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Savvy manufacturers often consider transferring their patents to a patent-holding company. This transfer can allow a business to increase its focus on maximizing the return from its patents by shifting the responsibility of developing licensing programs from the manufacturer to the holding company. The transfer may also provide increased business efficiencies in having one organization perform all administrative tasks to maintain the patents and run licensing programs. Such transfers can also have favorable tax consequences. A risk exists, however, that these transfers may reduce the ability to recover the full scope of damages available for patent infringement. By transferring ownership of its patents to its holding company, a manufacturer may transact away its ability to recover lost-profit damages for any infringement occurring after the transfer. Without a later reassignment of the patent back to the manufacturer, the manufacturer may also transact away its right to participate in any suit to enforce the patent. The manufacturer may find itself sitting on the sidelines while its holding company seeks a recovery limited to a reasonable royalty. No reported cases have yet definitively analyzed the available damages for patent infringement when a patent-holding company owns the infringed patent and the infringement harms the manufacturer’s sales. Nonetheless, arguments can be made that under traditional patent law principles regarding standing and damages, the manufacturer and holding company may pay a heavy price for having transferred the infringed patent to the holding company. The price can materialize in at least four ways: The manufacturer, having retained only a nonexclusive license to the infringed patent, may lose its right to participate in an infringement suit seeking to enforce the patent. The manufacturer may also lose its right to recover the economic losses it personally sustains from the infringement. The manufacturer may also lose its right to seek preliminary injunctive relief to stop the irreparable harm it will personally suffer if a court does not enjoin the infringing activity during the lawsuit. A lower overall damage recovery for the infringement may result since the patent-holding company most likely may recover only reasonable royalty damages. As part of the typical transactions in setting up the patent-holding company, the manufacturer receives a grant-back patent license from its holding company. Practical considerations regarding the ability to license the patents to others usually limit the grant-back license to being a nonexclusive license. Here lies the source of the potential problems for the manufacturer’s ability to recover infringement damages later. NO STANDING TO SUE Nonexclusive licensees have no standing to seek relief for harm they directly suffer from infringement, even if they suffer more commercial and economic harm from the infringement than the patentee. (See Rite-Hite Corp. v. Kelley Co. (Fed. Cir. 1995); Ortho Pharmaceutical Corp. v. Genetics Institute Inc. (Fed. Cir. 1995).) Accordingly, the manufacturer, as a nonexclusive licensee, probably cannot join in suing to enforce the patent for infringing activity that occurs after it assigns its patents to its patent-holding company. The corporate distinctions between the manufacturer and the patent-holding company, which can lead to favorable tax consequences, now haunt the manufacturer. To recover its infringement damages, the manufacturer needs to be treated as one with the patent-holding company. However, this would violate settled corporate law doctrine from Carver v. Velodyne Acoustics Inc. (W.D. Wash. 2002), holding that one “may not . . . take advantage of the corporate form and simultaneously shun its disadvantages.” Courts have used this principle to reject a nonexclusive licensee’s efforts to disregard the corporate distinctions between it and a patentee corporation so that the licensee could recover infringement damages. Courts have also refused to ignore the distinction between a sole shareholder of a patentee corporation and the corporation to allow the sole shareholder to join in recovering infringement damages. (See Lans v. Digital Equipment Corp. (D.D.C. 1999), aff’d. (Fed. Cir. 2001).) YOU CAN’T HAVE IT BOTH WAYS In Lans, the district court instructed that a plaintiff may not rely on the assignee’s corporate separate legal distinctness when it provides a tax advantage but ignore it when it provides an adverse consequence to pursuing infringement claims, even when the plaintiff is the sole shareholder of the assignee corporation. The district court in Lans explained that “a person who has voluntarily adopted the corporate form to engage in business is precluded from asking courts to disregard that form merely because the person is disadvantaged by its use.” Accordingly, under traditional patent law, the manufacturer that assigns its patents to a patent-holding company and receives a grant-back nonexclusive license lacks standing to pursue any claims of infringement for any assigned patent and, therefore, cannot seek damages for the economic harm it suffers from infringement. Had the manufacturer not assigned the infringed patent, it would have had standing to sue in its own name for infringement and recover its lost profits for the infringement. Lacking standing, a manufacturer, absent a showing of equitable ownership, cannot personally move for a preliminary injunction to prevent the irreparable harm it may personally suffer from infringement. The irreparable harm could take the form of lost market share, lost customer goodwill or loss of reputation as a technology leader. The patent-holding company potentially could rely on the manufacturer’s irreparable harm to support its motion for a preliminary injunction. But the nonexclusive status of the license may minimize or even negate this reliance. If the patent-holding company has granted nonexclusive licenses to others, it may also have a difficult time in proving entitlement to a preliminary injunction. ONLY A REASONABLE ROYALTY A patent-holding company typically does not manufacture or sell any products. This traditionally defeats a claim for lost-profit damages. Thus, a patent-holding company may only seek a reasonable royalty as compensation for any infringement of the transferred patents. A reasonable royalty generally yields a lower monetary recovery than an award of lost profits. Even though the manufacturing