility of the assets.
Lisa: That's great. But I would want to know, let's say again that I'm this startup company, how do you calculate the premium?
Shannon: That is a question we get all the time. So premium really is driven by a few key factors: the type and strength of the IP, so patents versus trademarks, pending versus granted, the industry and how litigious it tends to be, the geographic exposure, and of course the limit of coverage that you choose. And then, of course, and I think Michael's going to talk about this, for IPON clients, subsidization can really significantly reduce the cost barrier.
Michael: Yeah, you know, maybe just to put some numbers around it, and I'll speak in ranges just because the actual premiums, as you know, you just mentioned, depend on the client and all those other factors. But across the IPON program since we've launched, and it's just been a few months, the average annual premium is sitting around $5,500, and IPON is for its clients subsidizing 60% of that. Generally, out of pocket, a client might be paying, you know, $2,000, $1,500. But then again, the range is still fairly wide. We've seen premiums as low as around $4,000 and as high as around maybe $10,000, and that's annual. But that's for like a very meaningful coverage limit of about $1 million. So we're not talking about just a token policy to say, “Oh, I've got an IP insurance policy.” Like $1 million is substantial for a lot of our clients. And the spread, as Shannon mentioned, it's those factors like industry, geography, etc. Consumer products company selling only into Canada sits at one end of the range, and a pharma company shipping into the U.S., the EU, Asia with a granted patent and ongoing licensing sits at the very far end, would be far more expensive. So the key point I think for our audience is the order of magnitude. We're not in the 6 figures per year or even 5 figures territory for most. I think a lot of founders fear when they hear IP insurance. They're like, “Oh, okay, this is a weird product. It's probably going to be really expensive.” Working with Shannon and Navacord, we've been able to get the right appropriate product that I think a number of our clients can afford and find to be meaningful. And especially with the IPON subsidy at 60%, you know, of that premium cost that IPON is providing upfront, I think this is well within the budget of an early-stage company already carrying, you know, D&O, E&O, cyber coverage, all the other lines they should be managing alongside.
Lisa: Thanks for explaining the premiums and giving us an idea of how much that would cost. Okay, I know now that it's—we're not looking at 6 figures necessarily; it's something that could be affordable. “What then do I get? What is in the fine print? What is the coverage? What is included versus excluded?” Can you talk a little bit about that?
Michael: So at the core, IPON IP insurance policy covers, like, 3 pillars: your defense costs, damages and settlements if you're accused of infringing someone else's IP, and enforcement costs if you need to take action against an infringer. So, we covered both of those through the car insurance analogy a moment ago: liability coverage and collision coverage. What's broader than what people expect, it's not just patents; it applies across the full IP stack. Patents, trademarks, copyrights, trade secrets. So a company whose value is in a brand or in a proprietary method rather than just patents is still meaningfully covered. But I wanted to add this addition, you know, mention this additional layer that more recently I've heard from our clients is actually very meaningful. And this is where I'm going to get more mileage out of this car analogy. So the first one is just like this contractual indemnification coverage. So, think about if you were to lend your car to a friend for a month. Your insurance has to cover the fact that someone else is now using your asset. Someone else is using your car. The same logic applies to IP licensing. So our clients, our founders license their technology to a customer or a partner. Those agreements almost always include indemnification clauses. Essentially, what that clause says is if someone sues you for using my IP, I'll cover your legal costs and damages, meaning like you're, as the founder, you're having to commit to supporting the person who's using your technology in any future litigation. Now, if you don't have insurance, those clauses are a blank check that the startup can't afford to cash. And so they can't just remove them. Bigger customers won't license technology without indemnification protection. So this third coverage, like this beyond the offensive and defensive, is helping your deal flow. It makes, you know, licensing deals viable for startups. We're seeing this become a real deal blocker in the Ontario procurement, especially in the public sector. Government buyers tend to ask for very broad indemnities, and that's the requirement. So this contractual indemnification coverage has been very useful for a lot of our clients who have been thinking about and have now purchased the IP insurance. The second thing I'll just mention is that it covers confidentiality and trade secret disputes. And then the other thing that's really critical, people ask this all the time, Lisa, is like, “Is this worldwide coverage?” And yes, the answer is it's worldwide coverage by default, which matters because most of our clients aren't only worried about Canadian risk, they're mostly concerned about U.S. and Europe and Asia.
Shannon: I also kind of wanted to talk about how many companies I speak with assume that they're covered for IP risk under another policy, right? But in reality, traditional policies only go so far. So for example, general liability policies, many people think because they see the words “intellectual property” in their CGL policy that they're covered for any IP risk, but it only covers a very narrow slice of intellectual property, like advertising-related issues. And very often, I think exclusively exclude things like patents entirely. Cyber insurance policy, a lot of clients will assume that, you know, they see a mention of IP in their cyber insurance, but that's just focused on data and privacy. It certainly doesn't —cyber policies do not respond to IP disputes. And even errors and omissions or E&O coverage, where it exists, is usually quite limited when it comes to intellectual property. And what's unique and excellent about a dedicated IP policy is that it's built specifically to address those gaps. So it covers both sides of the problem, as we've been talking about. Defending yourself if you're accused of infringement and, importantly, as importantly, enforcing your rights if someone's infringing on you. And that second piece, enforcement, is something that simply does not exist in traditional insurance policies.
