Paying the Mafia? Intellectual Property Insurance

With the proliferation of open source software, the risks of unknowingly infringing a third party’s intellectual property have become alarmingly large. For example, infringing code produced by Developer A (and released under an open source license for distribution, such as the GNU General Public License (‘GPL’)) may be found and innocently used in a project by Developer B, who then delivers the finished product to Client C. In some situations, the wronged party may have actions against all of A, B, and C.

Where software is developed under contract by a third party, these risks are particularly important and less able to be controlled by the client. Though often unrealised, they are increasingly the subject of forced indemnification by the developer:

it is commonplace to demand that software produced ‘for hire’ by independent contractors be indemnified from patent violation. Since this is impossible, what contractors do is to buy insurance, which is hideously expensive. We are talking about tens of thousands, sometimes hundreds of thousands of Euros here. Small businesses generally cannot afford it, so they simply cross their fingers and pray they are not sued. Those rare ones that can afford such things are treated to an experience that has the same flavour as paying the Mafia ‘insurance’ to make sure that one’s business does not burn down.

Though it seems unlikely to halt the continued popularity of licenses like the GPL, the prospect of getting sued is becoming an issue for many open source developers. I anticipate that as market demand for low-cost IP insurance increases, the costs of loss distribution will rapidly decline.

Source: Jeffrey Causey, IP Wars