United States: Foreign Parent Could Not Seek Lost Profits Based On Sales Lost By Its United States Subsidiary

Last Updated: June 17 2013
Article by Stanley M. Gibson

After Fujitsu Limited ("Fujitsu") filed a patent infringement action against Tellabs, Inc. ("Tellabs"), Tellabs filed a motion for summary judgment on the issue of lost profits. As explained by the district court, Fujitsu Limited, a Japanese corporation, is the sole owner of two United States patents that Fujitsu Limited asserted in the litigation, U.S. Patent No. 5,521,737 ("137 Patent") and U.S. Patent No. 5,526,163 ("163 Patent"). Although Fujitsu Limited owns the patents, which relate to telecommunications systems, Fujitsu Limited does not sell any telecommunications systems in the United States. Sales of Fujitsu Limited's patented telecommunications systems in the United States are made by a non-exclusive licensee, its wholly-owned United States subsidiary FNC, which is a California corporation and headquartered in Richmond, Texas.

Tellabs contended in its motion "that (1) Fujitsu Limited is not entitled to damages in the form of the lost profits because it sells no products in the United States and (2) Fujitsu Limited cannot claim the lost profits of its North American subsidiary and non-exclusive licensee, Fujitsu Network Communications, Inc." The district court explained that Fujitsu Limited sought to recover the profits that were allegedly lost by its domestic subsidiary, FNC, due to Tellabs' sales of the allegedly infringing systems pursuant to the 2005 Verizon and 2006 Quest contracts that Tellabs obtained.

To analyze whether Fujitsu could seek lost profits in this situation, the district court stated that "[t]he issue governing whether a parent company patent owner may be compensated under the damages theory of lost profits for its wholly-owned subsidiary's lost sales turns on whether the subsidiary's profits "flowed inexorably" to the patent-owner parent. Mars, 527 F.3d at 1367. The mere fact that the subsidiary's lost sales "may have caused harm" to the parent company is not sufficient, by itself, to establish lost profits damages. Id. at 1365."

As further explained by the district court to analyze the facts here, "Fujitsu Limited, a Japanese corporation, owns the patents-in-suit. FNC, a California corporation headquartered in Texas, is a separate entity from Fujitsu Limited but is its wholly-owned subsidiary. The sales in the United States of the Fujitsu FLASHWAVE 7500 operating system at issue are made only by FNC. FNC is a non-exclusive licensee of the Fujitsu Limited patents-in-suit. Fujitsu Limited has also licensed the patents-in-suit to IBM, Texas Instruments, and AT&T in the United States, as well as Hitachi and Nippon Telegraph and Telephone Corporation in Japan. Fujitsu Limited has never received any corporate dividends from FNC."

After analyzing the applicable law in detail on lost profits, the district court turned to the undisputed facts of this case. "Fujitsu Limited asserts that its lost profits theory of recovery is "what Rite-Hite allows: the profits it would have received 'but for' Tellabs infringement." [Dkt. No. 683, page 121 In the en banc opinion in Rite-Hite Corporation v. Kelley Co., Inc., 56 F.3d 1538 (Fed. Cir. 1994), Judge Lourie writing for the majority upheld certain of the district court's determinations on damages awarded to patent owner Rite-Hite, a manufacturer of devices to secure a vehicle to a loading dock to prevent the inadvertent separation of the vehicle from the dock during the loading and unloading of the vehicle, while vacating other portions of the district court's damages award. Specifically, the majority upheld the award of lost profits on Rite-Hite' s lost sales of certain of its unpatented restraints, "ADL-100 devices" that Rite-Hite would have been able to sell but for defendant's infringement, but vacated the district court's lost profit damages award for "unpatented dock levers" because the dock levers "were merely items sold by Rite-Hite together with the restraints for convenience and business advantage." Id. at 1551. The facts relating to the damages determination in Rite-Hite are not the same as the facts before the court in this case where a domestic subsidiary, non-exclusive licensee sells the patented products of its foreign parent corporation."

The district court found that based on these facts there was no transfer or "flow" of profits. "The facts are clear that none of the payments by FNC to Fujitsu Limited are the transfer of profits or the inexorable flow of profits from FNC to Fujitsu Limited, as the law discussed earlier in this opinion requires before a parent corporation patent holder may recover damages under the theory of profits lost by its non-exclusive licensee subsidiary as a result of patent infringement. The fact that Fujitsu Limited assigns 20 to 30 employees to work at FNC at all levels of FNC's operations, and the fact that customers or others do not appear to differentiate between Fujitsu Limited and FNC are not material to the lost profits issue. Moreover, the fee paid by FNC to Fujitsu Limited for use of the "Fujitsu" brand and the manufacturing royalty paid by FNC for photonics components that FNC does not purchase from Fujitsu Limited is more of an agreed upon inter-corporate penalty rather than the flow of profit."

The district court also noted that Fujitsu's tax avoidance strategy also did not show a flow of profits. "The fact that Fujitsu Limited periodically alters the price it charges FNC, which, of course, is tax deductible to FNC as a cost paid by FNC, does not convert Fujitsu Limited's tax avoidance strategy to the inexorable flow of profits required by Mars, 527 F.3d at 1367. Fujitsu Limited's tax strategy is designed to minimize the taxes Fujitsu Limited and FNC pay to governmental entities in their respective countries and is not a transfer of profits from FNC to Fujitsu Limited."

Finally, the district court noted that there was a need for additional precedent in this area of lost profits for a foreign patent owner with a wholly owned U.S. subsidiary. "On the discrete issue of lost profits damages, there is a need for additional precedent for purposes of offering guidance to foreign patent owners--and district courts--regarding the circumstances, if any, under which a foreign patent owner that does not sell any products in the U.S. market can nevertheless collect as damages the lost profits of its wholly-owned U.S. subsidiary, specifically when the foreign patent owner sells component parts of the patented device to its wholly-owned U.S. subsidiary for sale of the patented device in the U.S. market."

Accordingly, the district court granted the motion for summary judgment on Fujitsu's claim for lost profits. Nonetheless, given the unique nature of the facts and the need for additional guiding precedent, the district court certified the lost profit issue to the Federal Circuit.

Fujitsu Limited v. Tellabs, Inc., Case No. 09 C 4530 (N.D. Ill. May 23, 2013)

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Stanley M. Gibson
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