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Lack of Constitutional Standing Limits Damages Recovery

June 02, 2008

Decision icon Decision

Last Month at the Federal Circuit - July 2008

Judges: Linn (author), Clevenger, Prost

[Appealed from: D.N.J., Judge Lifland]

In Mars, Inc. v. Coin Acceptors, Inc., Nos. 07-1409, -1436 (Fed. Cir. June 2, 2008), the Federal Circuit affirmed the district court’s findings that Mars, Inc. (“Mars”) was not entitled to recover lost profit damages, and that Mars’s subsidiary, Mars Electronics International, Inc. (“MEI”), lacked standing before 1996. The Federal Circuit also affirmed the district court’s determination of the reasonable royalty rate. The Federal Circuit, however, reversed the finding that Mars had standing to recover damages between 1996 and 2003.

The patents-in-suit relate to technology used in vending machines to authenticate coins. MEI manufactured and sold vending machine coin changers with the ability to recognize and authenticate coins electronically. Mars is a candy company and has never made vending machine coin changers. Before 1996, MEI had an agreement with Mars under which MEI made royalty payments to Mars based on the gross sales value of coin changers using Mars’s patented technology, even if MEI did not make a profit.

In 1990, Mars brought this action against Coin Acceptors, Inc. (“Coinco”), alleging that certain Coinco products infringed U.S. Patent Nos. 3,870,137 and 4,538,719 (“the ’137 patent” and “the ’719 patent,” respectively), which Mars owned at the time of suit. Coinco counterclaimed, alleging infringement of four of its own patents, and added MEI as a counterclaim defendant.

The district court found that Coinco infringed both of Mars’s patents, but that Mars did not infringe Coinco’s patents and entered final judgment on liability. Coinco appealed, and the Federal Circuit affirmed on liability. The district court then considered appropriate damages.

During the fifteen years that the infringement action was pending, however, several key events occurred that limited the damages available to Mars: (1) the ’137 patent expired in 1992; (2) in 1994, Coinco introduced noninfringing alternative technology and the parties agreed that Mars was not entitled to lost profits for any lost sales after that date; (3) Mars entered into the “1996 Agreements” with MEI and a Mars subsidiary in the United Kingdom (“MEI-UK”), in which, inter alia, Mars transferred its entire interest in the patents to MEI; and (4) the ’719 patent expired in 2003 and the parties agreed that Mars was not entitled to any damages thereafter.

As compensation for Coinco’s infringement, Mars sought (1) lost profits, or, at minimum, a reasonable royalty for sales before 1994 (the period before Coinco’s introduction of alternative technology); and (2) a reasonable royalty on Coinco’s sales from 1994 until 2003 (the remaining life of the patents). Coinco acknowledged that Mars was entitled to a reasonable royalty before the effective date of the 1996 Agreements, but disputed Mars’s claim to lost profits and claim to any damages after 1996.

Before the damages trial began, the district court granted Coinco’s SJ motion on Mars’s claim for lost profits and denied as futile Mars’s motion for leave to amend its complaint to join MEI as a coplaintiff because MEI lacked standing in the infringement action. On reconsideration, the district court modified its ruling on Mars’s motion, finding that the 1996 Agreements assigned all of Mars’s interest in the ’719 patent to MEI, and therefore MEI, not Mars, had standing from 1996 forward, but that Mars’s lack of standing could “be cured by the ‘imminent’ transfer back to Mars of the rights to the ’137 and ’719 patents before final judgment.” Slip op. at 5.

Mars then entered into a purchase agreement to acquire certain assets of its subsidiaries’ (including MEI) businesses. The purchase agreement was not made part of the record, either before the district court or on appeal. Instead, Mars offered a document, titled “Confirmation Agreement,” between it and MEI, effective in 2006. Apparently treating the “Confirmation Agreement” as a transfer of all of MEI’s rights back to Mars, the district court found that while MEI lacked standing, Mars was entitled to recover damages during the period MEI owned the patents (i.e., from the 1996 Agreements until the ’719 patent expired in 2003) because Mars had cured its lack of standing before the entry of final judgment.

