Risk Management Basics for Protecting Intellectual Property

September 26, 2011Articles New Jersey Law Journal

Intellectual property (IP) is perhaps your client’s most valuable corporate asset, and yet IP risk management is typically disjointed and misunderstood. Risk management is not merely purchasing gobs of insurance but rather a system of self-evaluation, risk identification and implementing risk reduction techniques to minimize exposure to loss. Failing to advise your client that a potential claim may be insured is not only bad practice, but it may be malpractice.

The landscape of insurance coverage and risk management is changing rapidly. To make matters worse, timing in IP insurance claims is of the essence because your client will lose its insurance rights if you do not give timely and appropriate notice. Unfortunately, IP counsel and client facing IP risk are often myopically focused upon the complexity of the claim before them, and they fail to consider whether existing insurance coverage will provide either defense or indemnity. With a little planning, a company facing IP risks can protect against punitive damages as well as both known and unknown loss.

For the past five years, we have nenjoyed a soft market, a market in which insurance premiums are low. A hard market is coming quickly and insurance rates are about to rise dramatically. Even if insurance rates stay low, however, an IP risk management program is more than buying insurance. If it is not structured correctly, that insurance tower will provide no protection at all. Rather, a quality risk management program will look systematically from cradle-to-grave to verify that your company’s IP rights are protected at each step, to quantify the risk and to put in place an action plan to protect your client’s IP. The steps from product conceptualization, design, manufacturing, marketing, distribution, sale andeven disposal or recall are steps thatinvolve different business groups and require critical evaluation to determine whether your IP rights are seamlessly protected throughout. Before deciding what insurance to put in place, you must know what it is you are insuring, so you need to commence the risk management process with an IP audit.

Engage Outsiders for Your Audit

The starting point for any IP audit should be a crafted audit plan, defining the scope of the inquiry, assignment of responsibility for the work to be done and the expected form of a report. You will need to look at state and federal filings, third-party ownership rights, potential defects in patent filings, infringement concerns and may need to address both key personnel and the risk of raiding by your competitors. Although in-house personnel know their product and are highly skilled, internal corporate politics will often defeat a company’s ability to engage in a meaningful internal audit without using an outsider as an integral part of the audit team. Using outside counsel is helpful for the simple reason that it is the strongest claim of attorney-client privilege (in-house counsel often wear a “business hat” as well), and because outsidecounsel should be independent enough to candidly discuss flaws in the company’s structure. A second reason is that corporations are operated in large part based upon political relationships, with some placing more control in management, others in its individual manufacturing units, but uniformly the seat of power is rarely ever legal counsel and certainly not the risk manager. Given this simple political reality, it is very difficult for an in-house risk manager or even qualified in-house legal counsel to ask the difficult questions, criticize the accepted operating structure and to bluntly identify and critique gaps in your company’s management of its IP rights. In short, if your client wants real results they need to get an outsider on their audit team.

Click here to view entire article

Reprinted with permission from the September 26 issue of the New Jersey Law Journal. (c) 2011 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.