United States: Subsidiary Has Standing To Join Lawsuit As Implied Exclusive Licensee, But Parent Cannot Recover Lost Profits Of Subsidiary From Patent Infringer

Abstract

Even in the absence of a written patent license agreement, a parent company successfully showed that its subsidiary had an implied exclusive license and therefore had standing to join the parent company as a co-plaintiff in a patent infringement case. According to the magistrate judge, if a subsidiary company has the right to practice the invention and an express or implied promise that all others will be excluded from practicing the invention, it has standing as a co-plaintiff. The magistrate judge also held, however, that the parent company could not recover the subsidiary's lost profits from the infringer.

Many companies place ownership of their intellectual property in entities other than the operating entities that actually practice the intellectual property for various fiscal reasons. This strategy can have unintended consequences for the enforcement of patents. For example, such an ownership strategy may impact which corporate entities can join in any suit for patent infringement. In addition, it may impact the ability for a corporation to collect lost profits damages from an infringer.

Recently, in a patent infringement suit brought by Mars against TruRX, a magistrate judge in Texas found that Mars' subsidiary, Petcare, was an exclusive implied licensee with standing to sue as a co-plaintiff but that Mars could not recover lost profits for products sold by Petcare because Mars itself did not sell those products.

Background

Mars, Inc. ("Mars") sued TrueRX, LLC, True Science Holdings, LLC, and Natural Polymer International Corporation1 (the "Defendants") for infringing two of its patents directed to breath-freshening pet treats. Two years into the suit, Mars amended the complaint to add its wholly-owned subsidiary, Mars Petcare US, Inc. ("Petcare"), as a co-plaintiff. Mars did not make or sell products covered by the patents, but Petcare and other subsidiaries did. Mars discovered that Petcare had lost profits due to Defendants' directly competing products and sought Petcare's lost profits from Defendants.

Defendants moved to dismiss Petcare from the litigation, arguing that Petcare did not have standing to be a plaintiff in the case because it was not a licensee, much less an exclusive licensee, of the patents. Defendants also argued that Mars could not show that it lost profits because Mars itself did not make or sell any products. Defendants challenged Mars' ability to recover lost profits on products sold by its subsidiary, Petcare.

Mars responded that as an exclusive licensee, Petcare had standing to be a co-plaintiff in the case. Mars also argued that it should be able to claim lost profits for products sold by its subsidiaries because the lost profits of its subsidiaries "inexorably flowed" to Mars.

The Mars Decision

The magistrate judge first addressed the issue of Petcare's standing as a co-plaintiff. The general rule is that only a patentee can bring a suit for patent infringement. However, this general rule has a notable exception—exclusive licensees have standing to sue as co-plaintiffs with the patentee. Nonexclusive licensees, conversely, do not have standing to join a suit as co-plaintiffs. To be an exclusive licensee, the party must have received: (1) the right to practice the invention and (2) an express or implied promise that others will be excluded from practicing the invention.

Defendants argued that Petcare was not a licensee at all because there was no document showing the grant of a license. And they argued that even if Petcare was a licensee, Mars could not show that Petcare was an exclusive licensee of the patent.

The magistrate judge rejected Defendants' argument that a written license was required since licenses can be either expressly granted in writing, or implied. The magistrate found that Mars gave Petcare an implied license to practice the patent, selling breath-freshening pet treats to a specific market—food, drug, and mass market stores (the "FDM channel"). Even though Petcare did not make royalty payments to Mars, the magistrate found evidence that the implied license was exclusive because no other Mars subsidiary or outside company held a license to sell products covered by the patents in the FDM channel. That, coupled with the corporate relationship between Mars and its subsidiaries and Mars' marketing and sales strategy, was sufficient to show that Petcare was an exclusive licensee with an implied right to exclude others from selling products that practiced Mars' patents in the FDM channel.

On the issue of lost profits, the magistrate judge found that Mars could not recover lost profits from an infringer based on the lost sales of its subsidiaries due to patent infringement because Mars itself did not sell those products. Despite Mars' arguments otherwise, the magistrate noted that the so-called "inexorable flow" test of a subsidiary's profits flowing to a parent company was not the Federal Circuit's settled standard for determining whether a parent company patent owner could obtain lost profits for its subsidiary's lost sales, and that no matter how profits flow between related companies, a parent company cannot recover lost profits for products that it does not itself sell.

Strategy and Conclusion

This case provides several insights in establishing and documenting legal relationships between a licensor and licensee and the effect of these relationships on the ability to recover lost profits for infringement, particularly in licensing situations between parent and subsidiary companies, where the relationships may tend to be more informal.

An exclusive licensee can establish standing as a co-plaintiff whether the patent license in question is express or implied. In a parent-subsidiary situation and in the absence of an express license, the court will look for evidence that the relationship between the parent and subsidiary, the market, and the corporate strategy to determine whether the license is exclusive.

Even though standing does not require preparing written license agreements between a parent company and its subsidiaries, a written license agreement avoids the issue and uncertainty of proving that an implied license exists.

No matter how the profits flow between parent and subsidiary companies, parent companies may not be able to recover lost profits on sales of patented products lost by a subsidiary due to infringement by a competitor if the parent company does not itself sell the patented products.

So, a parent company that does not sell any of the patented products itself should consider having an exclusive license agreement with its subsidiary in writing so that the subsidiary would have standing to bring suit on its own behalf without joining the patent so the subsidiary could attempt to recover its own lost profits.

Footnotes

1 The Mars v. TruRX  opinion may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/MarsIncvTruRXLLCetal6_13_cv_00526.pdf.

Previously published by LES Insights

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