Risk Management and Compliance Overview

Michael Brodowski, Ph.D. Partner (Intellectual Property)John Edwards Partner (Insurance)Mark Pomfret Partner (Employment)Thomas Turano Partner (Intellectual Property)

Today’s Agenda

Introduction IP Risk Considerations Employment Risk Considerations Insurance Risk Considerations

RISK

RISK - The quantifiable likelihood of loss or less-than-expected returns.

May be thought of in terms of expected value. Everyone is concerned about risk but risk is

frequently subjective. As reported in the Economist, some 1500 additional

people were killed in automobile accidents following September 11th, when more people chose to drive rather than fly.

RISK as a Business Condition

Sufficiently economically developed societies legislate to reduce societal risk.

Failure to meet these legislative requirements may result in either civil or criminal liability.

Today we will talk about three areas of risk and discuss ways to reduce risk in those areas.

IP Risk Considerations

Michael Brodowski, Ph.D.

Thomas Turano

Intellectual Property-Related Risk Management

Two areas of concern Your Company’s Intellectual Property Other’s Intellectual Property

Risk Management – Your Company’s IP

Ownership – Do you own what you think you own? Divulgation of IP – Did you lose rights by divulging

your IP? Transactional Considerations – Are you in breach of

your agreements? What is the worst that can happen?

Trade Secrets – Are they really secret and did you do all you should to protect the secrets?

Risk Management – Your Company’s IP

Ownership – Patents, Trademarks & Copyrights Employee Agreements – Do you have them? Explicit Assignment of Rights – Do you have

executed assignments? Consultants/Works for Hire – Are there agreements

in place? Do you explicitly recite nothing going either way?

Government Rights in Inventions – Was there government money involved in the development? Did you take all the steps necessary to secure rights?

Risk Management – Your Company’s IP

Divulgation of IP Divulgation of Invention – May cause a loss of patent

rights by publication or offering for sale Grace Period in United States – 1 year to file Loss of Non-U.S. Rights – Actual publication causes loss of

rights

Loss of Trade Secret Status – It’s not a trade secret once it is published

Patent Foreign Filing Licenses – May be required if the invention takes place in another country

Risk Management – Your Company’s IP

Transactional Considerations Compliance with License/Agreement Provisions

Frequent source of problems in investments and mergers

Proper Use of Open Source Code Open Source Code License Types – Viral and Benign Still must comply with license terms even if benign

Transferability Assignability of patent license rights needs to be in writing

Due Diligence Representations and Warranties Who owns the RISK?

Risk Management – Your Company’s IP

Trade Secrets Trade Secret Protection vs. Patent Rights – Can’t

have it both ways Maintaining IP as a Trade Secret

Policy and Procedures Must treat it as if it were a trade secret

Need-to-know basis

Risk Management – Other’s IP

Patent, Trademark & Copyright Clearance Monitoring of Other’s Patenting Activity Monitoring Significant IP Court Decisions and

Impact on Portfolio Defensive Portfolio Considerations

Risk Management – Other’s IP

Patents Clearance of Product/Service – “freedom-to-operate”

Attempt to ensure your product does not infringe before commercial release

Patent Opinions Relating to Infringement and Validity Formal reasoned opinions regarding non-infringement by

your product and/or invalidity of the relevant patent

Patent Reexamination/Non-U.S. Opposition Practice Attempt to invalidate a patent in a patent office instead of

litigation

Risk Management – Other’s IP

Trademarks Clearance of Proposed Trademark

Besides the issue of infringement, why advance another party’s mark?

Common Law vs. Registered Trademark Trademark rights by use vs. State, Federal or treaty

registration

Oppositions/Cancellation Proceedings To remove or limit a trademark held by another party

Risk Management – Other’s IP

Copyrights Registration NOT Required

Fair use vs. infringement

Registration vs. Non-Registration Statutory damages Right of U.S. entity to sue in the U.S. affected

Risk Management – Other’s IP

Monitoring of Other’s Patenting Activity Understand Patent Landscape, Keep Updated

Knowledge is Power Finding out about a problem early may permit a design-

around May permit fencing in of the patent

Patents, Patent Publications, Scientific Journals Downside – If not willing to follow through on

information, potential exposure to willfulness, treble damages and attorney fees

Risk Management – Other’s IP

Monitoring Significant IP Court Decisions and Impact on Portfolio Revisit portfolio analysis in view of changing legal

standards For example, has Supreme Court decision in KSR

rendered patents more susceptible to an obviousness invalidity finding?

