Authored by Robert A. Matthews and John C. Paul
As a tool to get the most from their patents, manufacturers may use holding companies to manage their patents. Using these holding companies may allow for an increase in focus on generating revenues from the patents by using a dedicated team of specialists with expertise and experience in maximizing the returns from patents. Sometimes, using a holding company as a vehicle for licensing patents may provide favorable tax treatment of licensing revenues.1 Having a holding company manage a manufacturer's patent may, in some cases, reduce litigation burdens on the manufacturer such as defending against unnecessary counterclaims or participating in party discovery in an infringement litigation.
Nonetheless, transferring a patent to a patent-holding company can create potential disadvantages, particularly if the patent-holding company seeks to recover the profits the manufacturer lost as a result of infringement.2 Depending on the scope of rights the manufacturer can claim to enjoy in the infringed patent during the patent-holding company's ownership tenure, the manufacturer may or may not have standing to join the holding company in a suit to enforce the patent. If the manufacturer lacks standing to join the suit, the manufacturer will not have the right to recover its lost profits directly. And it seems likely that the current state of U.S. law does not favor allowing the holding company to assert the manufacturer's lost profits as a measure of its infringement damages. Consequently, transferring rights in a patent to a patent-holding company may affect who participates in an infringement suit and the scope of damages available for infringement.
Standing of the Manufacturer
A manufacturer seeking to recover profits it lost due to infringement must have "legal standing" to prosecute an infringement claim in court. Generally, only the patent owner, i.e., the company holding legal title to the patent, at the time of infringement can sue for infringement. An exclusive licensee who owns at least one form of an exclusive right in the patent may join the patent owner as a coplaintiff in an infringement suit. In such a suit, the exclusive licensee may recover the damages it sustained from the infringement of its exclusive right in the patent. Normally, an exclusive licensee may not bring an infringement suit in its own name unless the licensee, as shown by a written instrument, holds all of the substantial rights in the patent in a manner that makes the licensee a virtual assignee. Other licensees holding only a nonexclusive license have no right to join a patentee or an exclusive licensee in a suit for infringement regardless of the level of economic harm the nonexclusive licensee sustains from the infringement.3
Generally, if a patent owner is itself owned by a parent corporation, the parent corporation does not have legal standing to join the patent owner in suing for money damages for patent infringement just because it owns the patent owner. Even though the parent may have a claim of equitable ownership of the patent, that claim generally does not equate to actual ownership of the patent for purposes of legal standing. Some case law suggests that a parent's status as an equitable owner of the patent may permit the parent to join the patent owner in a claim for injunctive relief, but other case law holds that a parent lacks standing to seek either injunctive relief or monetary damages.4
Limitations on Recovering Lost Profits
In some instances where a manufacturer assigns its patent to a holding company, the manufacturer takes back a nonexclusive license. If the holding company intends to generate revenues from licensing the patent to others, the manufacturer generally can take back only a nonexclusive license since any greater rights would defeat the holding company's ability to license the patent to others. In this scenario, only the patent-holding company has legal standing to enforce the patent for acts of infringement that occur after the manufacturer assigns the patent to the holding company. The manufacturer, retaining only a nonexclusive license, has no legal standing to join the holding company in an infringement suit if the only acts of infringement occur after the assignment to the holding company. Following this principle, one district court vacated a substantial damage award to a manufacturer when the infringer introduced newly-discovered evidence that the manufacturer's nonparty patent-holding company owned the patent on the day the manufacturer commenced the suit and the manufacturer only held a nonexclusive license.5
Under this setting, the manufacturer can lose more than the right to join the holding company in an infringement suit. Under the principle that a nonexclusive licensee has no standing to seek redress for infringement regardless of the economic harm it personally suffers,6 the manufacturer and the patent-holding company lose the right to seek a recovery of the manufacturer's lost profits due to the infringement. Instead, the damage recovery will be limited to a reasonable royalty available to the nonmanufacturing holding company.7
A manufacturer's possible status as the parent of the patent-holding company generally does not alter the outcome and give the manufacturer standing to pursue a compensatory damage claim for the infringement.8 United States law has long refused to permit related corporations to assert corporate distinctness when it benefits the corporations and to disregard it where the separateness creates disadvantages.9 Recently, in Poly-America, L.P. v. GSE Lining Tech., Inc., the Federal Circuit applied this rule to recovery of lost profits for patent infringement.10 In that case, the court held that a nonmanufacturing corporation that owned a patent (akin to a patent-holding company) could not recover the profits lost by its sister manufacturing corporation where the sister corporation held only a nonexclusive license to the infringed patent.11 The Federal Circuit explained that the two corporations "must take the benefits with the burdens . . . [and] may not enjoy the advantages of their separate corporate structure and, at the same time, avoid the consequential limitations of that structure—in this case, the inability of the patent holder to claim the lost profits of its non-exclusive licensee."12 While this case involved a patent-holding company that is a sister company rather than a parent or subsidiary, it will likely be used by interested parties to argue for a broader application of its holding: where a patent-holding company owns an infringed patent, and the manufacturer enjoys just a nonexclusive right to make, use, sell, or offer to sell that patented technology, neither the manufacturer, nor the holding company may recover the manufacturer's lost profits for any infringement.
