separating patent ownership from product sales: taxes, lost profits and the “right” plaintiff...
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SEPARATING PATENT OWNERSHIP FROM SEPARATING PATENT OWNERSHIP FROM PRODUCT SALES: PRODUCT SALES:
TAXES, LOST PROFITS AND THE “RIGHT” PLAINTIFFTAXES, LOST PROFITS AND THE “RIGHT” PLAINTIFF
James R. Ferguson
Mayer, Brown, Rowe & Maw LLP
Chicago, Illinois
LAW SEMINARS INTERNATIONAL
December 6, 2006
© 2006 James R. Ferguson Mayer, Brown, Rowe & Maw LLP
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IP HOLDING COMPANIES
IP Efficiencies
Tax Consequences
REASONS FOR SEPARATING IPOWNERSHIP AND PRODUCT SALES
Parent
IP HoldingSubsidiary
Sales
4
5
ACQUISITIONS
The acquired company has patents
and/or licenses that it continues to hold
as a new subsidiary of the parent
REASONS FOR SEPARATING IPOWNERSHIP AND PRODUCT SALES
Parent
AcquiredSubsidiary(IP Owner)
Sales
6
BUSINESS OR OTHER CORPORATE REASONS
REASONS FOR SEPARATING IPOWNERSHIP AND PRODUCT SALES
Sales Subsidiary
Sales Subsidiary
Parent(IP Owner)
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REASONS FOR SEPARATING IP OWNERSHIP AND PRODUCT SALES
LICENSE FROM A THIRD PARTY
LICENSEE DOES NOT SELL THE PRODUCT
Subsidiary
Parent(Licensee)
Sales
ThirdParty Patent
Owner
License
8
SEPARATING IP OWNERSHIP AND PRODUCT SALES
Issue: What is the legal relationship
between the IP-owning company
and the company selling the
product or service?
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INTRA-CORPORATE AGREEMENTS
NO AGREEMENT
Subsidiary(IP Owner)
ParentSales
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INTRA-CORPORATE AGREEMENTS
LICENSE AGREEMENTS
Licensee pays royalty to patent-owning company
Licensee is often the manufacturer as well
as the seller
Licensee sells product on its own behalf
Subsidiary(Manufacturer/
Seller)
SalesLicense
Royalty
Parent(IP Owner)
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DISTRIBUTION AGREEMENTS
IP owner sells product to distributor
IP owner is often the manufacturer
Distributor re-sells product on its own behalf
Transfer Pricing
INTRA-CORPORATE AGREEMENTS
Subsidiary(Distributor)
Sale Re-sale
Parent(IP Owner/
Manufacturer)
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SERVICE AGREEMENTS IP owner contracts with another subsidiary
entity to manufacture and sell the product on behalf of IP owner
Sales are booked to the IP owner IP owner pays the selling subsidiary
costs/service charge
INTRA-CORPORATE AGREEMENTS
Subsidiary(Manufacturer/Seller)
ContractParent(IP Owner)
Sales
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STANDING
PATENT OWNER MUST BE A PLAINTIFF
EXCLUSIVE LICENSEE CAN BE A CO-PLAINTIFF
EXCLUSIVE DISTRIBUTOR CAN BE A CO-PLAINTIFF
NON-EXCLUSIVE LICENSEES OR DISTRIBUTORS CANNOT BE A CO-PLAINTIFF
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THE POLY-AMERICA CASE
LOST PROFITS If the patent owner does not sell the product, the patent owner cannot recover “lost profits” from the sale of the product. Poly-America L.P. v. GSE Lining Technology, Inc., 383 F.3d 1303, 1311 (Fed. Cir. 2004)
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THE POLY-AMERICA CASE
Parent
Manufacturer/Seller
Non-Exclusive License
SUBSIDIARY A SUBSIDIARY B
No “Lost Profits” Recovery
Patent Owner
Sales
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LOST PROFITS
Issue: To what extent can a corporate
organization recover lost profits when patent ownership is
separated
from the sale of the patented product
or service?
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LOST PROFITS RECOVERY: SCENARIO ONE
NO AGREEMENT
No recovery of lost profits unless
implied exclusive license can be shown
Subsidiary
Parent(Patent Owner)
Sales
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LOST PROFITS RECOVERY: SCENARIO TWO
NON-EXCLUSIVE LICENSE
No recovery of lost profits (Poly-America)
Parent
IP HoldingCompany
Sales
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EXCLUSIVE LICENSE
Patent owner and exclusive licensee are co-plaintiffs Co-plaintiffs can jointly recover full damages Royalty paid by subsidiary may be relevant in
calculating “reasonable royalty”
LOST PROFITS RECOVERY: SCENARIO THREE
Parent(IP Owner)
Subsidiary(Manufacturer/
Seller)
License
Royalty
Sales
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NON-EXCLUSIVE DISTRIBUTION AGREEMENT
Patent owner is only plaintiff
Patent owner can arguably recover “lost profits” from sale to subsidiary (but not from
subsidiary to third party)
LOST PROFITS RECOVERY: SCENARIO FOUR
Parent(IP Owner/
Manufacturer)
Subsidiary(Non-Exclusive
Distributor)Sale Re-Sale
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EXCLUSIVE DISTRIBUTION AGREEMENT
Patent owner and exclusive distributor are co-plaintiffs
Co-plaintiffs can jointly recover full damages
Transfer price may be relevant in calculating “reasonable” lost profits
LOST PROFITS RECOVERY: SCENARIO FIVE
Parent(IP Owner/
Manufacturer)
Subsidiary(ExclusiveDistributor)
Re-SaleSale
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LOST PROFITS RECOVERY: SCENARIO SIX
SERVICE AGREEMENT
All sales are booked to the patent owner IP owner is the only plaintiff
Sales of infringing product cause losses to patent owner
Parent(Patent Owner)
Subsidiary(Manufacturer/
Seller)
ContractSales
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RECOVERY OF LOST PROFITS:POTENTIAL SOLUTIONS
1. Structure the relationship so that the sales made by the “selling company” are booked to the IP-owning company
Service Agreement
IP-owning company is the only plaintiff
2. Name both the IP-owning company and the selling company as co-plaintiffs in the patent infringement suit
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INTERNAL TAX-IP AUDIT WHERE SHOULD THE IP BE PLACED WITHIN
THE CORPORATE ORGANIZATION?
WHAT SHOULD THE LEGAL RELATIONSHIP BE BETWEEN THE IP-OWNING COMPANY AND THE SELLING COMPANY?
1. TAX ISSUES2. LIABILITY ISSUES3. OTHER
DO THE INTRA-CORPORATE AGREEMENTS ACCURATELY CREATE THE OPTIMAL LEGAL RELATIONSHIP?