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IP Compliance Obligations under Sarbanes-Oxley
Intellectual property compliance obligations arise in at least these ways under Sarbanes-Oxley. First, the lesson of the intellectual asset management movement is that intellectual property is a material asset of most businesses. Therefore, it should follow that a CEO and CFO responsible for certifying the financial condition of a company must insure that there are systems in place to manage IP assets and to bring material changes to the attention of management.
Second, the consequence of the GAAP changes by FASB regarding goodwill and intangible assets is that financial reports include an assessment of the value of acquired intellectual property assets. Therefore, it necessarily follows that the CEO and CFO responsible for the financial reports of the company must insure that there are systems in place so they can certify the reports are accurate with respect to those IP assets.
Best Practices for Compliance
Given the emerging position that Sarbanes-Oxley imposes obligations with respect to intellectual property, the failure of management to perform an oversight function may constitute bad faith - an extreme breakdown in the exercise of due care. Failure to act in good faith may cause directors and officers to lose the right to indemnification or insurance coverage and may create liability under traditional state law, in addition to potential liability under Sarbanes-Oxley.[1]
Here are actions management should consider to demonstrate due care in the handling of its intellectual property assets.
q Designate an IP control committee or officer to identify, protect and valuate IP assets. A multi-disciplinary team is probably best including legal, financial, marketing, research and development and sales.
q Conduct an inventory of intellectual property assets. This must be more than merely a list of trademark registrations, copyright registrations and patents. There are many unregistered rights that may be material to the financial condition of the company.
q Determine the value of each IP asset. Is it essential, critical, useful or minimally important? What is the economic effect if (i) the company were unable to use the asset; (ii) use of the asset were restricted; or (iii) others could use the asset without restriction? A valuation expert may be needed. According to one commentator, "how these changes in IP rights should be translated into public reports of firm value is a significant puzzle." But the fact that something is difficult does not excuse neglect.
q Take appropriate steps to insure that all assets that are not "minimally important" are properly protected. These steps include proper internal procedures concerning trade secrets as well as public registration of trademarks, copyrights and patents.
q Create internal procedures to insure timely reporting of material changes to IP assets. Material changes can arise from new marketing conditions as well as legal changes.
q Insure that the board exercises meaningful oversight. Consider adopting these steps as standard corporate practice:
- Include IP updates at board meetings
- Have minutes reflect updates
- Conduct IP seminars for directors
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[1] "Directors' responsibility of intellectual property in US corporations," Sterne et. al., Building and Enforcing Intellectual Property Value 2006 (IP 2006).
