Allocating Patent Damages Among Joint Owners and Between Parents and Subsidiaries: A Comparison of Japanese and U.S. Law

Yasufumi Shiroyama has published an article titled Overview of IP-Related Judgments Rendered by Japanese Courts in the First Half of 2013 in 38 A.I.P.P.I.--Journal of the Japanese Group of AIPPI 349 (Nov. 2013).  On the topic of patent remedies in particular, Mr. Shiroyama discusses Sangenic v. Aprica, a case that I have blogged about here, here, and here, in which a Grand Panel of the Japanese IP High Court held that article 102(2) of the Japanese Patent Act permits an award of the infringer's profit as long as the plaintiff can show that it would have made a profit but for the infringement, even if the plaintiff itself is not practicing the patent.  He also discusses the Apple v. Samsung FRAND/ abuse of right decision that I blogged about here and here, and which is now on appeal before a Grand Panel of the IP High Court.  

Of greatest interest to me, however, is Mr. Shiroyama's discussion of a case I had not seen any mention of before, the Judgment of the Tokyo District Court of January 24, 2013 (partially accepted, 2010 (Wu) No. 44473, Division 47).  (The term "partially accepted" means that the damages  award was less than the plaintiffs had requested.  I thank Mr. Shiroyama for clarifying this point and a few others for me by email.)  According to Mr. Shiroyama's account, the plaintiffs (Giken and Nippon Steel) were coowners of a patent on a technique relating to civil engineering works, which the defendant infringed.  The court stated that for the defendant to complete the construction works in question, it would have had "to subcontract the works of steel-pipe piling to Giken Seko Co., Ltd. (the plaintiff Giken's subsidiary)."  Absent the infringement, Giken therefore 

could have gained such part of the profits, made by the rise in stock value of Giken Seko due to an order from the JV for the subcontracting works of steel-pipe piling, that was proportionate to the jointly owned share of the disputed patent rights.  It should be noted that said profits from the rise in the stock value corresponds to the marginal profits calculated by deducting the variable costs from the gross profits. . . .  Since the disputed patent right was jointly owned by the plaintiffs, the plaintiff Giken may exercise the right to demand damages that are proportionate to their share of the joint ownership . . . .

Mr. Shiroyama informs me that the statement "proportionate to their share of the joint ownership" means that Giken was awarded 50% of the subsidiary's lost profit.  As for Nippon Steel, it would get 50% of its damages.  On this point, Nippon Steel argued that, but for the infringement, it would have "received an order for steel-pile pipes from Giken Seko and could have gained profits equivalent to the amount of marginal profits," but the court rejected this theory:

Since the disputed patent right was not for the invention related to steel pipe piles, even if Nippon Steel Corporation were unable to gain the marginal profits from the sale of steel pipe piles, it would not constitute the 'damage that was usually expected to occur,' to which Article 416 of Civil Code shall apply by analogy.

In other words, the theory was that, but for the infringement, Giken Seko (the sub) would have done the subcontracting work using Nippon Steel pipes, and Nippon Steel would have made a profit on that sale.  But Nippon Steel isn't entitled to recover its own lost profits on the steel it would have sold to Giken Seko--a supplier who didn't make a sale to a patentee because the patentee lost a sale due to an infringement normally isn't entitled to recover any damages from the infringer--but since Nippon Steel is also a joint owner of the patent apparently it is entitled to damages in the form of a reasonable royalty for the infringement (of which it gets 50%, as a joint owner).  Complicated.

In the U.S., would two joint inventors/joint owners of a patent receive a proportionate share of the damages, as in this case?  I honestly wasn't sure when I started thinking about this.  On the one hand, joint inventors are sometimes described as owning equal shares in the patent (absent an agreement to the contrary), which might seem to suggest that, in the event of litigation (in which both must be parties under U.S. law, as I explained here recently) each one shares any resulting damages award 50/50. On the other hand, section 262 of the U.S. Patent Act states that "In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners." Suppose then that an infringement causes Joint Inventor/Patent Owner A to lose a profit of $1000, while Joint Inventor/Patent Owner B is a nonpracticing entity.  If A has to share its lost profit with B, A is not fully compensated, since in the absence of the infringement A would have earned the entire $1000 (again, absent an agreement to the contrary) without being obligated to share it with B.  So under a sharing rule A wouldn't be fully compensated for the loss it suffered in fact.  Anyway, I posed the question on an IP Professors Listserv last week and the consensus among those responding seemed to be that A would not have to share 50% of the lost profits award with B (though again, B has to be joined to the lawsuit, and one can imagine B demanding a substantial share of the damages from A as a condition to agreeing to be a party).  The fact that there appear to be no cases directly on point suggests that these matters are usually dealt with through assignments or other agreements between joint inventors.

