SEPARATING PATENT OWNERSHIP FROM PRODUCT SALES: TAXES, LOST PROFITS AND THE “RIGHT” PLAINTIFF James R. Ferguson Mayer, Brown, Rowe & Maw LLP Chicago, Illinois.

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

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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

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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

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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?