If a manufacturer used a patent-holding company for purposes other than developing licensing revenues its possible the manufacturer may have taken back some form of exclusive rights in the patent. In this scenario, the manufacturer would likely have standing to join with the patent-holding company as a coplaintiff.13 Further, the manufacturer could seek to recover damages, including its lost profits, to the extent it suffered damages from infringement of its exclusive rights.14 The manufacturer could not prosecute an infringement suit solely in its name unless a writing shows that the holding company granted back to the manufacturer all substantial rights in the patent.15 If the manufacturer brought a suit solely in its name where it did not hold all of the substantial rights in the patent, the manufacturer most likely will meet the requirements for constitutional standing, but will not meet the requirements for prudential standing. In this situation, the law permits the manufacturer to seek leave to amend its complaint and join the patent-holding company to cure the defect in prudential standing.16
Ideally, a manufacturer asserting that it enjoys an exclusive right in a patent it assigned to its holding company will have the grant of that exclusive right memorialized in a written instrument. Absent that, parties seeking to keep a manufacturer in an infringement suit in an attempt to recover the manufacturer's lost profits may argue that the manufacturer operated under an implied exclusive license. Whether such a contention will succeed will depend on whether the facts show that the manufacturer truly possessed at least one form of an exclusive right in the patent. Evidence that the patent-holding company granted licenses to third parties after the date that the manufacturer alleges it received an exclusive license in the patent would probably defeat the claim of an implied exclusive license. The absence of third party licenses may support a claim that the manufacturer held an exclusive license. However, those challenging an assertion of an implied exclusive license should investigate whether the patent-holding company made attempts, although unsuccessful, to license the patent to third parties. Such attempts would tend to negate the claim of an implied exclusive license since they would be contrary to the existence of an exclusive license.
In some cases, relevant evidence on whether the manufacturer truly received a grant-back exclusive license may be found in how the patent-holding company treated the original assignment of the patent from the manufacturer. If the original transfer occurred in the United States and the holding company treated the original assignment as an intercorporate transfer free of federal taxes under 26 U.S.C. § 351 that fact may support an inference that the manufacturer only enjoys a nonexclusive license. Generally, a transfer under 26 U.S.C. § 351 requires that the transferring party actually part with all rights in the transferred asset.17 Retention of an exclusive license by a manufacturer may not comport with the requirements to obtain tax-free status under the statute, and therefore an assertion of an implied exclusive license might seem contradictory in view of the favorable tax treatment previously claimed.
Reassignment to Manufacturer
A patentee may assign its right to sue for past infringements when it assigns a patent. Hence, a manufacturer who before filing suit obtains a reassignment from the patent-holding company of the patent with a right to sue for past infringements will have standing to prosecute the suit solely in its name. This does not make the prior ownership by the patent-holding company irrelevant if the manufacturer has asserted a claim to lost profits. An assignee cannot acquire rights greater than those held by the assignor. Thus, an assignee takes a patent subject to all defenses assertable against the assignor.18 This rule applies to the manufacturer's ability to recover damages for infringement committed during the period that the patent-holding company held the patent. Consequently, a manufacturer who obtains a reassignment of a patent does not thereby create a right to recover its lost-profits during the period the holding company held the patent.19 If during the holding company's ownership of the patent, the manufacturer only held a nonexclusive license, the manufacturer probably has no right to seek lost-profit damages for the sales it allegedly lost due to infringement during that period.
As shown above, a manufacturer may pay a heavy price for transferring legal title to its U.S. patents to a holding company. Undoubtedly patentees and accused infringers will continue to test the bounds of what permits or denies a manufacturer the right to recover its lost profits where the manufacturer's patent-holding company held the patent. But for now, it appears that recent case law and traditional principles of legal standing prevent the manufacturer from recovering its lost profits absent a legitimate claim that the manufacturer held some exclusive rights in the asserted patent.
