Federal Circuit Clarifies Recovery for Lost Profits, Non-Exclusive Licensees: Parent Company Denied Recovery for Lost Profits of Subsidiary
By Jeff Gritton — Edited by Joshua Gruenspecht
Mars, Inc. v. Coin Acceptors, Inc.
Federal Circuit, June 2, 2008, No. 2007-1409
The Federal Circuit affirmed in part and vacated in part the District Court of New Jersey and remanded for recalculation of damages in a patent infringement suit.
The court affirmed the district court’s holding precluding Mars Inc. (“Mars”) from recovering damages on a lost profits theory, holding that Mars could not recover for its wholly owned subsidiary’s lost profits. The court stopped short of answering the question of whether a parent company could ever recover for its subsidiary’s lost profits, limiting its holding to the facts of the case at issue.
The court also affirmed the district court’s judgment denying Mars’s motion to amend its complaint to add its subsidiary Mars Electronics International (“MEI”) as a co-plaintiff in its action against Coin Acceptors, Inc. (“CoinCo”) for infringements occurring before 1996, agreeing with the lower court that MEI lacked constitutional standing as a non-exclusive licensee.
The Federal Circuit vacated the lower court’s conclusion that Mars had standing to recover damages for the period between 1996 and 2003. Because Mars had assign its title to the patent to MEI in 1996, it lacked standing for that period of time.
Finally, the court affirmed the district court’s assessment of a reasonable royalty rate for the calculation of damages related to the infringement. Because Mars’s lack of standing for the period from 1996 to 2003 changed the royalty base, the court remanded for recalculation of damages for the period prior to 1996.
The Patent Hawk provides a “sassy” take.
History: In 1990 Mars sued CoinCo, alleging infringement of two of its patents covering vending machine coin changers. Fifteen years later, in 2005, the Federal Circuit affirmed the District Court of New Jersey’s ruling of liability for infringement and a trial for damages was ordered. The determination of damages was complicated by multiple factors. First, Mars was not the actual seller of the coin changers, instead licensing its patents to MEI, its wholly owned subsidiary. Second, during the long trial over liability, a series of events occurred which affected the calculation of damages: In 1992 the first of Mars’s patents expired. On March 31, 1994, CoinCo introduced a noninfringing alternative coin changer. On Jan 1, 1996, Mars transferred to MEI its entire interest in the relevant patents in order to resolve a tax dispute in the UK. And on July 1, 2003, the second of Mars’s patents expired. Mars sought lost profits, or at a minimum a reasonable royalty, through March 31, 1994 (up to the introduction of the noninfringing alternative) and a reasonable royalty from April 1, 1994 through July 1, 2003 (when the last of its patents expired). The district court granted summary judgment denying lost profits to Mars and applied a reasonable royalty rate of 7% through the entire period up to July 1, 2003.
Lost Profits: By statute a party that has suffered harm is at least entitled to a reasonable royalty, though a party may argue that this royalty does not fully compensate them for the infringement. 35 U.S.C. § 284 (2000). One set of additional damages that can be awarded are those for lost profits, although the list of situations in which this is appropriate is limited by case law. See, e.g., Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978). Here, the Federal Circuit extended Poly-America L.P. v. GSE Licensing Technology, which held that the patentee could not obtain lost profits of a sister corporation when those profits do not flow inexorably to the patentee, to wholly owned subsidiaries. 383 F.3d 1303 (Fed. Cir. 2004). Mars received licensing royalties based on gross sales regardless of MEI’s profit, and thus was not entitled to an award for lost profits.
Standing: There were two controversies over standing. The first controversy involved MEI, Mars’s subsidiary. In order to recover lost profits from the period before the 1994 introduction of the new coin changer, Mars had sought to amend its complaint to add MEI as a co-plaintiff, a motion denied in district court because of MEI’s lack of standing. The Federal Circuit upheld the district court, holding that MEI was neither the patent holder nor an exclusive licensee before 1994, and therefore it did not have standing to sue for infringement.
The second controversy involved Mars’s own standing. The district court had held that Mars did lost standing on Jan 1, 1996 when it transferred its patents to MEI, but it allowed Mars to remedy that deficiency by immediately transferring the patents from MEI back to Mars. On appeal, the Federal Circuit held that the language of the 2006 post-trial agreement between MEI and Mars clearly indicated an intent to transfer the right to litigate over the patents but not title to the patents themselves. This, the court said, was insufficient to remedy Mars’s lack of standing as a non-titleholder in the patent.