Shifting IP

Update: See more recent post on related case here.

In large corporate entities, intellectual property is often placed and moved around to improve the company's tax position. The IP department may not be consulted on the shift, finding out only at the last minute when it is asked to execute the assignments that the ownership is changing. Mars, Inc. v. Coin Acceptors, Inc. demonstrates some pitfalls with licensing subsidiaries to intellectual property rights and moving ownership. At the end of the day, Mars lost years' worth of damages and its recovery was limited to a reasonable royalty rather than lost profits, all because of its corporate structure and shifting patent ownership during the suit.

Mars, the candy company, owned patents for vending machine coin changers. Mars did not make the coin changers; instead, its wholly-owned subsidiary, Mars Electronics International, Inc. (MEI-US), did. Before 1996 MEI-US had a royalty-bearing, non-exclusive license from Mars for the patents whereby MEI-US would pay Mars on the gross sales of changers it sold. On January 1, 1996, as part of a settlement of a tax dispute with the UK tax authorities, Mars entered into agreements with MEI-US and another subsidiary also called Mars Electronics International (MEI-UK), a UK company that also had a non-exclusive, worldwide license to the patents. In the transaction Mars assigned all the rights in the subject patents to MEI-US.

In 1990, before the assignment of the patents to MEI-US, Mars had sued Coin Acceptors (Coinco) for patent infringement. The assignment of the patents to MEI-US in 1996 gave Mars a standing problem, though, since it no longer owned the patents-in-suit. To repair the problem, in March, 2006 Mars and MEI-US entered into a purchase agreement selling some parts of the MEI-US business back to Mars. The purchase agreement was not entered into evidence; counsel for Mars stated that the purchase agreement "did not clearly state what [was] needed to be stated for this case," and that it would "not rear its ugly head" in the litigation." (Brackets in case). Instead, it entered into evidence an April, 2006 "Coinco Confirmation Agreement." That agreement said "Mars and [MEI] do hereby acknowledge that Mars owns and retains the right to sue for past infringement of the Litigation Patents."

As a result of the original structure and license, i.e., Mars' ownership and MEI-US's non-exclusive license, Mars could not recover lost profits for Coinco's infringement. Mars argued that MEI-US's lost profits flowed "inexorably" to it, so it should be able to recover lost profits. The problem was the license terms; MEI-US owed Mars royalty payments whether it made a profit or not. The income to Mars would not have been affected by MEI-US's profit losses or gains, so MEI-US's lost profits did not flow "inexorably" to Mars. As a result, Mars was entitled only to a reasonable royalty for Coinco's infringement.

Mars tried to amend its complaint to add MEI-US as a plaintiff on the pre-1996 infringements so that MEI-US would have a lost profits claim, but it was unsuccessful. MEI-US was not an exclusive licensee (the only non-owner that can bring a patent infringement suit) because MEI-UK was also a licensee with a territory that included the United States.

Although Mars could only get a reasonable royalty for the infringing products before 1996, it could collect nothing for infringement after that. The Confirmation Agreement, designed to allow Mars to collect damages for the period after 1996 when MEI-US was the owner, was ineffective. While under Schreiber Foods, Inc. v. Beatrice Cheese, Inc., 402 F.3d 1198 (Fed. Cir. 2005) it is possible to retroactively correct a jurisdictional defect that arises during a suit by transferring the patents back to the original owner, it was ineffectively done in this case. The Confirmation Agreement by its terms only assigned the right to sue, not full ownership of the patents, so the standing problem was not corrected before the entry of judgment.

Mars managed to escape one bullet, though. In the UK tax action Mars stated that "the historical royalty payment with respect to the Covered Intellectual Property was excessive to the extent it exceeded a net royalty of 4% . . . ." The lower court had awarded a 7% royalty, which Coinco argued Mars admitted was excessive. The appeals court pointed out that it was an intra-company license agreement, not to a competitor, so there was no error in awarding a 7% royalty rate.

The case reveals how things can go wrong. The original license, while probably favorable for tax purposes, limited Mars' recovery theories. It seems unlikely that a UK subsidiary performing the same function as a US subsidiary would actually exploit the patents in the US, but presumably there was a tax benefit to such a wide-reaching license. The assignment in settlement of the UK tax problem may have solved the UK tax problem, but it killed all patent damages after that. Finally, while there was a theoretical way to recover from the harm caused by the assignment, it was not effective here. The "Confirmation Agreement" was probably worded as carefully as possible to avoid breaching the UK tax settlement or upsetting Mars' tax position, but unfortunately it couldn't go far enough to correct Mars' standing problem. And while Mars was able to avoid the harm caused by its statement that anything beyond a 4% royalty was excessive, another plaintiff might not be so lucky.

