Property, intangible

a blog about ownership of intellectual property rights and its licensing

Tax Structuring Strikes Again

Oh, adidas.

adidas AG is a large multinational conglomerate headquartered in Germany. It reported that at the close of 2014 it had 154 subsidiaries, one of which is co-plaintiff adidas America, Inc.

A few years ago adidas developed “miCoach,” an “interactive personal coaching and training system.” Parent adidas AG owns the company’s US patents but, as is often done, there is a complicated structure of intracompany license agreements, presumably designed to give the corporate enterprise an advantageous tax position. In the case of the miCoach patents, in 2009 adidas AG licensed the patents to non-party adidas International Trading B.V. (“adidas IT”), giving adidas IT a non-exclusive license to the patents to manufacture or have manufactured products covered by the patents. The patents weren’t listed by number.

In 2011, adidas IT entered into a distribution agreement with adidas America, appointing adidas America “to act as [the] exclusive distributor for the sale” of adidas-branded products in the US. The agreement discussed adidas America’s enforcement of trademarks, but not patents.

In 2014, adidas AG sued defendants Under Armour, Inc. and MapMyFitness, Inc. for patent infringement. adidas AG, adidas IT and adidas America then entered into a “Restatement and Clarification Agreement” supposedly clarifying the 2011 distribution agreement. The “clarification” was:

For the avoidance of doubt, the parties agree and hereby restate and clarify that adidas AG and adidas [IT], by and through the License Agreement and the Distribution Agreement, have granted adidas America[], as the exclusive distributor of adidas products in the United States … , an exclusive license to all adidas brand intellectual property (which includes all … Patents identified in [Exhibit B] of the License Agreement ….

To the extent that there is any ambiguity arising out of the language in the various Agreements regarding adidas America[‘s] exclusive license, the Parties agree that they intended and hereby confer (retroactively, if necessary) an exclusive license to adidas America[] to the adidas AG intellectual property (which includes any Mark or Patent as those terms are defined in the License Agreement that relates to a Licensed Product) ….

adidas then added adidas America as a plaintiff to its patent infringement case. Three months later another company was added to the mix, when the original distribution agreement was terminated and adidas America and another subsidiary, Reebok International Ltd., were appointed as “joint exclusive distributors” instead.

Under Armour filed a motion to dismiss adidas America from the patent infringement lawsuit on the basis that adidas America didn’t have standing. For purposes of patent standing, there are three categories of ownership: patent owner, exclusive licensee, and non-exclusive licensee. The first has the right to sue, an exclusive licensee must be joined by the assignee in any patent infringement suit, and the non-exclusive licensee has no standing at all. Here, the question was which of the latter two categories adidas America fell into.

Normally answering this question requires investigating what rights various other parties might have to practice the patent, but the court had a much easier time here. There was a fundamental problem with the supposed patent license – the court couldn’t tell whether adidas was a licensee, exclusive or otherwise, of the patents asserted in the lawsuit:

The patents that were the subject of the original Licensing Agreement between adidas AG and adidas IT were never identified by number, only by their associated commercial embodiments. Among these embodiments is the adidas miCoach product, the apparent competitor product to the Defendants’ accused products. But strangely, the Plaintiffs have never made any attempt to link the asserted patents to the miCoach product. Therefore, if it accepts (for the moment) that the described series of agreements succeeding in making adidas America an exclusive licensee to the intellectual property identified in the Licensing Agreement, the court is left only with the conclusion that adidas America is the exclusive licensee to the miCoach patents (in addition to the other named products’ patents). What these patents are, the court cannot say.

From what the court can tell, the Plaintiffs looked at the accused products, identified the adidas patents they believed read on the accused products, and then simply assumed those patents are the same for the miCoach product. The Plaintiffs are not permitted to work backwards from the accused infringing products to satisfy their burden of establishing standing. The Plaintiffs make the conclusory statement that “[t]here is no dispute that [the licensing agreements] include[] the asserted patents, which relate to adidas America’s ‘miCoach’ products.” This is not true. The Defendants have never made such an acknowledgement. (D.I. 47 at 9 11.3 (“If one assumes that that the adidas MiCoach product embodies the inventions covered by the Asserted Patents (which Plaintiffs have not established ….”)).

The Plaintiffs bear the burden of establishing that jurisdiction exists. As a preliminary matter – before the court even gets to the question of what type of interest adidas America may hold – the Plaintiffs must prove that adidas America holds some interest in the patents actually asserted. The Plaintiffs have made no showing that the asserted patents are tied to the adidas miCoach product, or any other product for that matter. It is not the court’s role to fill in gaps, which the Plaintiffs may consider obvious inferences. Rather, the Plaintiffs must come forward with evidence to overcome the presumption that jurisdiction is lacking. They have not done so.

There’s a second problem – Reebok. adidas America doesn’t have the exclusive right to sell products with the asserted patents: “the Reebok Agreement conclusively demonstrates that adidas America is not the exclusive seller of products made according to the asserted patents. Thus, adidas America’s interest is not exclusionary. Although the Reebok Agreement was executed after adidas America joined as a co-plaintiff, the law makes clear standing must exist throughout the pendency of litigation.”

adidas America is therefore dismissed from the suit. The lawsuit still goes on though, with adidas AG as the plaintiff, so where’s the harm? Damages. Without the exclusive licensee in the lawsuit, the plaintiff isn’t going to be able to obtain lost profits, just a reasonable royalty.

Make no mistake, this was a post hoc effort to manufacture a patent licensee solely for purposes of litigation and the court signalled it wasn’t falling for it. Recall that the original agreement was characterized as a “distribution agreement,” a very different animal from a patent license, and the court calls them on it: “Even if the court were to accept the Plaintiff’s assertion—outlined in the Clarification Agreement—that “exclusive distributor” meant “exclusive licensee….” More notably, the court notices “Oddly enough, the Reebok Agreement uses the same language of the original Distribution Agreement—focusing on distribution rather than exclusive licensing—even after the Clarification Agreement attempted to explain what was really mean by the arguably unclear language.” Perhaps litigation and tax need to chat a little more often.

adidas AG v. Under Armour, Inc., No. 14-130-GMS (D. Del. June 15, 2015).

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