X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Licensing of core and non-core intellectual property has become a major revenue source for many companies. Texas Instruments, for example, now earns more from licensing its technology than from manufacturing. While the changes in the value and role of IP present businesses with newfound opportunities, they also expose officers and directors to newfound risks. In times past, directors and senior officers could -� and almost universally did -� ignore intellectual property, leaving it to a clerical staff that filed and forgot it. It was a rare company indeed where the IP portfolio was accorded a fraction of the attention directed to tangible assets. Now, however, the increased importance of the intellectual property portfolio mandates a commensurate increase in the care with which it is managed. It must, in fact, be managed with the same degree of care and attention as that accorded tangible assets. WASTE Every officer and director of a corporation, as a fiduciary, has an affirmative “duty of care” to manage the affairs and assets of the corporation diligently. Injuries arising from the mismanagement of intellectual property commonly fall into two general categories: waste and misvaluation. Waste occurs when an asset is not fully utilized or is sold for much less than its true value. The duty of care to prevent waste is governed by the business laws of the state in which the business is incorporated or based. Duties may also arise under state and federal securities laws. Avoiding IP waste requires, among other things, identifying the company’s IP, its uses and the estimated extent of such uses; determining the existence and merits of competing technologies; and assessing the validity of any company patents and the scope of their claims. Novel technology represents a valuable asset. A patent excluding others from practicing an innovation increases the value of the underlying technology. Thus, failure to aggressively patent the results of corporate R&D, like failure to insure valuable equipment, may be deemed mismanagement. Even patents for unused technology may pose risks because failure to license them implies that potential income streams were simply thrown away. Most U.S. companies face the issue of whether and in which countries to obtain foreign patents. Fear of potential liability should not drive the corporate executive to file in every foreign country. As long as this question is carefully deliberated, one may safely rely on the “business judgment rule,” which protects directors and officers from liability arising from bad decisions as long as these decisions were well informed and well considered. Failure to enforce IP rights is another example of mismanagement. Many technology-related corporations are rushing to file as many patents as possible. However, patents afford only exclusionary rights -� the right to sue. Failure to enforce these rights by bringing an infringement action creates a double waste: loss of a valuable monopoly on the use of the patented technology as well as loss of the capital spent obtaining and maintaining the unenforced patents. Substantial delay in enforcing the patents could also result in laches or estoppel, which would render the patents unenforceable or reduce any damage awards. Simply discussing these matters from time to time at board meetings may not be enough. Delay in implementing a sensible IP management program may cause waste because patents are “wasting assets” by their nature — patents expire, technology becomes obsolete. Waste need not involve any wrongdoing or evil intent. Negligence will suffice. Negligent waste may be established by a showing that no person of ordinary sound business judgment would say a fair benefit had been derived from the challenged transaction. In sum, waste may result from inadequate return for the license or sale of the intellectual property, failure to exploit it, or undue delay in doing so. MISVALUATION Whereas waste can be described as a “realized” loss, misvaluation is a “book” loss. Though misvaluation causes different injuries, it is closely related to waste. Both spring from the same errors and omissions. Failure to communicate the value of a publicly traded company’s IP to the financial community may result in undervalued stock, thus causing loss of value to shareholders. Likewise, a patent issued to a competitor that may erode the company’s market share should be disclosed to shareholders. Similarly, a patent issued to a competitor that may be infringed by the company’s product should be disclosed, regardless of whether or not an actual infringement notice has been received. Reasonable apprehension of a suit is enough. (The same criteria may be used by IP counsel to determine whether an action for declaratory judgment is justified.) Expiration dates of important patents, which may adversely affect the company’s market share, should be communicated to the shareholders. These and other important IP matters may need to be disclosed in press releases, in annual and quarterly financial statements, and in the management discussion and analysis section of registered financial statements filed with the Securities and Exchange Commission. Failure to timely report relevant IP information to the shareholders in the initial prospectus as well as in quarterly and annual reports could result in their ill-advised decision-making and subsequent losses, prompting them to seek relief in a class-action suit. While there is no relevant case law specifically dealing with mismanagement of corporate IP, there is no reason to believe that the standards will differ from the well-established duty of care standards for other corporate assets. Until recently, the market for technology stocks has moved consistently upward and everyone was a “winner.” It seems only a matter of time until some disgruntled shareholders attempt to recoup their losses through