Protecting soft wares

Risk & Insurance, Feb, 2005 by Michael Fitzpatrick

Software runs everything these days. Nowhere is that more true than in business. But the business of providing business software faces a few hurdles when it comes to risk management. Among those are the relatively young age of the industry and the scarcity of coverage for critical issues such as intellectual property.

Information wants to be free, author Stewart Brand once said, in a remark that still holds both promise and peril for the companies that provide the software that runs modern business.

Software makes modern business work by helping to move vast amounts of information around the world at lightning speed. But technology also makes it easier to share or steal information and to copy proprietary software, a fact that has made intellectual property one of the top concerns for risk managers at enterprise software companies.

"The biggest challenges for software companies are typically your professional liability, your intellectual property, your directors and officers liability and your business interruption exposure," says George Haitsch, vice president of corporate risk for SAP America, the largest enterprise software company.

"Depending on who the software company is, you may also have some significant risk related to your brand and your market presence. That's how I rank my risks and I think that would be fairly representative of our peer group as well," Haitsch says.

But disputes over intellectual property have become a high-profile challenge for risk managers seeking to protect the value of their companies' software and to fend off patent and copyright challenges from companies seeking to make up in the courtroom what they have lost in the marketplace.

"What we're hearing is there is a lot of concern about patent infringement and that's an area where you really can't at this point buy any viable liability cover. The products that are available are so few and so highly priced. Really they're just not affordable, and it's just an exchange of dollars with insurance companies," says Mari-Jo Hill, director of risk management at North Carolina-based business analytics software company SAS.

A trend by companies to seek so-called business method patents that cover a process, such as buying goods online, has heightened uncertainty and the risk in intellectual property disputes.

"Patent is becoming a bigger and bigger issue, especially for software companies," says Keith Kupferschmid, vice president of intellectual property for the Washington, D.C.-based Software & Information Industry Association.

"Recently there has been a lot of what people in the industry would call frivolous lawsuits. Companies going out there and getting patents on particular technologies or technological solution, and then going ahead and suing entire industries," Kupferschmid says.

LAWYERING LINUX

Among the big legal battles is the claim being pressed by software company SCO Group Inc. that it holds the rights to some of the code used in the popular Linux operating system, the so-called open source software that has been available to users without royalties.

In 2003, SCO sued IBM Corp. in a dispute over the Linux code and then launched a broadside at 1,500 large corporations seeking royalty payments for the use of Linux software.

IBM has fought back aggressively and offered to indemnify customers against claims by SCO. Other companies such as Hewlett-Packard Co., also have said they will protect their customers against the Linux claims.

In another case, Sun Microsystems recently agreed to pay $92 million to Eastman Kodak Co. to settle a dispute over whether Sun's ubiquitous Java programming language infringed Kodak patents. Saying it would "take bullets" for its customers, Sun which built up a cash cushion of more than $7 billion in the Internet boom years--said it would protect its customers against intellectual property claims that might arise over Java.

In fact, just the threat of costly legal battles can induce companies to settle cases they might have won by proving that similar techniques, knowledge or business methods existed beforehand in what is known as "prior art."

"In many cases these patents are eventually invalidated," Kupferschmid says. "It still costs the companies regardless even though they're not paying some sort of damage amount at the end of the day, they are paying a significant amount of expenses in hiring patent attorneys and searching the globe for this prior art." In some cases, the legal battles are just another competitive strategy.

"Particularly with software, the competition is so fierce that intellectual property litigation is very prolific--almost as a competitive tactic where companies will sue each other and get injunctions to create competitive advantage for their own product or to say there's a violation of my copyright on this particular software and as part of the settlement I get royalties on your software," says Brenda Shelly, executive vice president leading the technology industry group at broker Willlis Executive Risk.