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Delaware Decision Signals That Patent Monetization May Be Fiduciary Requirement

Officers and shareholders in any corporation have a fiduciary duty to act in the best interest of shareholders by increasing the value of the company. "Failure to diligently pursue the profit making goals of the corporation may constitute a breach of fiduciary duty and expose the officers and directors to personal liability for the breach."1 The New Castle County Superior Court in Delaware held that monetizing intellectual property ("IP") in order to maximize shareholder value may be a fiduciary requirement for corporate officers.

Monetizing intellectual property can be realized in a variety of ways. A company could license a patent or copyright to gain a royalty, use the IP as collateral on a loan, or simply sell the patent to gain some return on the innovative investment. Nir Kossovsky and Matthew Glasser, co-authors of an article entitled, "Monetizing intellectual property," describe IP as a financial instrument similar to an option. "Just as a call option provides the holder the right (but not the obligation) to purchase a share of stock that may or may not have value in the future, patents provide the right (but not the obligation) to invest in the development and use a technology that may or may not have value sometime down the line."2

Simply using IP as a legal deterrent against competition while necessary may not be sufficient for corporate officers to satisfy their fiduciary duties. As the amount and value of intellectual property increases, corporate shareholders will likely expect increasing profits from this part of the companies. Additionally, companies not previously considered "technology" companies have software and technology patents (computerized infrastructure for e-commerce) used to carry out their main business functions.3 Therefore, the duty to monetize patents will likely extend to more companies, not just those primarily producing technology or software.

It may be difficult to determine the best way to utilize IP to increase shareholder value. There are a number of ways in which a corporation can bring IP monetization in line with shareholder interests. These include establishing an IP committee, creating a subsidiary which has the purpose of monetizing IP, or outsourcing the function to a company that has expertise in the area of IP monetization. Corporate officers need to be aware of their increasingly prominent duty to get the most out of its patents financially, but shareholders must also hold officers accountable and realize that IP will continue to be a major component of adding value to a corporation.4

If you have any questions regarding this subject or this posting, please contact James E. Miller ([email protected]) or Michael Ols ([email protected]). We can also be reached toll-free at (866) 540-5505.

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