Lisa: So we've talked about enforcement and defense, but we know that litigation isn't really a linear thing. It's more like a pinball game, I think. But once you enter a situation where you have issues and you need to either defend or enforce your IP. So I'm going to put this a little bit to the test and see what you can comment on this scenario. So let's say that I am asserting my patent against another company that I think is infringing on my patent. Typically, what happens is that their first response is to try to invalidate my patent using administrative procedures. There's something called inter-party review, where they can present the IP office with information that can be used to invalidate my patent. So if my patent is invalidated, then the lawsuit that I initiated can now quickly actually turn it on its head, so that the infringing party becomes the plaintiff. They can accuse me, and without a patent, I can be accused of infringing. So am I still covered now?
Shannon: Lisa, this is a great question because, and I'm happy to answer it because it really gets to how these policies behave in real-world disputes. So generally speaking, your coverage doesn't just disappear as the situation evolves, right? If you started with a valid claim and things shift, for example, your example through an IPR, the policy is designed to continue responding, particularly on the defense side, and of course, subject to terms and conditions. That said, this is where the policy wording really matters.
Lisa: Thank you. So, we're talking about the procedural matters. We know that these, this is intertwined with the IP strategy. Should I go in? Should I defend? Very often we also choose who we want to work with. You might have an in-house counsel, or so forth. But who decides on these details, like who my lawyer is, and what litigation strategy we should pursue, when to settle? I mean, there are many, many decisions that need to be made. And how involved do I stay in this process, as somebody who pays the premium?
Shannon: Right. I'd categorize this as one of the top 3 questions we're asked all the time because, of course, owners of intellectual property want a real hand in their IP strategy. So, ultimately, it is still the insured's claim, and it's, of course, the insured's intellectual property. So, they do not lose control of the strategy, but in practice, it's collaborative. So, the insured typically has input into their choice of counsel. The insured and the insurer align on litigation strategy, and decisions like settlement are usually made jointly. So, the insurer is not there to take over. They're there to fund, they're there to support. But they also want to make sure that the claim is being handled in a commercially reasonable way. So, we find that the best outcomes happen when it's treated as a partnership between the insured and the insurer, not a handoff to the insurer.
Lisa: So, if we're thinking about the kind of behavior now, if I have an insurance, if many people have an insurance, if we go back to that David and Goliath argument for a moment, is there evidence anywhere that IP insurance is an effective deterrent?
Michael: Yeah, these types of experiments and studies that are conducted on things like insurance coverage are really nice. And so, there's actually this really elegant empirical evidence on this question. And again, so I'll lean on this David and Goliath framing. So the paper is by a number of researchers: Ganglmair, Helmers and Love. These 3 authors published in the Journal of Law and Economics, and Organization in 2022. And they asked a question that on its face seems counterintuitive. The question is, does the availability of defensive insurance invite more IP litigation? So that's sort of this conventional intuition. “Like, oh, well, these people have insurance, they must have deep pockets, let's go after them.” Or does this type of coverage actually deter litigation? So it's a good question. The finding after all this was, once this new insurance product got in place, the researchers noticed that it had a large negative effect on the likelihood that a covered patent was asserted by these NPEs. And that was a robust finding across both control groups. So in plain English, what does that mean? It means that the NPEs are less likely to sue when the target is insured against this specific type of assertion and action. So the deterrent effect is real and measurable. So, why does this happen? I think, you know, the theory is pretty straightforward. NPEs are running a business model. They calculate the expected value of their actions. They pick targets that will fold quickly because litigation is too expensive to defend. And the insurance coverage now flips the calculation for them. The target can defend. So they have to think about this differently. So the NPE's expected return on these types of cases drops and the case becomes uneconomic. So they move on, they choose other targets, or they don't even file in the first place. So bring it back to where we started. The insurance doesn't turn David into Goliath. I think it's just, it gives David the slingshot and then the NPE, the Goliath, looks at that and says, “Okay, I'm just going to move on and find an easier target.” So that's exactly the dynamic you want a market-based deterrent to produce. And so, for the founders that are listening, you know, the answer to that study was if you've been told insurance just attracts more lawsuits, the best available evidence says the opposite, at least when it comes to the actors you most fear, which is typically the NPEs that you're hearing about.
Lisa: Well, that's super interesting because I think by becoming less of a target for non-practising entities, there's an element of risk now that we can see drop. And if you're talking finance, when you're reducing risk, you get a reduced discount rate. And if I'm trying to put a value to now a company with versus without an insurance, I'm kind of asking myself, would you say that the value of the company increases when it has an IP insurance?