company, as sole shareholder of the patent-holding company, will effectively share in any damages recovered by the patent-holding company, it will enjoy a smaller damage recovery than if it had not transferred the patent. A manufacturer could try to avert losing its ability to recover its lost-profit damages by asserting that as the sole shareholder of the holding company it holds an “equitable” title to the infringed patent. This equitable title should give it standing to join an infringement suit and recover its money damages. The chances of succeeding on this theory appear slim, however. Stock ownership may not suffice to create an equitable title in a patent, and therefore may not confer standing on the shareholder. (See Beam Laser Sys. Inc. v. Cox Communications Inc. (E.D. Va. 2000).) Even if a manufacturer could show equitable ownership, that status will not confer the right to seek compensatory money damages, but it may give standing to join the patentee in seeking injunctive relief. (See Arachnid Inc. v. Merit Indus. Inc. (Fed. Cir. 1991).) The manufacturer could try to rewrite history by getting a reassignment of the specific infringed patent. This reassignment, however, most likely will not permit the manufacturer to recover the profits it lost from infringement committed when the patent-holding company held title to the patent. The U.S. Supreme Court has explained that “the injury inflicted by an act of infringement falls upon the individual who owns the monopoly at the date of the infringement. It does not affect former owners whose interest had terminated before the infringement was committed, nor does it so directly prejudice a future owner that the law can recognize his loss and give him a pecuniary redress. (See Crown Die & Tool Co. v. Nye Toll & Machine Works, U.S. (1923).) A reassignment, therefore, only prospectively re-establishes the manufacturer’s right to damages. It does not retroactively create a right to seek damages personally sustained for infringement committed before the reassignment. Thus, the break in the manufacturer’s holding of legal title to the patent, created by its original assignment to the patent-holding company, appears incurably to doom its right to assert injury for infringement committed when it did not hold title to the patent. To bolster the attempt to rewrite history further, the manufacturer may also obtain an assignment from the patent-holding company of the right to sue for past infringement. This will permit the manufacturer to bring an infringement suit in its own name for all infringements of the patent. But this should not resurrect the manufacturer’s right to recover the lost-profit damages it personally suffered during the period that the patent-holding company held title to the infringed patent. As the assignee of the chose-in-action for past infringement, the manufacturer steps into the patent-holding company’s shoes. Because the patent-holding company did not make or sell a product that competed with the accused product, the holding company has no right to pursue lost-profit damages. As the assignee of the patent-holding company’s infringement claim, the manufacturer is also subject to the defense that the holding company’s failure to market a product precludes recovering lost profits. Accordingly, under the assignment of the right to sue for past infringement, the manufacturer may seek the reasonable-royalty damages the patent-holding company could have sought, but nothing further. A manufacturer may also argue that it holds an implied or de facto exclusive license from the patent-holding company. Success of this theory will depend on the specifics of the terms and conditions of the grant-back license. (See Mi-Jack Prods. Inc. v. Taylor Group Inc. (N.D. Ill. 1997).) Further, if the patent-holding company was formed with the purpose of securing licensing revenues by licensing third parties, it will be more difficult to prove that the manufacturer holds an implied exclusive license. SELECTIVE ASSIGNMENT If the tax laws and other considerations driving the desire to use a patent-holding company permit, a manufacturer may best protect its lost-profits rights by not blindly assigning its entire patent portfolio to its patent-holding company. The source of the manufacturer’s deprivation of lost-profits rights originates from its status as a nonexclusive license. Keeping the manufacturing company as the legal titleholder of the infringed patent would avoid this loss. A manufacturer, therefore, should consider retaining select patents that cover the corporation’s biggest-selling items, which have the highest profit margins and the greatest likelihood of being infringed by a competitor. Further, the manufacturer should only keep those patents for which it can prove entitlement to lost profits. For example, the manufacturer should not retain patents covering products having competing non-infringing alternatives. The existence of non-infringing alternatives greatly reduces, if not defeats, the ability to recover lost-profit damages. Finally, the corporation should keep only those patents where the difference between an expected lost-profits recovery and a reasonable-royalty recovery exceeds the financial benefits expected from transferring the patent to the patent-holding company. Naturally, before excluding any patents from a transfer to a patent-holding company, the manufacturer must confirm that holding back select patents will not destroy or unacceptably lessen any tax or other benefits the manufacturer expects to achieve by using a patent-holding company. By assigning its patents to a patent-holding company and receiving only a grant-back nonexclusive license, the manufacturer may lose the ability to recover lost-profit damages for the patents it assigns to the holding company. It may have to settle for damages measured by a reasonable royalty and paid to its patent-holding company. Whether the benefits realized by the manufacturer outweigh the risk of adverse consequences to the ability to collect infringement damages requires a patent-by-patent evaluation based on the individual circumstances of the manufacturer. In any event, a manufacturer should at least consider the possible consequences to its ability to recover infringement damages before transferring its entire patent portfolio to a holding company. This article originally appeared in The National Law Journal, a publication of American Lawyer Media.

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