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SEPARATING PATENT OWNERSHIP FROM PRODUCT SALES: TAXES, LOST PROFITS AND THE “RIGHT” PLAINTIFF

SEPARATING PATENT OWNERSHIP FROM PRODUCT SALES: TAXES, LOST PROFITS AND THE “RIGHT” PLAINTIFF. LAW SEMINARS INTERNATIONAL December 6, 2006. James R. Ferguson Mayer, Brown, Rowe & Maw LLP Chicago, Illinois. © 2006 James R. Ferguson Mayer, Brown, Rowe & Maw LLP. REASONS FOR SEPARATING IP

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SEPARATING PATENT OWNERSHIP FROM PRODUCT SALES: TAXES, LOST PROFITS AND THE “RIGHT” PLAINTIFF

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  1. SEPARATING PATENT OWNERSHIP FROM PRODUCT SALES: TAXES, LOST PROFITS AND THE “RIGHT” PLAINTIFF LAW SEMINARS INTERNATIONAL December 6, 2006 James R. Ferguson Mayer, Brown, Rowe & Maw LLP Chicago, Illinois © 2006 James R. Ferguson Mayer, Brown, Rowe & Maw LLP

  2. REASONS FOR SEPARATING IP OWNERSHIP AND PRODUCT SALES  IP HOLDING COMPANIES  IP Efficiencies  Tax Consequences Parent Sales IP Holding Subsidiary

  3. REASONS FOR SEPARATING IP OWNERSHIP AND PRODUCT SALES  ACQUISITIONS  The acquired company has patents and/or licenses that it continues to hold as a new subsidiary of the parent Parent Sales Acquired Subsidiary (IP Owner)

  4. REASONS FOR SEPARATING IP OWNERSHIP AND PRODUCT SALES  BUSINESS OR OTHER CORPORATE REASONS Parent (IP Owner) Sales Subsidiary Sales Subsidiary

  5. REASONS FOR SEPARATING IP OWNERSHIP AND PRODUCT SALES LICENSE FROM A THIRD PARTY  LICENSEE DOES NOT SELL THE PRODUCT Parent (Licensee) Third Party Patent Owner License Subsidiary Sales

  6. 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?

  7. INTRA-CORPORATE AGREEMENTS NOAGREEMENT Parent Sales Subsidiary (IP Owner)

  8. 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 Parent (IP Owner) Subsidiary (Manufacturer/ Seller) Sales License Royalty

  9. INTRA-CORPORATE AGREEMENTS  DISTRIBUTION AGREEMENTS  IP owner sells product to distributor  IP owner is often the manufacturer  Distributor re-sells product on its own behalf  Transfer Pricing Parent (IP Owner/ Manufacturer) Subsidiary (Distributor) Sale Re-sale

  10. INTRA-CORPORATE AGREEMENTS  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 Parent (IP Owner) Contract Subsidiary (Manufacturer/Seller) Sales

  11. 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

  12. 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)

  13. THE POLY-AMERICA CASE Parent SUBSIDIARY A SUBSIDIARY B Patent Owner Manufacturer/ Seller Sales Non-Exclusive License No “Lost Profits” Recovery

  14. 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?

  15. LOST PROFITS RECOVERY: SCENARIO ONE NO AGREEMENT  No recovery of lost profits unless implied exclusive license can be shown Parent (Patent Owner) Subsidiary Sales

  16. LOST PROFITS RECOVERY: SCENARIO TWO NON-EXCLUSIVE LICENSE  No recovery of lost profits (Poly-America) Parent Sales IP Holding Company

  17. LOST PROFITS RECOVERY: SCENARIO THREE  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” Parent (IP Owner) Subsidiary (Manufacturer/ Seller) Sales License Royalty

  18. LOST PROFITS RECOVERY: SCENARIO FOUR  NON-EXCLUSIVEDISTRIBUTION AGREEMENT  Patent owner is only plaintiff  Patent owner can arguably recover “lost profits” from sale to subsidiary (but not from subsidiary to third party) Parent (IP Owner/ Manufacturer) Subsidiary (Non-Exclusive Distributor) Re-Sale Sale

  19. LOST PROFITS RECOVERY: SCENARIO FIVE  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 Parent (IP Owner/ Manufacturer) Subsidiary (Exclusive Distributor) Sale Re-Sale

  20. LOST PROFITS RECOVERY: SCENARIO SIX SERVICEAGREEMENT  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) Contract Sales

  21. 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

  22. INTERNAL TAX-IP AUDIT WHERE SHOULDTHE IP BE PLACED WITHIN THE CORPORATE ORGANIZATION?  WHAT SHOULD THE LEGAL RELATIONSHIP BE BETWEEN THE IP-OWNING COMPANY AND THE SELLING COMPANY? 1. TAX ISSUES 2. LIABILITY ISSUES 3. OTHER  DO THEINTRA-CORPORATE AGREEMENTS ACCURATELY CREATE THE OPTIMAL LEGAL RELATIONSHIP?

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