No lost profits when patent owned by parent but practiced by subsidiaryJune 4, 2008

In a decision this week, the Federal Circuit affirmed a district court's grant of summary judgment in the damages phase of a patent infringement case denying recovery for lost profits. The patentee's wholly-owned subsidiary actually practiced the claimed invention, but the subsidiary paid a standard license royalty to the patentee for use of the invention, and the subsidiary's profits did not "flow inexorably" to the patentee. As a result, the court rejected the argument that lost profits were available, but did not decide whether lost profits would be available if proof of such inexorable flow of profits existed. The court also found no abuse of discretion in a reasonable royalty of 7%, but held the patentee lacked standing for a period of the infringement, and thus held damages were unavailable during that period. The patentee assigned the patent to the subsidiary that practiced the invention, and then purportedly assigned it back, but the court found the later "reassignment" ineffective. More detail of Mars, Inc. v. Coin Acceptors, Inc. after the jump.The patents-in-suit related to coin authentication technology in vending machine coin changers. Mars is a candy company, but does not produce, and has never produced, vending machine coin changers. Mars Electronics International, Inc. (MEI) manufactures and sells vending machine coin changers and was a wholly owned subsidiary of Mars until 2006. Mars brought this action in 1990 against Coin Acceptors, Inc. (Coinco) alleging that Coinco infringed U.S. Patent Nos. 3,870,137 and 4,538,719. When Mars filed suit in 1990 it owned both patents, but in 1996 Mars transferred "its entire interest" in the two patents to MEI (1996 Agreement). Below is a timeline of the relevant events:

  • 1990: Mars files suit
  • March 1, 1992: '137 patent expires
  • March 31, 1994: Coinco introduces non-infringing alternative technology (the parties agreed that no lost profits were available after this point)
  • January 1, 1996: Mars enters agreements with MEI and a UK subsidiary of the same name, MEI-UK, resolving a tax dispute in the UK regarding royalty payments from MEI-UK to Mars, and transferring Mars' "entire interest" in the two patents to MEI
  • July 1, 2003: '719 patent expires
  • March 31, 2006: Mars and subsidiaries enter into a purchase agreement for part of the subsidiaries' businesses
  • June 19, 2006: Mars and MEI enter into "Confirmation Agreement," stating "Mars and [MEI] do hereby acknowledge that Mars owns and retains the right to sue for past infringement" of the two patents in this case

The district court granted summary judgment regarding lost profits stating that Mars itself did not lose any sales because it did not sell coin changers and there was no evidence that profits from MEI inexorably flowed to Mars despite MEI being a wholly owned subsidiary of Mars. The district court also ruled that MEI lacked standing in the infringement action prior to 1996, because it was neither the owner nor the exclusive licensee of the patents-in-suit, and after the 1996 transfer Mars did not have standing because it transferred its interest to MEI. The district court held that Mars could cure its lack of standing by the "imminent transfer" back to Mars of the rights to the patents before final judgment. The Confirmation Agreement was purportedly entered into for that purpose. The district court held this agreement restored Mars' standing, and assigned a 7% reasonable royalty for the two patents and applied this rate to Coinco sales up to 2003, when the '719 patent expired. Both parties appealed.The Federal Circuit first affirmed the district court's holding that Mars was not entitled to recover lost profits. It was undisputed Mars did not practice the patents and so could not have lost sales. While MEI practiced the patents, their relationship with Mars was a traditional royalty-bearing license agreement which did not involve profits and therefore the lost profits from MEI did not transfer to Mars. Interestingly, the court noted that it has never limited damages beyond a reasonable royalty to just a lost profits theory, noting that "while lost profits is plainly one way to measure the amount of damages that will 'fully compensate' the patentee under § 284, we have never held that it is the only one." In this case, however, Mars only pursued damages beyond a reasonable royalty under a lost profits theory, so the court did not elaborate as to what theory Mars could have potentially relied upon in this case.The Federal Circuit also affirmed the district court's ruling that MEI lacked standing prior to 1996, preventing MEI from being added as a party to collect lost profits. Before the 1996 agreements transferring ownership of the patents to MEI, MEI was just a nonexclusive licensee. The 1996 agreements recognized that a third party, MEI-UK, had and would continue to have a license to practice the patents in any country in the world. Therefore, prior to 1996 MEI was neither the owner nor the exclusive licensee of the patents, and so did not have standing.The Federal Circuit reversed a portion of the royalty award, finding Mars did not have standing after the 1996 agreements and that this lack of standing was not cured. The 1996 Agreement transferred Mars' "entire interest" in patents to MEI. While this could have been cured, as the district court noted, the Confirmation Agreement only transferred the right to sue for past infringement. There was simply no language in the Confirmation Agreement to actually transfer ownership of the patents, and therefore it could not convey standing. No party challenged the district court's ruling that MEI lacked standing for this time period. As a result, the court vacated the damages award for infringement from 1996 to 2003.The Federal Circuit upheld the 7% reasonable royalty rate despite being higher than the cost of non-infringing alternatives, and an admission by Mars to UK taxing authorities that any royalty over 4% for of any of its patents would be excessive. The court stated that a reasonable royalty is not capped by the cheapest available, acceptable, noninfringing alternative and that an intra-company license agreement made to satisfy the requirements of taxing authorities is likely to be very different from those resulting from negotiations between competitors.

This case serves as a reminder that it is essential to be aware of which corporate entity is the owner of a company's patents, as contrasted with the corporate entity that actually practices the patents, as well as the importance of accurately-worded assignments and license agreements. Here, as a result of how the various agreements were structured, the patent holder was not able to obtain lost profits damages, and lost out on eight years of damages from the infringer.To read the full decision in Mars, Inc. v. Coin Acceptors, Inc., click here.

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