When Your Tax Strategy Is Inimical to Your Patent Strategy
by Pamela Chestek • August 8, 2016 • patent • 0 Comments
Don’t let the tax department screw up your patent infringement case. Or, when they do, I hope they saved more on taxes than you lost on the patent case.1
W.L. Gore & Assocs., Inc. v. C.R. Bard, Inc. is an example of what can happen. In 1983, Gore set up a patent holding company, Gore Enterprise Holdings, Inc. (“GEH”). The patent-in-suit, Patent No. 5,735,892, was assigned to GEH and Gore became a non-exclusive licensee. After what, according to a Bard brief, looks like a series of losses in tax court, and after this lawsuit had been filed, Gore voted to dissolve GEH, assigned the patents back to Gore, and amended the complaint to drop GEH as a party. On a motion for summary judgment Bard challenged the sufficiency of the assignment-back, claiming it didn’t give Gore ownership and therefore Gore didn’t have standing, and also challenged Gore’s claim that Gore was entitled to lost profits for any infringement before the assignment-back.
Gore argued that assignment document was invalid because there was no consideration for GEH. But an assignment is not a contract:
Bard’s argument is based on the proposition that patent assignments must always be contracts, involving consideration on both sides, rather than gratuitous assignments. This proposition is not supported by the legal authority cited by Bard…. [G]ratuitous assignments are permissible under Delaware law “where there was an intention to make the gift and sufficient delivery.” The Assignment is valid as a gratuitous assignment because it was in writing, signed by GEH, and delivered to Gore.
Gore therefore had standing, but didn’t do as well on lost profits. In the assignment-back, GEH assigned the right to seek damages for past infringement. Gore claimed that meant it could claim lost profits, but the court thought otherwise:
“[I]f the patentee is not selling a product, by definition there can be no lost profits.” Rite-Hite, 56 F.3d at 1548. … While conceding that GEH was a non-practicing entity at all relevant times, Gore nevertheless argues that it may recover its own lost profits damages for infringement occurring prior to January 30, 2012, citing numerous cases as support. The cases cited by Gore do not support its claim for pre-Assignment lost profits damages.
Gore cites [cases] for the proposition that assignees are permitted to recover “all available forms of pre-assignment damages without limitation.” Bard responds that these cases merely stand for the proposition that assignees are generally permitted to recover pre-assignment damages where an assignment of a patent is coupled with an assignment of a right of action for past infringements and that there is no dispute between the parties on this point. The Court agrees with Bard that these cases permit assignees to recover pre-assignment damages as a general matter, but the cases are not relevant to the specific issue of whether Gore can recover its own purported pre-Assignment lost profits damages, apart from any damages that were assignable (and assigned) by GEH.
GEH described itself to a Maryland court as an independent subsidiary of Gore engaged in transactions with its parent ”at fair market value rates.” GEH’s expert opined in the Maryland tax proceedings that “the business arrangements between Gore, Inc. and GEH were arm’s-length and that the 7.5% royalty rate provided for in the license agreement between Gore, Inc. and GEH [for a portfolio of patents that included the ‘892 patent] was consistent with an arms-length rate.” GEH received “significant third-party income and expenses” that were not directly connected with sales of Gore’s products embodying technology covered by GEH’s patents. In addition, GEH characterized Gore’s sales as not being “use” of the patents.
As a non-practicing, independent subsidiary of Gore, GEH had no legal basis to recover lost profits damages arising from Gore’s lost sales. Therefore, GEH could not have assigned to Gore any right to recover such lost profits damages when it assigned GEH’s rights in the ‘892 patent to Gore. While GEH was free to assign all damages claims it had, it could only assign damages claims it did have. Because Gore must stand in GEH’s shoes, Gore may only recover what GEH could have recovered. Therefore, Gore is not entitled to recover pre-Assignment lost profits damages.
(Emphasis and brackets in original, internal citations omitted.)
You can see that the arguments GEH used in tax court, to demonstrate that it wasn’t just a sham entity, an exactly contrary to what Gore needed to argue on GEH’s behalf in order to have any opportunity to recover lost profits. From the documents in the case it looks like not only did the tax strategy fail, but it significantly harmed the patent damages claim too.
W.L. Gore & Assocs., Inc. v. C.R. Bard, Inc., No. 11-515-LPS (D. Del. July 27, 2016).
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- Shameless plug: I’ll be speaking on this topic at the AIPLA Mid-Winter Institute on February 3 in Ft. Lauderdale. ↩