SEPARATING PATENT OWNERSHIP FROM PRODUCT SALES: TAXES, 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. FergusonMayer, Brown, Rowe & Maw LLP

2  IP H OLDING C OMPANIES  IP Efficiencies  Tax Consequences REASONS FOR SEPARATING IP OWNERSHIP AND PRODUCT SALES Parent IP Holding Subsidiary Sales

4

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

6  B USINESS O R O THER C ORPORATE R EASONS REASONS FOR SEPARATING IP OWNERSHIP AND PRODUCT SALES Sales Subsidiary Sales Subsidiary Parent (IP Owner)

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

8 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?

9 INTRA-CORPORATE AGREEMENTS  N O AGREEMENT Subsidiary (IP Owner) Parent Sales

10 INTRA-CORPORATE AGREEMENTS  L ICENSE A GREEMENTS  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) Sales License Royalty Parent (IP Owner)

11  D ISTRIBUTION A GREEMENTS  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) SaleRe-sale Parent (IP Owner/ Manufacturer)

12  S ERVICE A GREEMENTS  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) Contract Parent (IP Owner) Sales

13 STANDING  P ATENT O WNER M UST B E A P LAINTIFF  E XCLUSIVE L ICENSEE C AN B E A C O -P LAINTIFF  E XCLUSIVE D ISTRIBUTOR C AN B E A C O -P LAINTIFF  N ON -E XCLUSIVE L ICENSEES O R D ISTRIBUTORS C ANNOT B E A C O -P LAINTIFF

14 THE POLY-AMERICA CASE  L OST P ROFITS  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)

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

16 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?

17 LOST PROFITS RECOVERY: SCENARIO ONE  N O A GREEMENT  No recovery of lost profits unless implied exclusive license can be shown Subsidiary Parent (Patent Owner) Sales

18 LOST PROFITS RECOVERY: SCENARIO TWO  N ON -E XCLUSIVE L ICENSE  No recovery of lost profits (Poly-America) Parent IP Holding Company Sales

19  E XCLUSIVE L ICENSE  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

20  N ON -E XCLUSIVE D ISTRIBUTION A GREEMENT  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

21  E XCLUSIVE D ISTRIBUTION A GREEMENT  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 (Exclusive Distributor) Re-Sale Sale

22 LOST PROFITS RECOVERY: SCENARIO SIX  S ERVICE A GREEMENT  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

23 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

24 INTERNAL TAX-IP AUDIT  W HERE S HOULD T HE IP B E P LACED W ITHIN T HE C ORPORATE O RGANIZATION?  W HAT S HOULD T HE L EGAL R ELATIONSHIP B E B ETWEEN T HE I P- O WNING C OMPANY A ND T HE S ELLING C OMPANY? 1.TAX ISSUES 2.LIABILITY ISSUES 3.OTHER  D O T HE I NTRA- C ORPORATE A GREEMENTS A CCURATELY C REATE T HE O PTIMAL L EGAL R ELATIONSHIP ?