The Federal Circuit recently held that a parent company could not recover its lost profits for infringement of a patent when the patent was licensed by a wholly owned subsidiary. Mars, Inc. v. Coin Acceptors, Inc., No. 2007-1409, -1436, 2008 WL 2229783, 2008 U.S. App. LEXIS 11707 (Fed. Cir., June 2, 2008). Plaintiff candy manufacturer, Mars, Inc., held a patent that covered technology to allow vending machine coin changers to recognize and authenticate different denominations of coins electronically. Mars did not manufacture the vending machine coin changers, but licensed the patent to its wholly owned subsidiary,

Mars Electronics International, Inc. (MEI). The parent maintained consolidated financial statements that reflected the profits, losses, assets, and liabilities of all of its subsidiaries, including MEI. The licensing agreement entitled Mars to a certain percentage of the MEI’s gross sales, regardless of whether the MEI made a profit. Mars sued Coin Acceptors, one of the subsidiary’s competitors, alleging that Coin Acceptors infringed its patent. During the lawsuit, Mars sought to recover profits it had lost as a result of Coin Acceptors’ alleged infringement. The district court did not allow Mars to seek its lost profits and the parent appealed that decision to the Federal Circuit.

In general, a patent holder is allowed to recover the lost profits of another entity when those profits would have flowed inexorably to the patent holder. Mars argued that the financial statements consolidating Mars with all of its wholly owned subsidiaries, including MEI, showed that Mars would have ultimately received any of MEI’s profits. Any profits of its subsidiaries would be reported as profits of the parent, under Mars’ reasoning.

The Federal Circuit rejected this reasoning. The court looked instead to the licensing agreement between Mars and MEI. The court reasoned that, since Mars received only a royalty payment based on gross sales of MEI, Mars was never entitled to MEI’s profits. Therefore, it could not have lost any profits by the defendant’s infringement. Accordingly, the court denied that Mars was entitled to lost profits and, instead, limited Mars to a reasonable royalty based on Coin Acceptors’ infringement.

The court’s decision is not surprising given the general requirement to prove “but for” causation to establish lost profits. However, it is a warning to companies that split manufacturing and patent ownership between multiple corporate entities to carefully consider their internal licensing arrangements. Companies cannot rely on the mere fact that their profits and financials for related entities are consolidated. In order to establish lost profit damages, the patent-owning entity has to show that it was entitled to receive the profits from the manufacturing entity. Since the court’s decision in this case turned on the specific terms in the licensing agreement between a parent and subsidiary, the decision may prompt companies that split manufacturing and patent ownership between multiple corporate entities to reexamine their agreements.