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Savvy manufacturers often consider transferring theirpatents to a patent-holding company. This transfer can allow a business toincrease its focus on maximizing the return from its patents by shifting theresponsibility of developing licensing programs from the manufacturer to theholding company. The transfer may also provide increased business efficienciesin having one organization perform all administrative tasks to maintain thepatents and run licensing programs. Such transfers can also have favorable taxconsequences. A risk exists, however, that these transfers may reduce theability to recover the full scope of damages available for patent infringement.By transferring ownership of its patents to its holding company, a manufacturermay transact away its ability to recover lost-profit damages for anyinfringement occurring after the transfer. Without a later reassignment of thepatent back to the manufacturer, the manufacturer may also transact away itsright to participate in any suit to enforce the patent. The manufacturer mayfind itself sitting on the sidelines while its holding company seeks a recoverylimited to a reasonable royalty. No reported cases have yet definitively analyzed theavailable damages for patent infringement when a patent-holding company ownsthe infringed patent and the infringement harms the manufacturer’s sales.Nonetheless, arguments can be made that under traditional patent-law principlesregarding standing and damages, the manufacturer and holding company may pay aheavy price for having transferred the infringed patent to the holding company. The price can materialize in at least four ways. First, themanufacturer, having retained only a nonexclusive license to the infringedpatent, may lose its right to participate in an infringement suit seeking toenforce the patent. Second, the manufacturer may also lose its right to recoverthe economic losses it personally sustains from the infringement. Third, themanufacturer may also lose its right to seek preliminary injunctive relief tostop the irreparable harm it will personally suffer if a court does not enjointhe infringing activity during the lawsuit. Finally, a lower overall damage recoveryfor the infringement may result since the patent-holding company most likelymay recover only reasonable-royalty damages. As part of the typical transactions in setting up thepatent-holding company, the manufacturer receives a grant-back patent licensefrom its holding company. Practical considerations regarding the ability tolicense the patents to others usually limit the grant-back license to being anonexclusive license. Here lies the source of the potential problems for themanufacturer’s ability to recover infringement damages later. NO STANDING TO SUE? Nonexclusive licensees have no standing to seek relief forharm they directly suffer from infringement, even if they suffer morecommercial and economic harm from the infringement than the patentee. Rite-HiteCorp. v. Kelley Co., 56 F.3d 1538, 1553-54 (Fed. Cir. 1995) (en banc); OrthoPharmaceutical Corp. v. Genetics Institute Inc., 52 F.3d 1026, 1031 (Fed.Cir. 1995). Accordingly, the manufacturer, as a nonexclusive licensee, probablycannot join in suing to enforce the patent for infringing activity that occursafter it assigns its patents to its patent-holding company. The corporate distinctions between the manufacturer and thepatent-holding company, which can lead to favorable tax consequences, now hauntthe manufacturer. To recover its infringement damages, the manufacturer needsto be treated as one with the patent-holding company. However, this wouldviolate settled corporate law doctrine holding that one “may not … takeadvantage of the corporate form and simultaneously shun itsdisadvantages.” Carver v. Velodyne Acoustics Inc., 202 F. Supp. 2d1147, 1149 (W.D. Wash. 2002). Courts have used this principle to reject a nonexclusivelicensee’s efforts to disregard the corporate distinctions between it and apatentee corporation so that the licensee could recover infringement damages. Id. Courts have also refused to ignore the distinction between a soleshareholder of a patentee corporation and the corporation to allow the soleshareholder to join in recovering infringement damages. Lans v. DigitalEquipment Corp., 84 F. Supp. 2d 112 (D.D.C. 1999), aff’d, 252 F.3d 1320,1328 (Fed. Cir. 2001). YOU CAN’T HAVE IT BOTH WAYS In Lans, the district court instructed that aplaintiff may not rely on the assignee’s corporate separate legal distinctnesswhen it provides a tax advantage, but ignore it when it provides an adverseconsequence to pursuing infringement claims, even when the plaintiff is thesole shareholder of the assignee corporation. Id. at 121 n.8. The districtcourt in Lans explained that “a person who has voluntarily adoptedthe corporate form to engage in business is precluded from asking courts todisregard that form merely because the person is disadvantaged by itsuse.” Id. at 121 n.10. Accordingly, under traditional patent law, the manufacturerthat assigns its patents to a patent-holding company and receives a grant-backnonexclusive license lacks standing to pursue any claims of infringement forany assigned patent, and therefore cannot seek damages for the economic harm itsuffers from infringement. Had the manufacturer not assigned the infringedpatent, it would have had standing to sue in its own name for infringement andrecover its lost profits for the infringement. Lacking standing, a manufacturer, absent a showing ofequitable ownership, cannot personally move for a preliminary injunction toprevent the irreparable harm it may personally suffer from infringement. Theirreparable harm could take the form of lost market share, lost customergoodwill or loss of reputation as a technology leader. The patent-holdingcompany potentially could rely on the manufacturer’s irreparable harm tosupport its motion for a preliminary injunction. But the nonexclusive status ofthe license may minimize or even negate this reliance. If the patent-holdingcompany has granted nonexclusive licenses to others, it may also have adifficult time in proving entitlement to a preliminary injunction. ONLY A REASONABLE ROYALTY? A patent-holding company typically does not manufacture orsell any products. This traditionally defeats a claim for lost-profit damages. Rite-Hite,56 F.3d at 1548. Thus, a patent-holding company may only seek a reasonableroyalty as compensation for any infringement of the transferred patents. Areasonable royalty generally yields a lower monetary recovery than an award oflost profits. Even though the