No Lost Profits to Owner of Patent, Where Patent Was Licensed to and Used by Subsidiary

Mars, Incorporated v. Coin Acceptors, Inc., [2007-1409, -1436] (June 2, 2008) [LINN, Clevenger, Prost] The Federal Circuit affirmed in part, reversed in part, and remanded the district courts judgment, agreeing that Mars was not entitled to recover on a lost profits theory, that Mars’s subsidiary lacked standing prior to 1996, and that the reasonably royalty rate was correct, but disagreeing with the district court’s conclusion that Mars had standing to recover damages for the period between 1996 and 2003.
SIGNIFICANT: Lost profits are not available to non-practicing patent owner who licensed patent to subsidiary.
BRIEF: As to the availability of lost profits, LOF: “Availability of lost profits is a question of law reviewed without deference.” The Federal Circuit said that patent infringement is a tort. In patent cases, as in other commercial torts, damages are measured by inquiring: had the tortfeasor not committed the wrong, what would have been the financial position of the person wronged? The Federal Circuit said that there were other measures of damages besides lost profits and reasonable royalty, but that marks stipulated that it would only seek lost profits or a reasonable royalty, and was bound by its stipulation. “The correct measure of damages is a highly case-specific and fact-specific analysis.” Mars claims that, by virtue of the parent-subsidiary relationship and its consolidated financial statements, all the subsidiary’s lost profits were inherently lost profits of Mars. The Federal Circuit said that Mars identified no record evidence that it ever received or recognized any form of profit or revenue from the subsidiary apart from royalty payments. Thus the Federal Circuit concluded that Mars’s claim that it “inherently” lost profits when MEI lost profits is unsupported by the record, as the district court correctly concluded. The Federal Circuit said that id need not decide whether a parent company can recover on a lost profits theory when profits of a subsidiary actually do flow inexorably up to the parent.
Regarding motion to amend to add the subsidiary as a party, the Federal Circuit stated that only a patent owner or an exclusive licensee can have constitutional standing to bring an infringement suit; a non-exclusive licensee does not. Finding that another subsidiary also held a license, the Federal Circuit found that MEI was not an 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.
Regarding Mars standing, the Federal Circuit first noted that the plaintiff in an infringement action must be the person or persons in whom the legal title to the patent resided at the time of the infringement. Thus whether Mars had title depended upon the agreements. Construction of patent assignment agreements is a matter of state contract law. The first agreement, by its terms was governed by Delaware law, and the Federal Circuit held that it was a transfer from Mars to MEI. The second agreement, by its terms was governed by New York law, and the Federal Circuit held that it merely transferred the rights to sue for past infringements. Regarding the 7% reasonable royalty, defendant argued that the district court erred by awarding a reasonable royalty rate higher than the cost to Coinco of implementing acceptable noninfringing alternatives, that a reasonable royalty rate could not exceed 4%, in light of Mars’s representations to Inland Revenue. Finally, and finally that it was error to rely on incremental profit, rather than its operating profit, to calculate a reasonable royalty. The Federal Circuit rejected all three arguments. As to the first, the Federal Circuit said an infringer may be liable for damages, including reasonable royalty damages, that exceed the amount that the infringer could have paid to avoid infringement. As to the second argument, the Federal Circuit held that representations to a taxing authority were not representative of the mark. As to the last, the Federal Circuit said we have never held that any one profit accounting methodology is appropriate in all industries, for all companies, in all cases. The selection of the appropriate method of profit accounting in the circumstances is properly left to the broad discretion of the district court. Here, the district court heard competing expert testimony and found that a profitability analysis based on incremental profits was appropriate, and deferred to that finding.