Going back to the Japanese case, the court's decision to award Giken damages based on the loss in stock value of its subsidiary might seem like a rather roundabout way of simply awarding the subsidiary's lost profits, though I take it that the complication was due to the fact that the work would have been done by the subsidiary and not by Giken, the plaintiff, itself.  Similar issues have arisen in the U.S.  For example, in the nonprecedential opinion Fujitsu Ltd. v. Tellabs, Inc., __ Fed. Appx. __, 2013 WL 5098993 (Fed. Cir. Sept. 11, 2013) (per curiam), the majority wrote:

Fujitsu is a Japanese corporation and sole owner of United States Patent Nos. 5,521,737 (“the ′737 patent”) and 5,526,163 (“the ′163 patent”). Sales of Fujitsu patented telecommunications systems in the United States are made by a non-exclusive licensee, Fujitsu Network Communications, Inc. (“FNC”). FNC is a wholly owned subsidiary of Fujitsu and a California corporation.

Fujitsu sued Tellabs for patent infringement. When submitting its expert reports, Fujitsu indicated it would be seeking damages based on lost profits regarding two contracts Tellabs obtained. Tellabs moved for summary judgment on the issue of whether Fujitsu could recover lost profits on the two patents.

The district court stated that whether a parent company patent owner may be compensated under the damages theory of lost profits for its wholly-owned subsidiary's lost sales turned on whether the subsidiary's profits “flowed inexorably” to the patent-owner parent, citing Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1366 (Fed. Cir. 2008). The court then concluded that based on the facts of this case, Fujitsu would not be allowed to seek lost profits as a theory of recoverable damages at trial.

The court certified the following issues for interlocutory appeal under 28 U.S.C. § 1292(b):

1) Can a foreign patent owner that does not sell any products in the U.S. market collect lost profits damages based on sales lost by its wholly-owned U.S. subsidiary, which is a non-exclusive licensee under the patent?

2) Can a foreign patent owner that manufactures and sells component parts to its wholly-owned U.S. subsidiary via a transfer pricing mechanism designed to comply with the Internal Revenue Code, 26 U.S.C. § 482, recover as lost profits the lost payments from its wholly-owned U.S. subsidiary for these component parts?

Fujitsu Ltd. v. Tellabs, Inc., No. 09–C–4530, slip op. at *16, 2013 WL 2285794 (N.D.Ill. May 23, 2013).

The case the district judge (Judge Holderman) cited, Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1366 (Fed. Cir. 2008), states as follows:

Mars claims that, by virtue of the parent-subsidiary relationship and its consolidated financial statements, “all MEI's lost profits were inherently lost profits of Mars.” . . .  But, as the district court concluded, the facts do not support this claim.

The uncontradicted testimony of Mars's Corporate Tax Director, Thomas Cornell, shows that Mars and MEI had a traditional royalty-bearing license agreement. MEI paid Mars a royalty “[b]ased on gross sales value” of MEI's products that use Mars's patented technology, and MEI was required to make those royalty payments whether or not it made any profit. J.A. 4131. Mars identified no record evidence that it ever received or recognized any form of profit or revenue from MEI apart from these royalty payments. . . . Thus, Mars's claim that it “inherently” lost profits when MEI lost profits is unsupported by the record, as the district court correctly concluded. The district court was correct to grant summary judgment on this basis.

Because we conclude that MEI's profits did not—as Mars argued—flow inexorably to Mars, we . . . need not decide whether a parent company can recover on a lost profits theory when profits of a subsidiary actually do flow inexorably up to the parent. . . . We hold simply that the facts of this case cannot support recovery under a lost profits theory.

In any event, the Fujtisu court denied the motion for interlocutory appeal, on the ground that "a district judge may certify for appeal an otherwise unappealable order when it is 'of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.' 28 U.S.C. § 1292(b) (emphasis added). . . . In general, a question of law is 'controlling' within the meaning of Section 1292(b) only if our resolution of that issue could have an immediate impact on the course of the litigation.  In past cases we have held that a question regarding the theory on which damages may be recovered cannot be controlling where the issue of liability remains undecided."  The case then disappears from Westlaw, so I'm guessing the parties settled.  Based on the above, though, the U.S. rule appears to be that the parent is (at best) entitled to recover the sub's lost profits only if those profits otherwise would "flow inexorably" to the parent.