It may be tempting to delegate oversight of the company's intellectual assets to the IT and legal departments, but directors and officers could find themselves defendants in a lawsuit for doing so.
Intellectual property rights ("IPR") is no longer a small, niche matter. A survey of Fortune 500 companies estimated that anywhere from 45% to 75% of their wealth comes from IPR, and experts believe between 70% and 90% of the market value of publicly-traded companies is attributed to IPR.
The importance is not limited by industry. While patent-heavy technology and healthcare sectors remain in the forefront, all business sectors depend on IPR. Financial product and service industries depend on innovative methods and processes that must be protected. Brand names and trade secrets exist in most every industry from the restaurant around the corner to the global software provider.
Bases for Liability
Most of the bases for directors and officers ("D&O") liability have been developed through case law. Generally, directors and officers may find themselves in litigation crosshairs for breach of fiduciary duty or waste. Courts have construed a breach claim (often called a Caremark claim, after the Delaware court opinion of the same name) to require the plaintiff to show a failure "to implement any reporting or information system or controls" or having implemented such a system or controls, "consciously fail[ing] to monitor or oversee its operations thus disabling themselves from being able from being informed of risks or problems requiring their attention." In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del.Ch.1996).
In contrast, waste claims often involve affirmative actions and may occur in the context of asset transfers, compensation or stock option grants. Waste liability requires the plaintiff to show that "what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation has paid." Saxe v. Brady, 184 A.2d 602, 486 (Del. Ch. 1962).
A third, but less defined, theory for liability is a breach of good faith. The Delaware Chancery Court has most recently adjudicated this basis for liability in In re Walt Disney Co. Derivative Litigation, 907 A.2d 693 (Del. Ch. 2005). The court found, by way of example, that good faith would be breached "where the fiduciary intentionally fails to act in the face of a known duty to act." Disney, 907 A.2d at 755. Most importantly, the court provided that liability should be determined on a director-by-director basis rather than on the board as a whole. Disney, 907 A.2d at 748.
Increasing the Level of Engagement
No single prescription exists to keep liability away. Boards should consult with in-house and IP counsel to tailor a cohesive strategy that ensures that will they meet their fiduciary obligations and, by extension, that ensures the enterprise will reap the most benefits.
Following are three "first steps" a board can take toward exercising the appropriate level of oversight over the company's intellectual assets.
1. Include IP on the Board Agenda
IP should have a recurring presence on the board agenda. Board meetings should include regular IP updates recorded in the minutes and other corporate records. These regular updates may consist of reports on the registration and renewals of trademarks and patents, reports benchmarking the company's IP activity with that of its competitors, and updates on the law and industry trends in IPR. Periodic or special meetings with in-house and/or IP counsel may be in order, depending on the level of the board's understanding of the company's IP, its value, and its role in business strategy.
2.Ensure that Necessary IP Strategies are Implemented
The board should understand why and how the company must maintain the control, use and ownership of its intellectual assets. While directors need not get "into the weeds" of IP management, they should monitor the overarching strategies for protecting IP.
Key areas where intellectual assets are implicated are non-disclosure agreements ("NDAs"), supplier agreements and employment contracts. NDAs both protect a company's IP and serve as courtroom evidence of the company's due diligence in protecting its IP. Supplier agreements and employment contracts govern who owns and who may use any intellectual property generated in the respective business relationships. Boards should consider implementing company-wide strategies for using these documents and determining what minimal components they should contain.
3. Ensure that Protocols for Preventing and Reacting to Cyber Incidents are Implemented
A 2012 report from Carnegie Mellon University's CyLab found that company boards in the Forbes Global 2000 are still largely overlooking the threat of cyber risks. To properly manage these risks, boards should regularly review and approve top-level policies on privacy and IT security. Despite the complexity of the underlying technologies, the safeguards from an oversight perspective are fairly straightforward: Make sure that the company has an adequate budget and competent IT professionals to diagnose security risks and implement solutions. Appoint a corporate-level executive who is made accountable for cyber-threat risk management and who reports to the board. Require an internal audit as part of the company's quarterly review to evaluate the company's ongoing effectiveness at cyber-risk management.
Conclusion
In a knowledge-based economy where a company's intellectual assets are the predominant source of its value, directors and officers simply cannot ignore IP as the esoteric domain of the legal or IT departments. Avoiding personal liability-and maximizing shareholder value-require attention and proactive management. The rewards are great, and the reprimand greater.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