the courts. “INFORMED” BUSINESS JUDGMENT When an officer or director fails to meet his duty of care, and waste of IP assets results, one or more of the shareholders or directors may bring an action on behalf of the corporation. Typically, officers and directors try to defend against these actions on the basis of the “business judgment rule.” The courts, however, have begun requiring that the challenged decision result from “informed business judgment,” based on all information “reasonably available.” An investigation is generally deemed necessary to satisfy this requirement. An informed acceptance or rejection of a settlement offer in a patent infringement suit, for example, is a decision that may be justified under the business judgment rule. If, however, an offer is rejected and an unfavorable judgment results, management and the board could be exposed to personal liability if they failed to perform litigation risk analysis. Note that the acceptance of the office of director implies a competent knowledge of the duties assumed. A director cannot be excused on the grounds of ignorance or inexperience. Nor does serving without compensation or merely as an “accommodation” negate a director’s responsibilities. Note also that the duty of care owed with respect to IP depends in part on the nature of the company’s business. The duty may be greater where the type of business affects the general public, especially where there is an established regulatory scheme for that type of business �- such as investment banking. While valuation of an IP portfolio is always prudent in the day-to-day management of corporate assets, valuation of an IP portfolio involved in an initial public offering, merger and acquisition, divestiture or corporate reorganization may be obligatory. Decline in the price of stock resulting from the dissemination of false information about the value of corporate IP constitutes an actionable injury to individual shareholders. Although the standards applied by courts to publicly traded companies may be the same as those applied to privately held nonbanking concerns, the SEC itself is a powerful potential plaintiff. Misrepresentation or omission of material information pertaining to the IP assets of the securities issuer is a violation of � 10(b) of the Securities Exchange Act of 1934. So is presentation of values for IP assets that are based on invalid data or techniques. Other caveats: � The courts often hold that failure to determine actual value, as opposed to book value, of a corporation engaged in a merger is a breach of care. IP assets are a major factor contributing to the discrepancy between actual and book value. � Officers and directors may also be liable to corporate creditors for losses suffered as a result of mismanagement. If the corporation is in reorganization or liquidation, such an action may be brought by the corporation’s trustees or receivers. � A director of a holding company may be liable to that company for the diminished value of its share resulting from his waste of a subsidiary’s IP assets, even though he might also be liable to the subsidiary for the same acts. DELEGATION OF RESPONSIBILITY While management of the IP portfolio may be delegated, such delegation must comply with certain requirements to satisfy the duties of due care. A director may not delegate responsibility to nondirectors for activities that are outside the ordinary course of business. Furthermore, the director should, despite any delegation, remain informed about the general goings-on of the delegated functions and their use of resources. He is chargeable with knowledge that he would have possessed had he diligently discharged his functions. Where a board of directors appoints a committee of its members to assume responsibility for a task, a nonmember director is still expected to satisfy himself that the committee merits his confidence. Neither the designation of the committee nor the delegation of authority to it constitutes full compliance, by any non-member director, with his duties as a director. Directors must often seek the advice of experts. Where directors seek expert advice and honestly follow it, they are protected from personal liability, even if the advice proves erroneous. (To be entitled to rely on it, they must either read it, be present at a meeting at which it is orally presented, or take other steps to become generally familiar with it.) Indeed, precedent suggests that failure to seek advice from outside experts may itself constitute a breach of duty. A number of IP management firms provide businesses with such advice. As an initial matter, our firm generally advises that IP management no longer be relegated to middle management or even to in-house patent counsel overburdened with filing and prosecuting patent applications. Corporate directors and officers must address the matter. Despite the obvious complexities involved, they should devise and establish a reasonable IP management program. The first step is to conduct an IP portfolio audit �- to identify core, non-core and obsolete IP. Prudence dictates that an IP management firm or other specialist conduct the audit and otherwise manage a corporation’s IP portfolio. Such management may include development of a corporate technology transfer program or a joint venture to leverage dormant IP assets. Obviously, the individual(s) involved must have appropriate education and experience. There should be a documented history of success in the management of intellectual property. Further, the manager(s) should be required to provide regular and complete reports of their activities, including reasonably detailed descriptions of methodologies employed. Alexander I. Poltorakis chairman and chief executive of General Patent Corp., an IP management firm based in Suffern, N.Y. Paul J. Lerner is the senior vice president and general counsel of the firm.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.