Shannon: I would say yes, but maybe not in a way that shows up immediately on a balance sheet. Because what it does, what IP insurance does, is remove a layer of uncertainty. For investors, acquirers, for partners, one of the biggest risks that they consider around intellectual property is, can this company defend what it owns and can it survive a challenge? And IP insurance helps answer both of those questions. So it can strengthen a negotiating position. It can make a company's IP more actionable, if you will, and it signals to investors especially and acquirers that you've managed your risk in a really sophisticated way. So it's less about adding value directly and more about protecting the value that's already there.
Michael: We have evidence that insurance can mitigate the risk of dealing with at least NPEs. There's growing evidence that increases the viability in terms of debt. And so, I tend to want to think that increases company value. The theory is sound. You know, there’s pract—I mentioned there's practitioners that believe this, and there's a signalling mechanism that seems intuitive. But I'd rather tell our clients, and this is what I think Shannon tells us, is it's a credible bet. We don't yet have rock-solid causal proof, but the evidence will come and the market just needs a bit more time.
Lisa: You're saying that it's relatively nascent here in Canada. Other countries have done insurance for a long time. So I wanted to ask you from a more systemic level, if we really zoom out now and see Canada as one country and what happens with IP laws as a result of litigation, we get jurisprudence and so forth. So if we take a look at what could be the long-term effects of basically injecting capital in the litigation machine, perhaps this is a little bit more on a theoretical level, what could be the long-term effects of IP insurance in Canada if it takes off?
Michael: Yeah, and this is the question that I think ties to like everything that we're doing at IPON, and it's a question I think and, you know, everyone at IPON thinks deeply about because IPON's mandate isn't just about helping individual companies, it's about strengthening Ontario's and Canada's innovation ecosystem. So, you know, just a recap of what our current state of the land is, Canada has a real structural problem. We generate world-class IP, then we watch it migrate often south. And historically, I think we've too often celebrated that migration. And that IP migrates because the company migrates, because of a U.S. acquisition, because of capital availability and market access. Now, sometimes it migrates because of the founders migrate, and sometimes the IP stays in Canada, but it never really gets commercially defended, which is another form of loss. I don't think IP insurance is going to fix all of that, but it changes this very specific piece of the calculus. So right now, a Canadian founder looking at a U.S. infringer often makes a perfectly rational decision. I can't afford to enforce. So I'll either license cheaply or sell to a U.S. acquirer who can. And insurance, I think, gives that founder a third option. They'll say to themselves, “I can enforce on commercially reasonable terms without diverting growth capital into legal fees.” So I think if you scale that across the ecosystem, you start to see 3 things happen. The first is you get a signal effect. Canadian companies start to be known as companies that protect their IP credibly, more than just the paper, but they back it up. And that changes how counterparties engage. It changes how acquirers price them. It changes how investors model the risk. And second, you get, again, a retention effect. More Canadian companies stay independent longer, more Canadian IP stays Canadian-owned and Canadian-commercialized. We slow down the migration of IP value out of the country. And third, and this is the systemic one, you get confidence effect in the IP system itself. Rights that can't be enforced are just rights on paper. When a meaningful fraction of innovators can actually enforce, and we're up to about 1,400 clients at IPON now, not all of whom have IP insurance, but we're working on making sure that those who need it do get it. So, but you know, once we get a meaningful fraction of innovators that can start to enforce their rights, I think the entire system becomes far more credible. People file more, people license more, people invest more in IP-intensive R&D because the returns are more secure. I think you invited me earlier on, Lisa, to be a bit more philosophical here, and I think of this as completing, you know, the IP enforcement ecosystem. Canada has world-class IP creation, increasingly strong IP protection, but historically weak commercialization enforcement. So insurance alongside all these other tools that IPON and other partners like IAC, whom you've interviewed before, and Elevate, the IP programs, all of these things are starting to help fill that last gap. And IP insurance is this additional step. Now, again, not a silver bullet, but the more Canadian companies that use it, the more it normalizes, I think, the idea that defending your IP isn't a luxury, it's basic business hygiene.
Lisa: Thank you so much, Michael, and thank you, Shannon. I've certainly found this conversation very, very interesting. I learned a lot of things. I think we'll find some of the articles that you referred to and put those in the description to this podcast. But for now, I really want to sincerely thank you for explaining these things to me and our listeners. Thank you.
Shannon: Thanks so much, Lisa.
Michael: Yeah, thanks, Lisa. For anybody wanting to look at the IPON program, the easiest entry point is ip-ontario.ca, or you can Google “Intellectual Property Ontario”. Love to hear from you, especially if you're an Ontario innovator wondering whether this is something you should be thinking about.
Lisa: You've listened to Canadian IP Voices, a podcast where we talk intellectual property. In this episode, we discussed IP insurance with Michael Huynh and Shannon Shannon, who help founders supported by IP Ontario understand and maybe consider IP insurance for their companies. To learn more about the work they do, open the description to this episode for the links to the IPON web page, as well as another page at IPON describing how their subsidized IP insurance works.