Mars Revisited
Much has been written about and discussed regarding the Federal Circuit’s decisions on various damages issues in Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359 (Fed. Cir. 2008). One issue, however, does not appear to have been addressed:
Why would Mars and Coinco be considered competitors, if Mars cannot recover lost profits because it did not manufacture a competitive product (or establish that profits flow inexorably to it from its subsidiary that competed directly with Coinco)?
As a refresher, the case involved patents concerning technology used in vending machine coin changers with the ability to recognize and authenticate coins electronically. The Federal Circuit addressed four damages issues, the first two of which raise the question posed above:
- Whether Mars was entitled to profits lost by its subsidiary MEI
- Whether a 7% royalty award was in error
- Whether Mars had standing to recover damages from 1996 to 2003
- Whether MEI had standing to recover damages prior to 1996
The patent owner (Mars) is a candy company that did not manufacture or sell any vending machine coin changers. However, while Mars did not manufacture coin changers, it argued that it was entitled to lost profits because its formerly owned subsidiary company, Mars Electronics International, Inc. (MEI), did manufacture a product that competed directly with the infringing coin changers. Mars had full ownership and control of MEI and the two entities had consolidated financial statements. Mars and MEI had “a traditional royalty-bearing license agreement” concerning the patents at issue and MEI was required to pay a fixed royalty rate to Mars based on gross sales value, regardless of the profits it generated. Based on this license agreement, the district court held, and the Federal Circuit affirmed, that the facts were insufficient to demonstrate that MEI’s profits inexorably flowed up to Mars and, therefore, Mars was not entitled to lost profits.
The defendant, Coinco, argued that the royalty rate of 7% that the district court awarded was erroneous because the license agreement between Mars and MEI specified that a net royalty rate over 4% would be excessive. The 4% rate had been agreed upon to satisfy taxing authorities in the United Kingdom. The district court reasoned that “it would be economically suicidal” for Mars to license the competitor of its subsidiary at the same rate as an inter-company license. The Federal Circuit agreed, noting that “an intra-company license agreement made to satisfy the requirements of the United Kingdom taxing authorities are likely to be very different from those resulting from a hypothetical negotiation between competitors.” (Emphasis added.) This appears to suggest that Mars and Coinco are competitors (even though Mars’ subsidiary MEI is the entity that competed directly with Coinco).
This circles back to the question raised above. In the end, Mars may simply indicate that, in a hypothetical negotiation to determine a reasonable royalty, a non-manufacturing patent holder may take into account the effect of infringement on related companies.