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Issue 106 | September 12, 2003
The Downside of Patent Holding Companies
 The June 16, 2003 issue of the "National Law Journal" presents a thought-provoking article on the downside of using patent holding companies in order to minimize corporate tax liabilities where the corresponding operating company is not an exclusive licensee. Corporate entities that use patent holding companies may want to review their subsidiary, grant-back licensing agreements for exclusivity in order to avoid possibly forfeiting lost-profits recovery for patent infringement. Otherwise, the corporate family may have to settle for a mere reasonable royalty paid to the holding company.

The article notes that, under Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir. 1995) (en banc), nonexclusive licensees have no standing to seek relief for harm that they suffer from infringement and "probably cannot join in suing to enforce the patent for infringing activity." Therefore, in order to recover money damages, the operating company would need to be treated as one with the patent-holding company. However, at least one court has rejected a nonexclusive licensee's efforts to disregard the corporate distinctions between it and a patentee corporation so that the licensee could recover infringement damages because one "may not...take advantage of the corporate form and simultaneously shun its disadvantages." Carver v. Velodyne Acoustics Inc., 202 F.Supp. 2d 1147, 1149 (W.D. Wash. 2002). According to the article, courts have also refused to ignore the distinction between a sole shareholder of a patentee corporation and the corporation to allow the sole shareholder to join in recovering infringement damages. Lans v. Digital Equipment Corp., 84 F.Supp. 2d 112 (D.D.C. 1999), aff'd, 252 F.3d 1320, 1328 (Fed. Cir. 2001).

In light of these decisions, the article concludes that operating companies should "consider retaining select patents the corporations biggest-selling items, which have the highest profit margins and the greatest likelihood of being infringed by a competitor... then keep only those patents that it can prove entitlement to lost profits." Operating companies should also "not retain patents covering products having competing noninfringing alternatives since the existence of noninfringing alternatives greatly reduces, if not defeats, the ability to recover lost-profit damages."

Unfortunately, the article does not provide a simple way to estimate when "the difference between an expected lost-profits recovery and a reasonable-royalty recovery exceeds the financial [tax] benefits expected from transferring the patent to the patent-holding company." In fact, the suggested approach seems to be tailored toward businesses with a small number of patented products, such as pharmaceutical research companies. In light of the difficulty in applying this type of analysis to a business with many products in different market segments, a simpler approach may be to provide operating subsidiaries with exclusive grant-back licenses from their related patent holding companies.

"Patent Holding Companies Hold Risks," by Robert A. Matthews Jr., is reprinted at http://www.finnegan.com/publications/
index.cfm?info=articles&id=19
. For other ideas on how to maximize the value of your company's patent portfolio, contact the author of this abstract, Bill Heinze at bill.heinze@tkhr.com of Thomas, Kayden, Horstemeyer & Risley in Atlanta, Georgia USA.

The information contained in this email is provided for informational purposes only and does not represent legal advice. Neither the APLF nor the author intends to create an attorney client relationship by providing this information to you through this message.

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