Have Your Cake And Eat It Too? Corporate Holding Structures May Limit Patent Infringement Remedies

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Who should own intellectual property assets, such as patents, created by your business? At first glance, this is a mundane choice between the operating entity or an IP holding company. Yet, far from inconsequential, the answer could significantly impact your ability to protect these valuable assets. The proper choice depends on your business, the likelihood you will be involved in an infringement lawsuit with your competitors and the remedies you would like to seek in such a lawsuit.

In a simpler world, the operating entity that makes and sells a patented technology would be the same entity that holds the patents. This operating entity could avail itself of the full range of remedies for a competitor’s patent infringement, including an injunction prohibiting the competitor from making or selling infringing products and “lost profit” damages that fully compensate the patentee for the infringement. But, we do not live in a simple world. Complex corporate structures are the norm, and these corporate structures often result in the separation of patent ownership from the operating entity. Whatever immediate benefits may flow from this separation, many organizations later discover that injunctive relief is unavailable in a lawsuit to enforce the patent, or that damages are limited to a lesser “reasonable royalty.”

Many organizations, including large multinationals, hold their patents within their U.S. operating entities. Many other organizations separate the entity that owns the patents from the entity that practices the patents. It is common for all patents for a group of related entities to be held by a single holding company. Another common structure is for a corporate parent to own the patents and for its subsidiaries to practice the patents. There are many good reasons for these structures, including tax benefits, ease of administration and protection of patent assets. In limited circumstances, these structures can be employed without losing the right to an injunction or damages for lost profits.

It is therefore important to consider the relationship between the entity that owns the patents and any related operating entities that hold a license to the patents. Only an exclusive licensee having “all substantial rights” to a patent may sue on its own. An exclusive licensee without all substantial rights can bring an infringement lawsuit, but the licensor must join the lawsuit. In either instance, an exclusive licensee that is an operating entity is entitled to all available injunctive and damages remedies, even though the patent is owned by a non-practicing related entity. A non-exclusive licensee cannot be a party to an infringement lawsuit, regardless of whether the licensor joins the case. If the non-exclusive licensee is the entity that practices the patent, it is unlikely that any entity will be able to get an injunction or lost profits damages.

There are many traps for the unwary in structuring these license arrangements. Courts are highly unlikely to find an exclusive license absent a clear written license; rather, they respect the corporate form no matter how close the actual relationship between the entities. Even if there is a written license agreement, courts will look to the substance of the agreement to ensure that the licensee is an exclusive licensee, or that the exclusive licensee has “all substantial rights.”

There are significant consequences if the patent plaintiff is not an operating entity that practices the patent. A patent plaintiff may be entitled to both equitable remedies (an injunction) and legal remedies (damages). The strongest available remedy for patent infringement is a permanent injunction barring the infringer from engaging in any infringing activities–such as making, selling, or importing products that practice the patent, or inducing others to do so-during the remainder of the term of the patent. With very few exceptions, an injunction is only available if the patent plaintiff also practices the patent.

Under the patent statute, a patent plaintiff that proves infringement of a utility patent (the type of patent that is most commonly asserted in patent litigation) is entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty . . .” Absent unique and compelling circumstances, a non-practicing holding company or related entity will be limited to this reasonable royalty measure of damages, which may be significantly less than the lost profits measure of damages available to operating entities. Litigants have engaged in many creative attempts to obtain more than a reasonable royalty for a non-operating plaintiff, but with very little success.

In sum, the general rule is that holding companies and related entities that do not practice the patents are not entitled to an injunction or lost profits, and an operating entity that holds a mere non-exclusive license lacks standing to sue. In deciding the best strategy for ownership and licensing of patent assets, organizations should consider these potential consequences for future patent enforcement. Finally, it is possible to assign patents to an operating entity prior to filing an infringement lawsuit. There are some negative consequences to doing so. For example, the operating entity may not be able to recover lost profits for the time prior to the assignment. Nonetheless, the operating entity will be in a far better position to obtain an injunction and lost profits moving forward.