What You Don't Know Can Hurt You: D&O Obligations For Oversight Of IP Assets

It may be tempting to delegate oversight of the company's intellectual assets to the IT and legal departments, but directors and officers could find themselves defendants in a lawsuit for doing so.

Intellectual property rights ("IPR") is no longer a small, niche matter. A survey of Fortune 500 companies estimated that anywhere from 45% to 75% of their wealth comes from IPR, and experts believe between 70% and 90% of the market value of publicly-traded companies is attributed to IPR.

The importance is not limited by industry. While patent-heavy technology and healthcare sectors remain in the forefront, all business sectors depend on IPR. Financial product and service industries depend on innovative methods and processes that must be protected. Brand names and trade secrets exist in most every industry from the restaurant around the corner to the global software provider.

Bases for Liability

Most of the bases for directors and officers ("D&O") liability have been developed through case law. Generally, directors and officers may find themselves in litigation crosshairs for breach of fiduciary duty or waste. Courts have construed a breach claim (often called a Caremark claim, after the Delaware court opinion of the same name) to require the plaintiff to show a failure "to implement any reporting or information system or controls" or having implemented such a system or controls, "consciously fail[ing] to monitor or oversee its operations thus disabling themselves from being able from being informed of risks or problems requiring their attention." In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del.Ch.1996).

In contrast, waste claims often involve affirmative actions and may occur in the context of asset transfers, compensation or stock option grants. Waste liability requires the plaintiff to show that "what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation has paid." Saxe v. Brady, 184 A.2d 602, 486 (Del. Ch. 1962).

A third, but less defined, theory for liability is a breach of good faith. The Delaware Chancery Court has most recently adjudicated this basis for liability in In re Walt Disney Co. Derivative Litigation, 907 A.2d 693 (Del. Ch. 2005). The court found, by way of example, that good faith would be breached "where the fiduciary intentionally fails to act in the face of a known duty to act." Disney, 907 A.2d at 755. Most...