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A number of recent and well-publicized intellectual property disputes in the United States have resulted in verdicts or settlements in the seven- and eight-figure amounts. Those are the kinds of numbers that catch the attention of boards of directors and cause them to demand increasingly detailed information. A board must be adequately informed about the nature of the company’s IP assets and IP threats, both to meet the board’s fiduciary duties and to make effective business decisions. Yet briefing the board raises its own significant litigation risks because of the rules governing attorney-client privilege, work-product immunity, and waivers under IP, corporate, and securities laws. Gone are the days when directors felt comfortable that they could satisfy their fiduciary obligations by receiving very general explanations from the company’s management and counsel. Gone are the days when IP briefings could be protected simply by not providing documents or by having counsel attend. Recognizing IP as a critical asset, directors are demanding significantly more information and refusing to settle for broad answers. Meanwhile, courts have expanded the scope of inquiry into the process by which directors make decisions, and are now likely to review the adequacy of that information. This is placing much more pressure on management to provide more frequent and extensive IP briefings. Unfortunately, opposing litigators are also aware of these developments. They are seeking to exploit the vulnerabilities in such expanded briefings in order to obtain broader discovery and potentially higher damages. So IP and corporate counsel must wrestle with the real-world conundrum of how to brief the board with enough information to protect against liability while not waiving privilege or immunity in critical cases. OVERSIGHT RESPONSIBILITY Directors assessing their IP responsibilities must start with the big picture. A director of any U.S. company, public or private, owes basic duties of care, loyalty, and good faith to the company and its shareholders. Directors must inform themselves about important issues involving the company, and act in good faith with the honest belief that the actions they take are in the company’s best interests. When making decisions involving the company, they must exercise the care of an “ordinarily prudent” person�a standard dating back more than 100 years, to the Supreme Court’s decision in Briggs v. Spaulding (1891). Generally, directors are protected from being second-guessed by the courts under the so-called business judgment rule. Procedurally, the rule places the initial burden on a plaintiff challenging a board decision to show that the directors violated one of the duties owed to the corporation. Substantively, the rule provides that directors cannot be liable for their business decisions unless they lack independence relative to the decision, fail to act in good faith, act in a manner that cannot be attributed to a rational business purpose, or reach their decision by a grossly negligent process. Otherwise, a court will respect a board’s decision regardless of whether the decision was ultimately “correct.” In this post-Enron/WorldCom environment, courts are reviewing decisions with considerable scrutiny to determine whether directors have met their fiduciary duties such that they are entitled to the protection of the business judgment rule. This scrutiny often focuses on the board’s process. Thus, a court will look at the documents provided to the board to determine if the board acted in an informed manner (including appropriately relying on its advisers), took sufficient time to deliberate, and acted with independence and without self-interest. In the event the board cannot satisfy the requirements of the business judgment rule, it then faces the burden of establishing the fairness of its decision�practically, a very difficult burden to meet. The loss of business judgment protection creates major risks, ranging all the way up to personal liability for the directors themselves. As IP is a key aspect of many companies’ business these days, the director’s obligation to take an active and informed role with respect to IP strategy grows. Especially when it comes to large cases that constitute “bet the company” litigation, courts increasingly expect boards to pay considerable attention. THE LAW OF WAIVER As the board seeks IP information, it must take care not to waive privileges. For a communication to be generally immune from discovery, the board must be receiving legal, not business, advice or discussing matters with counsel that are covered under the attorney-client privilege, work-product immunity, or other applicable privilege. Over the past few years, however, the scope and use of the privilege or immunity in the context of board deliberations have become more complex�in several ways. Merely having counsel present at a meeting is no longer considered a sufficient basis to claim that a particular matter is privileged. Rather, a court will consider the nature of the information itself. For example, to the extent business issues were being discussed, was counsel present to provide appropriate, related legal advice? Even if a particular conversation or document is deemed privileged, the underlying factual analysis may not be. For example, one company’s analysis of whether another’s patents could be infringed by its product road map may be privileged. But the road map itself�that is, its plan for future enhancements, extensions, and marketing of a product�may not be, even if it was provided to the board in connection with a review of potential infringement issues. Even where a claim of privilege is sound, boards are under increasing pressure to waive the privilege. In recent months a number of regulators, including the Securities and Exchange Commission and the Department of Justice, have required companies to waive the attorney-client and work-product privileges in the context of internal investigations in order to gain credit for cooperating with the government. Even if the regulators promise confidentiality, this does not guarantee that the privileges survive. In other words, any agreement to show regulators privileged