As a corporate law practitioner, an interesting IP question that pops up with more regularity is whether and under what circumstances a director of a corporation may be held personally liable for mismanagement of intellectual property. This question is usually not posed with reference to conflict of interest possibilities, but instead with regard to the duty of care and its implications on maintaining complete information and making sound decisions with regard to that IP. Of course, many board members don’t completely understand the ins and outs of intellectual property law, much less the complete set of opportunities the growing asset class creates. Some of these directors are worried that their lack of knowledge will implicate them if their decisions are made in ignorance of certain alternatives made available by the flexible disposition of intellectual property. Or rather, if their decisions are made in ignorance of certain limitations placed on them because of intellectual property owned by others.
A recent IP Think Tank podcast (including Stephen Albainy-Jenei from Patent Baristas) discussed the topic, but not with as much detail as I would have liked, which is understandable. Quite frankly, the issue is one without much precedent in the courts. The U.S. applies vicarious and contributory liability on parent entities for the actions of their employees, as well as personal liability on directors of corporations that run afoul of duties of care and loyalty. The business judgment rule that shields directors from personal liability so often may not put up such a hard shield when dealing with an asset that hardly anybody completely understands (except for certain professionals), and therefore putting corporate directors on notice that an extra effort should be taken to apprise themselves of relevant information. Does this mean every board of directors’ decision must wait until an independent opinion has been obtained from an IP professional? This solution seems unreasonable, not to mention burdensome and expensive. Still, it is an issue to seriously consider, as more board decisions, especially in the M&A context, must carefully account for the disposition and value of intellectual property.
Director liability for mismanaging intellectual property generally falls under two categories: waste and incorrect valuation. Both stem from a lack of understanding or attention paid to the relevant IP assets. Intellectual property is usually, if not always, an asset with diminishing value (patents expire, technology is superseded and becomes obsolete, etc.). Thus, directors could become liable if complete information is not obtained and sound business judgments are not made which account for this inherent quality. Similarly, if IP is not used during its “window of opportunity”, it could subject a director to liability if a reasonable business person would have taken some action with respect to that intangible asset.
Another factor is timely apprising shareholders, whether in the initial prospectus or in annual reports, of the disposition and value of corporate IP. As IP becomes obsolete, or becomes a cash flow asset by becoming the subject of a license, this information must be accounted for on the books and in the reports.
A 2003 survey conducted by Accenture found that 49% of corporations rely on intangible assets to build shareholder value, but 5% or fewer of them have internal systems for adequately maintaining and managing those all-too-important assets. (Both of these figures have probably grown since) The Delaware case of In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch.1996) (approved by Stone v. Ritter in 2006), created the duty of oversight for directors, opening up directors to greater risk of liability for not overseeing the internal systems for managing assets. The court did note that an ongoing employee training program which teaches them about those assets is one way to relieve a director of liability.
This issue will be of growing importance as the perception of intangible assets change from just a tool for litigation to proactive profit centers. We don’t know if courts will take a heightened standard of care approach or a lesser standard with regard to making corporate decisions which involve IP. What we do know is that directors should understand that the opportunity for liability is out there, and that the disposition and value of IP should be considered in all material board decisions.