On November 18, 2013, Judge Spero of the Northern District of California issued an order in Volterra Semiconductor Corp. v. Primarion, Inc., Civil No. 3:08-cv-05129, addressing the parties’ competing Daubert and summary judgment motions. Of the many issues raised, one was of particular note, a lengthy discussion on the ability of a plaintiff to seek damages for injury to a related entity. The plaintiff, Volterra Semiconductor, claimed damages “as a result of price erosion caused by Defendants’ infringement on certain sales by its subsidiary, Volterra Asia.” Put differently, because Volterra Asia had to drop its prices because of the alleged infringement, Volterra Semiconductor obtained less profits than it otherwise would have but for the infringement.
The Defendants responded that they were entitled to summary judgment because, under Poly-America, L.P. v. GSE Lining Technology, Inc. and Mars, Inc. v. Coin Acceptors, Inc., a company cannot collect damages that were suffered by separate corporate entities. Specifically, Defendants alleged that the plaintiff was at most a mere shareholder of the harmed entities, and a shareholder does not have standing to sue on its own behalf for diminution in the value of its own shares – i.e., “derivative” harm. Defendants argued that, as a matter of fairness, “a corporation cannot obtain the benefits of adopting a corporate form but then disregard that corporate form when convenient for its recovery.” Volterra countered by arguing that its damages theory was proper because the damages reflect "damages for the economic injury to Volterra Semiconductor itself as a result of price erosion on sales made by its subsidiary, Volterra Asia."
The Court held that while it did not accept all of Defendants’ challenges to Volterra’s damages theory, in the end the theory was still inconsistent with Poly-America and Mars. The Court found that there was no evidence for a jury to conclude that Volterra suffered any direct injury, and thus summary judgment was appropriate:
Nonetheless, damages are available only for "direct" injury. King Instruments, 65 F.3d at 949. Further, under Mars and Poly-America, a separate corporate entity's loss of profits due to price erosion does not constitute a direct injury to the parent because a patent holder may not "enjoy the advantages of their separate corporate structure and, at the same time, avoid the consequential limitations of that structure." Poly-America, 383 F.3d at 1311. Yet that is just what Volterra seeks to do in relying on Dr. Meyer's expert opinions in this case. Dr. Meyer's opinion is that the direct injury to Volterra Semiconductor is, dollar-for-dollar, the decrease in the amount of cash held by its "assets" as a result of price erosion on the subsidiaries' sales. This "injury" is indistinguishable from a claim for the lost profits of a subsidiary….
Volterra seeks to prove that its subsidiary lost profits through price erosion, and, as a result, the parent lost the exact same amount of money (adjusting only for taxes and royalties) — now called loss of value of the subsidiary. Although Volterra's expert says that she is just valuing the assets of the subsidiaries, the fact that the asset value is not only tied to lost profits but is exactly equal to lost profits requires the conclusion that Plaintiff's theory is not entirely distinct from a lost profits theory. To hold otherwise would eliminate the rule announced in Mars because a parent corporation could always recover the lost profits of its wholly owned subsidiary simply by characterizing them as the lost value of its asset. Indeed, the parent corporation in Mars presumably could have obtained an award of its subsidiary's lost profits by simply renaming the loss….
The Court concludes that Volterra's theory as to the Volterra Asia damages, as reflected in the expert opinions offered by Dr. Meyer, is not "entirely distinct from lost profits" and is barred by Poly-America and Mars. The Court further finds that Volterra has not demonstrated a material issue of fact on this question because the expert opinions of Dr. Meyer are the only evidence it cited in response to Defendants' request for summary judgment to show that Volterra Semiconductor was directly harmed by price erosion on the Volterra Asia sales.
Cases involving related entities, subsidiaries, and holding corporations have proliferated greatly over the last decade, as companies form related corporations for foreign activities, patent holding entities, and so on, to help with tax issues, avoid potential counterclaims, etc. Opinions like this show that patent strategy should be discussed as part of overall corporate strategy, as there may be good reasons for having the patent-holding entity also be the patent-practicing entity.