information may destroy the privilege and allow shareholders or plaintiffs to discover the information in later litigation. Courts have also been pushing�demanding, for example, that a board seeking to show that, by obtaining advice from counsel, it acted in good faith and on an informed basis waive the privilege with respect to that advice. Such demands place the board on the horns of a true dilemma: How can it maintain the confidentiality of its deliberations with counsel and meet its heightened burdens? BETTER BRIEFINGS There are four main scenarios for an IP briefing, and thus four main scenarios in which a board can stumble and fall. The first is a basic briefing about the company’s IP program and strategy. The chief IP officer may explain the process by which the company tries to protect its new ideas. While this sounds like fairly basic information, the board should not listen lightly. A poorly conceived or weakly implemented IP program could cost the company valuable assets. And the board is ultimately responsible for ensuring that the company’s research investment is not wasted by a failure to seek proper IP rights. The second scenario is a briefing on the company’s IP metrics and performance�that is, quantitative measures of its IP assets, advantages, and liabilities�and, periodically, how they compare with those of its competitors. Directors who ignore the numbers (and their ups and downs over time) may have trouble convincing a court that they were properly informed. The third scenario involves ongoing tutorials on IP rules, developments, and trends. Besides the company’s own performance, the board must stay on top of larger developments that can affect the performance of IP assets. The legal regimes of key international markets must be followed, and pending IP legislation here and abroad must be monitored. These three types of briefings should proceed with counsel present. To further protect confidentiality, written material should be marked with appropriate legends. Board minutes should only record generally the topics discussed and should segregate topics that are privileged or legal work product. Directors should exercise sensitivity as to what they discuss in the context of threatened or actual litigation. FACING AN ACTUAL DISPUTE The fourth and most problematic briefing is one that addresses an actual IP dispute. In the past, boards rarely heard much about specific IP disputes. Typically, the dispute would be described briefly in SEC filings and the corporation’s annual report. Why was so little information provided? Sometimes, outside counsel and in-house lawyers saw the chances of success as high and the risks to the company as low�and thus saw no need to bring in the board. They also feared that a board briefing might waive the confidentiality of their litigation strategy. In addition, defense counsel worried that a briefing itself might provide fodder for a claim of willful patent infringement where the litigation assessment of the company’s actions was less positive than was the previous assessment by opinion counsel. (The company’s “reliance witness” usually testifies at trial that he or she read and understood the opinion counsel’s assessment and that the company relied on it when deciding to begin or continue the allegedly infringing activity.) But in the current climate, too little information can be as risky as too much information. Some litigation counsel still argue that the board should not be briefed on the full litigation strategy but should only receive high-level assessments of potential financial loss. But other counsel now provide a more-detailed assessment of the strengths and weaknesses of the case, and conclude that such briefings are adequately covered by the attorney-client privilege and work-product immunity. The risk of waiver in a shareholder suit if the company loses the case is considered acceptable. Indeed, in that situation the board is less likely to be found liable if directors can show that they were kept abreast about the pros and cons of the litigation. Even the defense counsel who does not discuss actual litigation strategy with the board may still choose to provide the opinion counsel’s assessment to the company’s reliance witness under the reasoning that privilege will be waived as to the opinion anyway if (and frequently when) the opinion is produced at trial. The risk of providing only the view of opinion counsel to the board, however, is that it may have been too “rosy” and may not have reflected all the downsides known by litigation counsel. Moreover, such an opinion is fixed in time and may not reflect recent developments. In any case, the relevant board minutes should be segregated to help preserve privilege. The minutes must be sufficiently general in nature and not reveal specifics, especially involving litigation strategy, so that if produced in the course of litigation they will not constitute a waiver of any applicable privilege. At the same time, the minutes must also show the topics the board considered such that they help demonstrate that the board met its duty of care. For example, it might be wise to preserve some discussion of the reserves set aside to cover a settlement or a court loss and how that monetary figure was set. When the legal questions raised by briefing the board do come up in IP litigation, variations in the local rules of federal and state courts and in rulings of individual judges can lead to disparate outcomes. So far these issues have not entered the mainstream of IP and shareholder derivative disputes. But we predict this will change quickly. It behooves prudent counsel to take precautions now to shield clients against liability and unwanted waiver.
Robert G. Sterne and David K.S. Cornwell are partners at D.C.’s Sterne, Kessler, Goldstein & Fox. Trevor J. Chaplick and David J. Berger are partners in the Reston, Va., and Palo Alto, Calif., offices of Wilson Sonsini Goodrich & Rosati. Sterne handles IP issues in the electronics, telecom, and Internet areas. Cornwell focuses on patent litigation. Chaplick advises tech firms, underwriters, and venture capitalists in corporate and transactional matters. Berger heads the firm’s M&A litigation department.

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