Intellectual Property - Law Firms IP Holding Companies Beware: Lessons From The Poly-America Case

Thursday, September 1, 2005 - 01:00

Many corporate families include an IP holding company - a separate corporation that owns the intellectual property assets of the family and then licenses assets to affiliated companies as needed for their use. The reasons for adopting such a structure are varied, ranging from the ability to more easily manage the intellectual property portfolio that comes from the consolidation of assets in one company, the ability to assure clear common ownership to address certain types of obviousness rejections, and the easier facilitation of transfers and assignments, to beneficial tax treatment that may be obtained in some jurisdictions. Problems may arise, however, when one company in the family owns the IP, but others in the family are responsible for the manufacturing and selling. One danger that is not always anticipated is the difficulty that the IP holding company may have in proving damages based on lost profits when it brings suit for infringement of one of its patents. The Poly-America case decided recently by the Federal Circuit should serve as a cautionary tale.

The Poly-America Case

The patent statute provides that where infringement has been proven, the claimant shall be awarded damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty ...." 35 U.S.C. § 284. Since lost profits are often significantly more than the royalty that may be awarded, where profits are lost to infringing goods, the typical patent infringement plaintiff wants to collect them.

In Poly-America, L.P. v. GSE Lining Technology, Inc., the Federal Circuit held that the plaintiff corporation was not entitled to claim damages for the profits lost by its sister corporation. Poly-America, L.P. v. GSE Lining Technology, Inc., 383 F.3d 1303, 1310-12 (Fed. Cir. 2004). In that case, the plaintiff owned the patent, but licensed it on a non-exclusive basis to its sister corporation, which sold goods that competed with the infringing goods. The plaintiff argued that it operated with its sister as a single economic unit for purposes of producing, marketing and selling the patented products and shared a unity of interest that justified treating them as a single economic unit for a lost-profits analysis. See id. at 1310. The Federal Circuit rejected this argument, pointedly noting that the companies would have to live with the consequences of their separate corporate status:

[Plaintiff] and [sister] have a common parent corporation and are not simply divisions of a single corporation, but are separate entities. Their parent has arranged their corporate identities and functions to suit its own goals and purposes, but it must take the benefits with the burdens. While we do not speculate concerning the benefits that the two companies reap from dividing their operations and separating the owner of the patent from the seller of the patented product, [plaintiff] and [sister] 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.

Id. at 1311.

The Federal Circuit further noted that the sister corporation also could not collect its own lost profits because it held only a non-exclusive license from the plaintiff:

We have held that a licensee generally may not sue for damages unless it has exclusive rights under a patent, including the right to sue. [Sister] does not have exclusive rights. It is clearly identified in the license agreement as a non-exclusive licensee, and as such, it received only a 'bare license' and has no entitlement under the patent statutes to itself collect lost profits damages for any losses it incurred due to infringement.

Id. Thus, because of the corporate structure, while profits were lost due to infringement, they could not be collected.

Lessons

The lesson of Poly-America for corporate families with a separate IP holding company is clear: beware how you allocate the functions of IP ownership, manufacturing, and selling among affiliated companies, lest you structure yourself out of entitlement to lost profits damages.

Lessons For Parent IP Holding Companies

Poly-America involved sister corporations - one sister owned the IP, while another sold goods that competed with the infringing products. Whether the result would have been different under a unity-of-interest theory had the owner of the patent been the parent company, instead of a sister, and licensed the patent to its subsidiary, is unclear.

Certainly there are strong arguments, given the patent statute's broad mandate for adequate compensation, that under the right circumstances, a parent IP holding company should be able to prove that it is entitled to the lost profits of a wholly owned subsidiary. For example, if the parent IP owner could prove that the value of the patent was in excluding competitors, not in licensing to them, and that it received the benefit dollar for dollar of its wholly owned subsidiary's profits, there would be a strong argument that lost profits should be collected. Past Federal Circuit cases recognize the guiding principle of the patent statute to award an amount to adequately compensate for all the harm caused by infringement. See, e.g., King Instruments Corp. v. Perego, 65 F.3d 941, 947 (Fed. Cir. 1995) ("The section's broad language awards damages for any injury as long as it resulted from the infringement."); Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1545 (Fed. Cir. 1995) (the patent statute means that "'adequate' damages should approximate those damages that will fully compensate the patentee for infringement.").

However, in light of Poly-America, such an outcome is not certain. In a broad sweep, the Federal Circuit in Poly-America commented that " Éthe patentee needs to have been selling some item, the profits of which have been lost due to infringing sales, in order to claim damages consisting of lost profits." Poly-America, L.P., 383 F.3d at 1311. Thus, it is an open question whether, faced with a parent IP holding company as just described, district courts or the Federal Circuit would still apply this rule that the patentee itself, rather than a wholly owned subsidiary, must sell the goods on the basis of which lost profits would be claimed.

Lessons For All

As noted at the outset, there are many reasons for having an IP holding company among the corporate family. However, if a corporate goal is to be able to sue for the profits lost due to infringement, Poly-America highlights the dangers that can attend a corporate structure in which the ownership of the IP portfolio is divided from the functions of manufacturing and selling the products that compete with potentially infringing goods and in which only non-exclusive rights inadequate to convey standing are licensed between affiliates. If the ability to collect lost profits is an important goal, to be safe, there are some pointers for structuring the corporate family that should be heeded:

  • The company that owns the IP portfolio should also be the company that sells and/or sells and manufactures the competing goods.

  • Alternatively, the IP owner should exclusively license the relevant IP to one company in the family that sells the goods, so that that exclusive licensee could sue to collect for the lost profits. In that case, the license from the patent owner to the affiliate must convey sufficiently substantial rights to establish standing in the licensee alone or in the licensee in conjunction with the patent owner. In order for the licensee to be able to sue alone, the license must include specific language conveying the exclusive rights under the patent to make, use, or sell; the exclusive right to sue on the patent; and the ability to freely transfer the rights under the patent. See, e.g., Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245 (Fed. Cir. 2000); Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870 (Fed. Cir. 1991); National Licensing Assoc., LLC v. Inland Joseph Fruit Co., 361 F. Supp. 2d 1244 (E.D. Wash. 2004); Calgon Corp. v. Nalco Chemical Co., 726 F. Supp. 983 (D. Del. 1989).

Further, the exclusive license should include the right to sub-license, so that the exclusive licensee could then sub-license rights to make or sell on a non-exclusive basis to other affiliated companies, as needed.

However the structure for a corporate family is ultimately decided, if IP is an important asset, the lessons of Poly-America should at least be considered.

Shari Fleishman Esfahani is a Litigation Partner in the Washington, D.C., office of Akin Gump Strauss Hauer & Feld LLP. Her practice focuses on complex civil litigation, including patent and antitrust cases.

Please e-mail the author at sesfahani@akingump.com with questions about this article.