Mars Attacks: The Agony of Lost Profits and the Ecstasy of Reasonable Royalties Tom Engellenner Nutter McClennen & Fish LLP World Trade Center West 155 Seaport Boulevard Boston, Massachusetts 02210 Telephone 617.439.2000 www.nutter.com Overview Mars Incorporated and Mars Electronics Int l. (MEI) v Coin Acceptors, Inc. 527 F. 3d 1359 (CAFC 2008) Nutter McClennen & Fish LLP www.nutter.com 2 1
Overview Statutory Basis for Patent Infringement Damages Standing to Assert Lost Profits Determination of Damages when the Plaintiff is not entitled to Lost Profits Nutter McClennen & Fish LLP www.nutter.com 3 Background 35 U.S.C. 284 Patent Infringement Damages. Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. Nutter McClennen & Fish LLP www.nutter.com 4 2
Background Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978). For lost profits the Patentee must prove four factors: (1) a demand for the products covered by the patent; (2) an absence of acceptable non-infringing substitutes to the patented product or process; (3) that the patentee possessed the manufacturing and marketing capabilities to exploit the demand; and (4) the amount of profit the patentee would have made had the infringement not occurred. Nutter McClennen & Fish LLP www.nutter.com 5 Background Lost Profits also requires a Plaintiff with proper standing to assert losses due to the Defendant s infringement Patent Owner: ~~~~~~~~~~~~>Yes Exclusive Licensee: ~~~~~~~>Yes Non-exclusive Licensee: ~~~> No Nutter McClennen & Fish LLP www.nutter.com 6 3
Tax Benefits of an IP Holding Company Assume $100 Million in gross profits State corporate income tax ~ 10% Federal corporate income tax ~ 35% royalty rate 5 percent Allows Company to shelter $5 Million from a combined tax burden of 45% Savings: ~ $3 Million Nutter McClennen & Fish LLP www.nutter.com 7 The Intra-Corporate Relationship Non-exclusive license Operating Company Delaware IP Holding Corp Royalties Nutter McClennen & Fish LLP www.nutter.com 8 4
The Technology Separation of Coins of Different Denominations based on AC Conductivity Measurements at various frequencies Nutter McClennen & Fish LLP www.nutter.com 9 The Technology Nutter McClennen & Fish LLP www.nutter.com 10 5
Mars v Coin Acceptors Procedural History: Mars was the owner of the patents-in-suit MEI was a wholly owned subsidiary of Mars with a license to make coin recognition systems in return for royalties Mars sued Coin Acceptors (Coinco) in 1990 and wins on infringement and validity issues in a bifurcated trial ten years later Nutter McClennen & Fish LLP www.nutter.com 11 Mars v Coin Acceptors Procedural History (continued): Prior to the damages phase, Coinco moved for partial SJ on the lost profits issue. Mars moved for leave to add MEI as co-plaintiff District Court granted Coinco s partial SJ motion, denying lost profits because Mars didn t manufacture coin recognition machines and denying leave to add MEI Nutter McClennen & Fish LLP www.nutter.com 12 6
Mars v Coin Acceptors Procedural History (continued): Mars sought reconsideration based on a 1996 assignment to MEI and again moved to add MEI as co-plaintiff. (The 1996 agreement was part of a settlement with the UK tax authority.) District Court permitted joinder of MEI holding that the 1996 agreement essentially assigned all of Mars interests to MEI and MEI therefore had standing to pursue claims from 1996 forward Nutter McClennen & Fish LLP www.nutter.com 13 Mars v Coin Acceptors Procedural History (continued): In 2006 Mars and MEI sign another agreement essentially folding MEI back into Mars and giving Mars the right to sue for past infringements. After a damages bench trial, the District Court held that the 2006 agreement gave Mars the right to damages during the period MEI owned the patents but it still couldn t seek lost profits. Instead, Court set damages at a 7% royalty rate. Nutter McClennen & Fish LLP www.nutter.com 14 7
Mars v Coin Acceptors Issues before the CAFC: Whether Mars was entitled to lost profits; Whether MEI had standing to recover damages incurred prior to 1996 Whether Mars had standing to recover damages incurred from 1996 to 2003 Whether the Court erred imposing a 7% rate Nutter McClennen & Fish LLP www.nutter.com 15 Mars v Coin Acceptors CAFC Holdings (on lost profits): Mars claim that it inherently lost profits when its subsidiary lost profits was not supported by the record, hence, no lost profits are not avail MEI lacked standing prior to 1996 because it was not an exclusive licensee. (Another Mars subsidiary had rights in the U.S. as well.) Both Mars and MEI lacked standing subsequent to 1996 (because Mars transferred the right to sue for past infringement but not title to the patents.) Nutter McClennen & Fish LLP www.nutter.com 16 8
Mars v Coin Acceptors CAFC Holding (on damages): Despite evidence that the intra-company royalty rate paid to Mars was 4% and the cost of adopting a non-infringing alternative was significantly lower than the awarded damages, the CFAC affirmed the 7 % royalty rate. The use of an incremental profit rather than operating profit analysis was not error. remanded for recalculation based on Mars lack of standing from 1996 to 2003. Nutter McClennen & Fish LLP www.nutter.com 17 Late Breaking News St. Louis Business Journal January 9, 2009: Coin Acceptors Inc., (Coinco) a St. Louis company that was ordered to pay nearly $27 million in a patent litigation case, has filed a legal malpractice lawsuit against its former attorneys. Coinco s lawyers allegedly advised the company that its products did not infringe on the patents owned by Mars and, additionally, that the patents were invalid. because Coinco had invented an identical device before Mars Coinco alleges that the professional standard of care required by lawyers was breached by failing to advise Coinco it should cease and desist in making the alleged infringing coin acceptors and failing to tell Coinco that they were potential witnesses in the litigation and therefore could not serve as trial counsel. Nutter McClennen & Fish LLP www.nutter.com 18 9
The End Thank you Tom Engellenner Nutter, McClennen & Fish, LLP Boston Nutter McClennen & Fish LLP www.nutter.com 19 10