When IP Litigation Becomes a D&O Claim

 

The growing risk of an intellectual property dispute ending up as a D&O claim must alert the C-suite to the need to mitigate their organisations’ IP risks.

As business value transitions from tangible to intangible assets, the threat of litigation in the intellectual property (IP) space continues to grow for organisations of all sizes. And, as the potential financial impact from this litigation spreads, with the chance of not only damaging a balance sheet but pushing a business into insolvency, so does the possibility that uninsured IP risks could translate into a material risk for an organisation’s directors and officers.

For company boards, that connection between IP risk and a claim on their D&O policy – and their own personal exposure – must alert them to the urgent need to mitigate any potential IP risk.

Surfacing IP litigation
IP litigation relating to infringement of patents, copyright, trademarks and/or theft of trade secrets continues to surface. A recent patent infringement lawsuit filed against NanoString, for example, briefly barred the biotech business from selling some of its products in 17 EU member states while the plaintiff – 10X Genomics – was awarded USD$31million in damages. With NanoString filing for bankruptcy soon after the judgement, it’s an example of how an IP litigation event can lead to a financial fallout so significant it puts the future of the business at peril.

How an IP Problem Becomes a D&O Problem
For companies that are less mature and perhaps in the growth stage or seeking to go public, IP litigation can have a disproportionate impact on their financial position where the legal costs and any potential settlement can be so severe it forces them in to bankruptcy. For examples like NanoString, it is not difficult to imagine that, having seen its share price tumble, shareholders might consider a class action lawsuit against the business and its management for a breach of their fiduciary duties, with a resulting D&O claim against the entity itself and its board members.

Failing to sufficiently protect the balance sheet with appropriate IP insurance could enhance the claims of any would-be D&O plaintiff. A legal case in the Netherlands in 2020 saw how inadequate insurance can lead to a D&O liability when a director of a construction company failed to have liability cover in place for employees. The court decided that this absence of insurance made the director personally liable for any losses following an industrial accident. There is no reason why the same principle could not apply to IP risk.

This is not just an issue for small or mid-sized companies either with bigger organisations also seeing increasingly frequent examples of IP litigation which will result in large publicly listed organisations having to notify shareholders if they sustain a financial impact at a particular level. As well as the financial harm to the balance sheet, this disclosure could, again, easily be the trigger for a D&O suit.

A Failure to Manage IP Risk
The problem for many organisations is that the possibility of a D&O claim from IP litigation is the consequence of a failure to manage their IP risk at the outset. If there is no financial mitigation in place following an IP claim, such as an IP liability insurance policy, then there is nothing to stop the issue from becoming a financial statement issue and subsequently, a D&O claim.

Why then, is IP risk not always managed appropriately? It is often due to the low visibility of the risk at board level. IP risk is usually looked after by either the IP team or the risk management team but these teams rarely have representation at board level. That means the only time the board gets to hear about IP risk is when they are asking for budget for an expense or if there is a particular issue that could lead to litigation.

Protect the Organisation and the Directors
Any board that has been through an IP infringement issue, however, will know how important IP risk is and will recognise the ultimate D&O risk to both themselves as individuals and their organisation if that risk is not managed. That is why it is critical that boards take steps to fully understand the scope of their IP risk, and how best they can manage and mitigate the risk, using insurance if necessary to protect their balance sheet from an IP event.

 

This article was authored by Will Kier and Collin Breeney.