Ovitz and Innovation

It’s been a summer of blockbuster judicial opinions in the realm of innovation and information law, from the Supreme Court’s ruling in MGM v. Grokster (for copyright mavens) to the Federal Circuit’s en banc decision in Phillips v. AWH (for patent mavens) to the First Circuit’s recent opinion in United States v. Councilman (for cyberlaw mavens). (UPDATE: I shouldn’t forget the Brand X decision.)

Even so, is it possible that the most important innovation law decision of the summer may turn out to be Chancellor Chandler’s ruling in the Ovitz/Disney litigation? (In re Walt Disney Co. Derivative Litigation, from the Delaware Chancery Court, 8/9/2005)

The case has nothing to do with intellectual property law or the internet; it has everything to do with corporate directors’ duties of care and fiduciary duties. (The folks at Conglomerate have collected an exhaustive commentary on the ruling from a corporate governance perspective.) Doctrinally speaking, the issue in the case is whether Disney directors breached a legal duty when they approved an unbelievable buyout of Michael Ovitz’s employment contract. Despite saying some uncharitable things about the Board, the Chancellor says “no.”

Is there more to the case? I litigated a lot of corporate governance cases when I practiced law, many of them dealing with risks and innovation at technology companies. In that light, here’s the passage from the opinion that caught my eye:

“Even where decision-makers act as faithful servants, however, their ability and the wisdom of their judgments will vary. The redress for failures that arise from faithful management must come from the markets, through the action of shareholders and the free flow of capital, and not from this Court. Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith by faithful directors or officers, those decision-makers would necessarily take decisions that minimize risk, not maximize value. The entire advantage of the risk-taking, innovative, wealth-creating engine that is the Delaware corporation would cease to exist, with disastrous results for shareholders and society alike. That is why, under our corporate law, corporate decision-makers are held strictly to their fiduciary duties, but within the boundaries of those duties are free to act as their judgment and abilities dictate, free of post hoc penalties from a reviewing court using perfect hindsight. Corporate decisions are made, risks are taken, the results become apparent, capital flows accordingly, and shareholder value is increased.”

If I’m an investor in/director of a tech-based start up, I’m feeling just a little more frisky today. (And if I’m a plaintiff’s lawyer looking at those companies, I’m a little down.) In the long run, that may be a good thing for innovation.