Do You Have Your IP Assets Covered?
A convergence of regulatory changes and evolving corporate fiduciary duties has heightened the importance of sound intellectual property (IP) management. Directors and officers of public and private companies need to know about IP generally, understand their own company’s IP specifically, and be sufficiently informed to make or direct defensible judgments on IP issues.
Regulation of corporate IP management has expanded over the last several years, emanating from multiple sources. For instance, the Financial Accounting Standards Board (FASB) has issued rules relating to the accounting and valuation of certain acquired IP assets, while the Sarbanes-Oxley Act (SOX) requires companies to establish and implement internal controls, necessarily encompassing a company’s IP assets, if material.
Corporate law regarding directors’ duties is driving the need for greater board-level and officer education about IP. The Delaware Supreme Court’s 2006 decision in Stone v. Ritter found that directors can be subject to oversight liability for failing to implement a reporting or information system that protects corporate assets, and for failing to oversee the operation of that system. The court defined this oversight failure as a breach of the duty of loyalty (not the duty of care) so that directors can be held personally liable for IP mismanagement.
The business judgment rule – the legal presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company – does not insulate board members from claims of corporate waste. In recent cases plaintiffs are applying these types of claims in the IP management context.
It hardly needs to be said that paying insufficient attention to IP management also raises competitive concerns for companies.
A few steps can help directors ensure that their company’s IP is properly managed and that regulatory and litigation risks are mitigated. Companies should start by assessing their current IP-related controls, and perform an IP risk assessment, which includes evaluating internal information flow and the transparency of the existing IP program, assessing processes, and performing risk and opportunity analyses.
Companies should also develop, document and implement effective internal IP controls, which should provide management with information to make good decisions about IP protection and commercialization. Not only will these steps reduce legal risk, of course, they also should lead to improved IP asset management and financial performance.