To aide in preserving the right to recover a manufacturer's lost profits, manufacturers may consider using alternative forms of transferring rights in the patent to the holding company other than a full assignment of the patent. For example, the manufacturer could make the holding company a joint owner of the patent.20 Alternatively, the manufacturer could transfer to the holding company just an exclusive right in the patent with the right to grant sublicenses, subject to the manufacturer's continued preexisting rights to make, use, sell and offer for sale the patented technology.21 These forms of partial transfers retain ownership rights of the patent in the manufacturer, and therefore should preserve the manufacturer's right to assert legal standing to sue for infringement and its lost profits. Before implementing such transfers, however, manufacturers should investigate fully whether these alternative transfer forms adversely impact or even defeat the specific benefits sought to be gained by using a holding company. This includes determining whether the alternative form of transfer creates any unintended tax consequences.
1 For example, in the United States several individual states permit an intellectual property holding company to receive licensing revenues free of state income taxation, and a royalty-paying grant-back license to the manufacturer may create a business-expense type of tax deduction for the manufacturer.
2 See generally Robert A. Matthews Jr., A Potential Hidden Cost of a Patent-Holding Company: The Loss of Lost-Profit Damages, 32 AIPLA Q.J. 503 (2004).
3 Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1553 (Fed. Cir. 1995) (en banc); Ortho Pharmaceutical Corp. v. Genetics Institute, Inc., 52 F.3d 1026, 1031 (Fed. Cir. 1995).
4 Compare Steelcase, Inc. v. Smart Technologies, Inc., 336 F. Supp. 2d 714, 719 (W.D. Mich. 2004) (no standing) with Pipe Liners, Inc. v. Am. Pipe & Plastics, Inc., 893 F. Supp. 704, 706 (S.D. Tex. 1995) (standing to pursue injunctive relief). See also Arachnid, Inc. v. Merit Indus., Inc., 939 F.2d 1574, 1578-80 (Fed. Cir. 1991) (no standing for money damages but noting possibility of standing for injunctive relief).
5 Schreiber Foods, Inc. v. Beatrice Cheese, Inc., 305 F. Supp. 2d 939, 951-52 (E.D. Wis. 2004), appeal pending.
6 Ortho, 52 F.3d at 1031. E.g., Carver v. Velodyne Acoustics, Inc., 202 F. Supp. 2d 1147, 1149 (W.D. Wash. 2002) (patentee could not recover lost profits of its wholly owned nonexclusive licensee).
7 As a mere holding company, the patent-holding company normally does not manufacture or sell a product itself so it suffers no lost-profit damages as a result of infringement, and therefore may only recover reasonable royalty damages. Rite-Hite Corp., 56 F.3d at 1548.
8 Arachnid, 939 F.2d at 1578-80.
9 See Dole Food Co. v. Patrickson, 538 U.S. 468, 474-75 (2003); Lans v. Digital Equipment Corp., 84 F. Supp. 2d 112, 121 n.10 (D.D.C. 1999), aff'd, 252 F.3d 1320, 1328 (Fed. Cir. 2001).
10 383 F.3d 1303 (Fed. Cir. 2004)
11 383 F.3d at 1311-12.
12 383 F.3d at 1311.
13 Steelcase, 336 F. Supp. 2d at 718 (manufacturer holding an oral exclusive license from patent-holding company had standing to join suit). See also Kalman v. Berlyn Corp., 914 F.2d 1473, 1481-82 (Fed. Cir. 1990) (party granted exclusive right to sell had standing to join patentee).
14 See Weinar v. Rolform, 744 F.2d 797, 807 (Fed. Cir. 1984) (patentee's distributor having oral exclusive license of the right to sell could recover its lost profits from infringement).
15 See Enzo Apa and Sons, Inc. v. Geapag A.G, 134 F.3d 1090, 1093 (Fed. Cir. 1998).
16 Intellectual Property Dev., Inc. v. TCI Cablevision of California, Inc., 248 F.3d 1333, 1339 (Fed. Cir. 2001).
17 See Schreiber Foods, 305 F. Supp. 2d at 946-47.
18 Worley v. Tobacco Co., 104 U.S. 340, 344 (1881); Whitely v. Swayne, 74 U.S. 685, 687 (1868).
19 See Poly-America, 383 F.3d at 1311-12 (instructing that by agreements parties cannot "synthetically create lost profits" if there are none).
20 35 U.S.C. § 262
21 An exclusive license only means that no further licenses will be granted by the licensor. Hence, an exclusive licensee may have to suffer the rights of prior licensees. E.g., Abbott Lab. v. Diamedix Corp., 47 F.3d 1128, 1131 (Fed. Cir. 1995).
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