Thursday, May 03, 2007
Neglect of Intellectual Property may breach Fiduciary duty [Outsourcing Contracts]
A fiduciary is an individual, corporation or association holding assets for another party, often with legal authority and duty to make decisions regarding financial matters on behalf of other party. The directors and officers of a corporation are fiduciaries of the corporation and its shareholders. The fiduciary duty includes the obligation to prevent a waste of corporate assets and other actions and omission which damage the corporation. With the growing importance of IP in a companys overall value, any IP mismanagement is seen as a serious waste of corporate assets. By outsourcing, the organization gives up control over physical access to its system and the control over all company functions becomes more flaccid. The inability to tightly control all aspects of the company increases the risk of illegal activity such as piracy which may constitute a breach of fiduciary duty. The fiduciary responsibility of the directors encourages them to oversee IP assets more closely. The relationship between an organization and its outsourcing firm is not considered to be fiduciary (Op. cit., Mylott). In this light, the management should consider how effectively it will be able to control functions in its offshore entity. The officers and directors must carefully plan how to supervise the people directly managing the offshore part of the corporation. If this control is not planned and executed properly, the company may find its intellectual property falling victim to illegal activities such as piracy and its high level management subject to litigation for breaching fiduciary duty to the corporation and its U.S. stockholders by allowing such illegal activities to occur.