Following a four-day bench trial, the district court issued a detailed oral opinion from the bench analyzing the fifteen Georgia-Pacific factors and concluding that a blended 7% royalty rate for the two patents was
reasonable. After resolving post-trial motions, the district court applied the 7% royalty rate to Coinco sales up to 2003, resulting in damages of $14,376,062. The district court awarded prejudgment interest and entered final judgment. Both parties appealed.

First, the Federal Circuit agreed with the district court that Mars was not entitled to lost profits and noted that because Mars had only asserted lost profit and reasonable royalty theories, the Court did not need to consider any other damages theories. Rejecting Mars’s assertion that all of MEI’s lost profits were inherently lost profits of Mars, the Court noted that the uncontradicted testimony indicated that MEI paid Mars a royalty based on the gross sales value of MEI’s products and that MEI was required to make those payments whether or not it made a profit. Thus, the Court did not need to determine whether a parent company could recover on a lost profits theory when profits of a subsidiary actually do flow inexorably to the parent because that was not the case here.

Second, the Federal Circuit agreed that Mars’s attempt to amend its complaint by adding MEI as a coplaintiff for infringement that occurred before 1996 was futile because (1) it was undisputed that MEI did not own either of the patents before 1996, and (2) MEI was not an exclusive licensee in the United States because the 1996 Agreements allowed MEI-UK to continue to “exploit . . . [the patents at issue] in any country of the world in exchange for a royalty,” and “any country of the world” included the United States. Id. at 13.

Third, the Federal Circuit considered the district court’s finding that Mars had standing to recover damages based on sales between 1996 and 2003 because Mars cured its lack of standing before final judgment. On appeal, Coinco argued that Mars failed to recover standing because (1) the Confirmation Agreement (the only agreement relied upon by Mars) transferred only the right to sue under— not title to—the ’719 patent; and (2) the transfer occurred after final judgment.

Applying Delaware state law to interpret the 1996 Agreements, the Federal Circuit concluded that Mars had transferred its “entire interest” in the patents, which includes title. Applying New York state law to interpret the Confirmation Agreement, the Court concluded that it provided (1) a “recognition” of rights that the contracting parties (Mars and MEI) believed had already been transferred (which was also supported by the agreement’s title (i.e., Confirmation Agreement)); and (2) a transfer of “any rights in or to any past infringement of the . . . Patents or any recovery therefore.” Id. at 18-19. The Federal Circuit concluded that only the latter portion was in fact an assignment of rights, but that the only right assigned was the right to sue for past infringement. Additionally, the Court rejected Mars’s argument that an assignment of the right to sue for past infringement is equivalent to an assignment of title when pertaining to an expired patent: “Title to a patent—even an expired patent—includes more than merely the right to recover damages for past infringement.” Id. at 20. Thus, Mars lacked standing from 1996 to 2003 because it assigned title to MEI in the 1996 Agreements, and MEI never assigned it back. Based on its finding, the Court did not need to reach Coinco’s argument that the effective date of the Confirmation Agreement was after, not before, the entry of final judgment.

Finally, the Federal Circuit rejected Coinco’s challenges to the royalty rate. Specifically, the Court rejected Coinco’s argument that a reasonable royalty rate could not exceed the cost of switching to an available noninfringing alternative because (1) as a matter of fact, the district court did not find that there were available, acceptable, noninfringing alternatives; (2) as a matter of law, royalty damages are not capped at the cost of implementing the cheapest available, acceptable, noninfringing alternative; and (3) the district court reduced the blended royalty rate from 11.5% to 7% because it found that Coinco probably could have designed an acceptable alternative. The Court also rejected Coinco’s argument that its royalties should be capped at the same rate used in a Mars intra-company agreement implemented to satisfy the UK taxing authorities because the circumstances and relationship between the parties were completely different, including that Coinco was a competitor. Finally, the Court rejected Coinco’s argument that the district court erred by using Mars’s incremental profit rather than its operating profit in the reasonable royalty analysis because the district court was well within its discretion to select the appropriate method of profit accounting.

Thus, the Federal Circuit affirmed-in-part, reversed-in-part, and remanded for a recalculation of damages for the period before 1996.