Consider not only impact on other’s IP but Company’s IP too

Risk Management – Other’s IP

Defensive Portfolio Considerations Breadth of portfolio provides potential negotiating

leverage in dispute Need to evaluate leverage based on current legal

standards, e.g., KSR decision

Employment Risk Considerations

Mark Pomfret

Protection of IP Through Employment

Non-Disclosure Agreement Invention Agreement Non-Competition Agreement

– Legitimate Business Interest

– Reasonable in Terms of Content, Duration and Geographic Scope

Non-Solicitation Agreement

– Employees

– Customers

Practical Considerations (1)

Provide for favorable choice of law and/or consent to jurisdiction

Consider requiring former employees to disclose all employment/consulting relationships undertaken during restricted period

Get agreements signed at the outset of employment

Keep agreements in file, under lock & key Give copies to employee upon departure Remind employee of obligations

Practical Considerations (2)

Non-Disclosure Agreement

– Treat confidential information as confidential

– Secure the information

– Don’t let anyone see your IP without signing an NDA

– Include remedies that will produce real deterrence

– Ensure survivability language

Practical Considerations (3)

Non-Competition Agreement

– Don’t ask everyone to sign the non-compete

– Get a new non-compete if duties or nature of business change

– Focus on what you really need

– Consider paying for the non-compete

– California issues

– Weigh deterrent effect on attracting talent Always have a successors clause

Employee Classification Risk Avoidance

Introduction Exempt v. Non-Exempt Salary and Duties Tests Employer Recordkeeping Employee v. Independent Contractor

Employee Classification Risk Avoidance (2)

Proactive Practical Steps

– Audit

– Address Question and Complaint Through Hotline

– Establish Investigation Process

– Prepare and Abide by OT Policies

– Develop Payroll Integrity Policies

Wage Payment Risk Avoidance

Timing Payroll Information Vacation Policies Meal/Rest/Holidays Reporting Pay

Dangerous Documents Risk Avoidance (1)

Applications Offer Letters Equity Agreements Job Descriptions Personnel Records and File Retention Handbooks Electronic Communication Policies Restrictive Covenant Agreements

Dangerous Documents Risk Avoidance (2)

Performance Appraisals Up To Date– Supports Decision-Making– Workforce Planning

Retention of Key Performers– Inducements to Remain– Defined Role in Reorganization

IP Risk - Insurance Considerations

John M. Edwards

Insurance For IP Risks

Comprehensive/Liability IP Defense IP Defense and Indemnity IP Infringement Abatement

Comprehensive/Liability & D&O

Not a Primary Source of IP Coverage Often Contain Exclusions Purporting to Bar

Coverage for Copyright, Patent and Trademark Claims

But IP Litigation Often Accompanied by Claims of Trade Secret, Misappropriation and Other Business Torts which Might be Covered

In These Policies, Pay Attention to and Avoid Language Regarding Allocation of Defense Costs

IP Defense and IP Defense and Indemnity

Protection for Claims Made Against You IP Defense – Costs of Defense Only

IP Defense and Indemnity

Costs of Defense and any Resulting Settlement – Judgment (Past royalties, Past Profits, Interest, Taxed Costs and Fees)

Claims – Made Claims First Made During Policy Period Claims First Made and Reported During Policy Period

Defense Costs Erode Limits Defense Settlement and Judgment/Cost Participation (5%-

25%)

IP Infringement Abatement

Indemnifies for Costs of Prosecuting a Patent Infringement Action

Must Claim Infringement and Request Authority to Commence Litigation

Subject to Deductibles, Participating Percentages and Limits Once Authorized, Litigation Expenses will be Advanced Periodically

Underwriting Process is Considerable and Can Cost Money Whether or Not Coverage is Offered

Patents Often must be Explicitly Identified

IP Infringement Abatement (2)

Timing of Infringing Activity is Critical Retroactive Dates Pre-Policy Awareness of Infringement or

Foreseeability of Infringement Economic Benefit/Presumed Economic Benefit

Carefully Consider What Constitutes Economic Benefit/Presumed Economic Benefit

Carefully Consider Whether Paybacks Will Exceed Economic Benefit

Employment Risk – Insurance Considerations

John M. Edwards

Insurance for Employment Risks

Comprehensive Liability General D&O Employment Practices Liability

Comprehensive General Liability and D&O

Not a Primary Source of Employment Practices Liability (“EPL”) Coverage

Exclusions Purport to Bar Coverage for EPL Claims EPL Claims Often are Mixed with Other Claims, such

as Defamation Pay Attention to and Avoid Allocation of Defense

Cost Provisions and Scope of EPL Exclusion

Employment Practices Liability Insurance

The Principle Source of EPL Coverage (Wrongful Discipline, Discrimination, Retaliation, Breach of Contract, Other Employment Law Violations)

Claims – Made Claims First Made During Policy Period Claims First Made and Reported During Policy Period

Defense Costs Erode Limits Avoid Panel Counsel Obligations Carefully Review Defense Consent Clauses

Employment Practices Liability Insurance

Avoid or Revise Hammer Clauses Pay Close Attention to Potential Coverage Gaps

Analyze Interplay Between Claims – Made Language and Retroactive Dates Prior or Pending Litigation Exclusions

Questions & Answers