manufacturing company, as sole shareholder of thepatent-holding company, will effectively share in any damages recovered by thepatent-holding company, it will enjoy a smaller damage recovery than if it hadnot transferred the patent. A manufacturer could try to avert losing its ability torecover its lost-profit damages by asserting that as the sole shareholder ofthe holding company it holds an “equitable” title to the infringedpatent. This equitable title should give it standing to join an infringementsuit and recover its money damages. The chances of succeeding on this theory appearslim, however. Stock ownership may not suffice to create an equitable title ina patent, and therefore may not confer standing on the shareholder. BeamLaser Sys. Inc. v. Cox Communications Inc., 117 F. Supp. 2d 515, 520 (E.D.Va. 2000). Even if a manufacturer could show equitable ownership, thatstatus will not confer the right to seek compensatory money damages, but it maygive standing to join the patentee in seeking injunctive relief. ArachnidInc. v. Merit Indus. Inc., 939 F.2d 1574, 1578-80 (Fed. Cir. 1991). The manufacturer could try to rewrite history by getting areassignment of the specific infringed patent. This reassignment, however, mostlikely will not permit the manufacturer to recover the profits it lost frominfringement committed when the patent-holding company held title to thepatent. The U.S. Supreme Court has explained that “the injury inflicted byan act of infringement falls upon the individual who owns the monopoly at thedate of the infringement. It does not affect former owners whose interest hadterminated before the infringement was committed, nor does it so directlyprejudice a future owner that the law can recognize his loss and give him apecuniary redress.” Crown Die & Tool Co. v. Nye Toll & MachineWorks, 261 U.S. 24, 41 (1923). A reassignment, therefore, only prospectivelyre-establishes the manufacturer’s right to damages. It does not retroactivelycreate a right to seek damages personally sustained for infringement committedbefore the reassignment. Thus, the break in the manufacturer’s holding of legaltitle to the patent, created by its original assignment to the patent-holdingcompany, appears incurably to doom its right to assert injury for infringementcommitted when it did not hold title to the patent. To bolster the attempt to rewrite history further, themanufacturer may also obtain an assignment from the patent-holding company ofthe right to sue for past infringement. This will permit the manufacturer tobring an infringement suit in its own name for all infringements of the patent.But this should not resurrect the manufacturer’s right to recover thelost-profit damages it personally suffered during the period that thepatent-holding company held title to the infringed patent. As the assignee of the chose-in-action for pastinfringement, the manufacturer steps into the patent-holding company’s shoes.Because the patent-holding company did not make or sell a product that competedwith the accused product, the holding company has no right to pursuelost-profit damages. As the assignee of the patent-holding company’sinfringement claim, the manufacturer is also subject to the defense that theholding company’s failure to market a product precludes recovering lostprofits. Accordingly, under the assignment of the right to sue for pastinfringement, the manufacturer may seek the reasonable-royalty damages thepatent-holding company could have sought, but nothing further. A manufacturer may also argue that it holds an implied orde facto exclusive license from the patent-holding company. Success of this theorywill depend on the specifics of the terms and conditions of the grant-backlicense. See, e.g., Mi-Jack Prods. Inc. v. Taylor Group Inc., No. 96 C7850, 1997 WL 441796, *8 (N.D. Ill. July 30, 1997). Further, if thepatent-holding company was formed with the purpose of securing licensingrevenues by licensing third parties, it will be more difficult to prove thatthe manufacturer holds an implied exclusive license. SELECTIVE ASSIGNMENT If the tax laws and other considerations driving the desireto use a patent-holding company permit, a manufacturer may best protect itslost-profits rights by not blindly assigning its entire patent portfolio to itspatent-holding company. The source of the manufacturer’s deprivation oflost-profits rights originates from its status as a nonexclusive license.Keeping the manufacturing company as the legal title holder of the infringedpatent would avoid this loss. A manufacturer, therefore, should consider retaining selectpatents that cover the corporation’s biggest-selling items, which have thehighest profit margins and the greatest likelihood of being infringed by acompetitor. Further, the manufacturer should only keep those patents that itcan prove entitlement to lost profits. For example, the manufacturer should notretain patents covering products having competing noninfringing alternatives.The existence of noninfringing alternatives greatly reduces, if not defeats,the ability to recover lost-profit damages. Finally, the corporation should keep only those patents wherethe difference between an expected lost-profits recovery and areasonable-royalty recovery exceeds the financial benefits expected fromtransferring the patent to the patent-holding company. Naturally, beforeexcluding any patents from a transfer to a patent-holding company, themanufacturer must confirm that holding back select patents will not destroy orunacceptably lessen any tax or other benefits the manufacturer expects toachieve by using a patent-holding company. By assigning its patents to a patent-holding company, andreceiving only a grant-back nonexclusive license, the manufacturer may lose theability to recover lost-profit damages for the patents it assigns to theholding company. It may have to settle for damages measured by a reasonableroyalty and paid to its patent-holding company. Whether the benefits realizedby the manufacturer outweigh the risk of adverse consequences to the ability tocollect infringement damages requires a patent-by-patent evaluation based onthe individual circumstances of the manufacturer. In any event, amanufacturer should at least consider the possible consequences to its abilityto recover infringement damages before transferring its entire patent portfolioto a holding company. Robert A. Matthews Jr. is a partner in the Reston, Va., officeof Washington’s Finnegan, Henderson, Farabow, Garrett & Dunner (www.finnegan.com). If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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