Connecticut Technology & Intellectual Property

Last week, I posted about the valuation of intellectual property asset portfolios, and the trend towards aggregators of IP asset portfolios seeking to maximize profits from IP assets (See The Rise of IP Aggregators).

As this monetization/valuation of IP assets movement continues, it will be especially important for directors/officers/etc. to have proper oversight on the intellectual property assets of their companies.  There was an interesting article on law.com from December 2008 regarding the various fiduciary duties that directors/officers/etc. have in regards to management of IP (Measuring Up:  IP Oversight).  A couple of interesting quotes from the article:

A 2006 decision by the influential Delaware Supreme Court, 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. Furthermore, the court defined this oversight failure as a breach of the duty of loyalty (not the duty of care).  As a result, directors can be held personally liable for IP mismanagement.

One classic situation in which director and officer liabilities could arise: A corporation has over time accumulated a substantial IP portfolio- whether patents, trademarks, trade secrets, or copyright-and has effectively lost track of what it has.  It has not considered how best to maintain or strengthen the protections for the IP, let alone how best to exploit it.  The problem is not necessarily in (just) failing to take certain steps to protect the IP or to exploit it, but in the failure to be sufficiently informed to competently consider alternatives so that the decision to take action or not can be defended as one that was given due consideration.  This is where sound IP management can enhance internal controls and reduce regulatory and litigation risk.

In my experience, the situation presented by the second quote occurs more often than people think.  Too often an improper “IP audit” of rights and best methods to exploit/protect are not considered outside of the “core” piece of IP (and, sometimes, even with the core piece of IP).

The risks presented from improper management of IP can become even more problematic for directors who are VC investor designees/representatives to the Board.  Such directors are not as intimately involved in the operations of the company as management representatives, thus relying on info given to them by officers/management. 

Tech companies (including management and their governing boards) need to make sure that, in focusing their efforts to increase sales/revenues/exit, they do not let their IP assessments fall through the cracks.

- Gregg J. Lallier