How Patents Could Change Competition
In The Industry
By Tom Bakos and Mark Nowotarski, National Underwriter,
March 24, 2003
Part
Two of a Series
Patents are starting to grab up the new, inventive insurance products, marketing
methods or techniques, and risk selection mechanisms.
For example, patent #5,754,980, essentially patents a Reversionary Annuity,
a product that pays a benefit to a beneficiary for as long as she lives following
the death of the insured. It’s unique because its issue is conditioned
on the life expectancies of both an insured and a beneficiary.
Patent #5,974,390 creates a system in which policy owners can pool their
polices. If the pool is large enough, this method allows policyowners to receive
lower but predictable regular payments (resulting from deaths on policies
in the pool) in exchange for the higher but unpredictable death benefit otherwise
available if they did not assign their individual policy to the pool. This
invention probably would be used as part of a life settlement or viatical
marketing plan.
There are also a number of pending applications that propose systems for
underwriting insurance in real time using the Internet, or other means, in
order to eliminate the delays in regular underwriting. And, there are patents
issued and pending for sales methods, illustration processes, and tax-advantaged
marketing programs
On the surface, it may seem that this is just a problem affecting big companies.
But, competing in a patent-rich environment starts with the little guy. Inventors
can’t be companies. Only a natural person can patent an invention. So,
a new product development model begins with a company’s relationship
to its employees or agents. A company cannot patent an invention but it can
own an invention through an assignment by the inventor. So, the employee,
employer, agent relationship needs to be clear.
The next thing for a company to do is recognize new limitations on how it
conducts its business. Before a lot of time, effort and money is spent, developing
a new product companies will need to determine if there are existing patents
that they might be infringing if they introduced a product. This is especially
true if they still have a "follow the leader" product development
approach.
"Ignorance is no excuse" when it comes to patents. An infringer
is liable for damages to a patent owner, even if the infringer was totally
unaware of the existence of the patent he is infringing. If he is aware, it’s
even worse. Intentionally infringing a patent can result in a liability equal
to three times the damages inflicted on the patent owner.
In essence, damages are measured as the patent owner’s lost profits.
It is essential that insurance companies and even agencies active in developing
new products institute "patent watches" now to make sure
that their new products do not infringe any existing or new patents that issue.
There also needs to be some concern about patent applications still pending.
Clearly, if your product development cycle takes a year or longer (and many
do), a pending patent could be issued before you get to market or shortly
after. If you are infringing, you may have to pull your product from the market,
and all your development costs would have been wasted. Your agents who wanted
or expected the product may have to go to another company, perhaps the patent
owner, to get it.
So, even if your company is not harnessing the intellectual property of its
employees and aggressively seeking patents, you still have a problem that
has to be dealt with if other companies are doing that. And, if your company
decides to aggressively participate in a patent-rich environment, you may
have internal problems. You must be on good terms with your inventive employees.
You will need to recognize inventiveness in employee-job descriptions. You
will, probably, need to introduce employment contracts that clearly spell
out rights, privileges and expectations with respect to inventiveness. It
will have to factor in, somehow, compensation.
Certainly, imposing all this on an existing employment relationship that
doesn’t currently recognize, expect or reward inventiveness is fraught
with difficulties far beyond the scope of this article to contemplate. And,
working with inventive agents or brokers presents even more challenges.
Patents cost money. The visible expenses of a typical patent are $7,000 to
$20,000 in legal fees and filing costs. Hidden costs are two to three times
this figure. The hidden costs include inventor time associated with the patent
application and licensing efforts. In addition, executive time and effort
to exploit the patent should be included. Add another $5,000 to $10,000 in
processing costs for each foreign country in which the patent is filed. Consider
that protecting the patent may generate additional legal expenses, and it’s
not hard to see how total patent costs of $100,000 or more are not uncommon.
Patents require patience. The time between a patent application and ultimate
issue is, typically, two to five years in the U.S. Delays of 10 years or more
are not unheard of. Extensive delays are often due to the belated discovery
of relevant prior art which require repeated amendment of the patent application
in order to try to get a patent that can issue. A thorough prior art search
done before a patent application is filed can help keep these delays to a
minimum.
Despite the expense and delays, however, a patent on a product can be worth
a lot. A patent, specifically, gives its owner the right to prevent anyone
else from making, using or selling the invention (within the framework of
antitrust laws and regulation). The owner can be the exclusive provider of
the product, sharing nothing with competitors. By controlling a market you
can prevent others from saturating a limited market and take the profit of
your idea away from you.
And this track may be advantageous for other than just a pure profit motivation.
You also can prevent others from abusing your idea such that regulatory controls
are brought to bear which impact adversely on the value of your invention.
A patent owner can generate additional revenue by licensing the patent to
others. In fact, the acceptance of insurance patents might lead to the emergence
of insurance "development labs" that do nothing but invent new insurance
gizmos. If they are good, or lucky, they can license or sell their ideas to
product manufacturers.
Straight licensing of patents can be very profitable. Universities in the
U.S., for example, collectively generate over a billion dollars a year by
licensing the inventions of their faculties. Their combined patent, licensing
and inventor costs are only about $300 million per year.
With the availability of insurance development labs, an insurance company
might become a pure product manufacturer by getting rid of its product development
function and costs and buying or licensing products from others. This already
has happened in the pharmaceutical industry where pure product development
companies are performing an increasing share of the drug discovery process.
The effect that patents can have on the insurance industry’s product
development model is going to force everyone to change and adapt one way or
another. The options above or some others will have to be considered because
standing pat does not seem like a successful strategy. As much as we were
impressed with our first computer, we have all upgraded.
Reproduced
from National Underwriter Life & Health/Financial Services Edition,
March 24, 2003. Copyright © 2003 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.
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