There's no right or wrong way to manage ownership of IP to capture the full benefit for the company. Here, this may have been the outcome that Mars anticipated, because it was the best way to handle both its patent infringement and tax problems. But the case serves as a reminder that everyone in the company should be talking.

Mars, Inc. v. Coin Acceptors, Inc., Nos. 2007-1409, 2007-1436, 2008 WL 2229783 (Fed. Cir. June 2, 2008), opinion here.

Work Made for Hire Doctrine Trashed by Trailer Trash

It turns out that the success of Trailer Trash Barbie was indeed the fact that it was a Barbie. After Paul Montwillo (doing business under the name Paul Hansen) and his business partner, William Tull, settled a lawsuit Mattel brought in 1997 against them for their sale of Barbie dolls turned into "Trailer Trash Barbie," "Hooker Barbie" and the like, they started a business making trailer trash-themed dolls that weren't based on Barbie. The business was an abysmal failure and, as one could have predicted, the two turned on each other.

Tull and Montwillo had formed a new company for the new dolls, a partnership that was converted into a limited liability company of which both were managing members. Tull was in charge of business affairs, sales, distribution and manufacturing. Montwillo was in charge of design and advertising of the product line, including product design and packaging. Upon dissolution of the company (triggered by Montwillo's personal bankruptcy), Tull claimed to own the copyrights in the five dolls created by Montwillo for the new business as satisfaction of a company debt owed to him. Montwillo claimed that he was the owner of the copyrights in the doll designs.

The district court's decision on summary judgment is most remarkable for the weakness of the advocacy and reasoning. The court held that the doll designs were not works made for hire under Section 101 of the Copyright Act, which defines a work made for hire as "a work prepared by an employee within the scope of his or her employment." (Emphasis in decision). Tull admitted in a Request for Admission that Montwillo "was never an employee" of the company. The court therefore stated, "Here, it is undisputed that plaintiff was not an 'employee' of [the company]. Defendants have not cited any cases applying the 'work for hire' doctrine to a non-employee, and the Court is not aware of any such authority. In the absence of any such authority, and because the statute defines a 'work for hire' as 'a work prepared by an employee . . . ', the Court finds that the 'work for hire' doctrine is inapplicable." Note that the Court doesn't even get the name of the doctrine right; it is correctly "work made for hire," not "work for hire."

The reasoning is nonsensical; of course one would not apply a statute about an employee to a non-employee, but the question is "what is an employee?" The Court and the parties must not have searched very hard to have missed the Supreme Court's authority on this very point in Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989). CCNV held that whether a person is an employee is a matter of the common law of agency, with 13 factors to consider. Surely a managing member of a limited liability company whose responsibility was the design of the dolls might fall into the "employee" category as defined by CCNV, or at least Tull deserved a passing mention of the 13 factors in the decision. Indeed there was his admission that Montwillo was not an employee, but Montwillo had also stated in his bankruptcy petition that he did not own any "patents, copyrights, [or] other intellectual property," and he had designed the packaging for the dolls that listed the LLC, not himself, as the copyright owner in the copyright notice. Certainly whether the dolls were works made for hire could not be so easily decided on summary judgment.

Case is Montwillo v. Tull, 2008 WL 2264574, No. C 07-3947 SI (N.D.Cal. June 2, 2008).

No Peace in the Inner Peace Movement

Francisco Coll-Monge (deceased at the time of the suit) founded two non-profit companies in the 1960's, Inner Peace Movement, Inc. (IPM) and Peace Community Church (PCC), to promote self-actualization programs. He registered various trademarks, including INNER PEACE MOVEMENT and PEACE COMMUNITY CHURCH, in his own name. The district court got it wrong but the court of appeals got it right, that Coll indeed owned the trademarks.

In Section 5 the Lanham Act recognizes the commercial reality that trademarks are used by entities other than than the registrant - such as motorcycle logos used on jackets - but that the goodwill arising from the use should nevertheless accrue to the registrant. The statute calls these entities "related companies." Section 5 defines a "related company" as "any person whose use of a mark is controlled by the owner of the mark with respect to the nature and quality of the goods or services on or in connection with which the mark is used." The district court wrongly held that the non-profits could not be "related companies," and that instead Coll had registered the mark on behalf of the non-profit companies. The district court erred by interpreting "related companies" in the corporate law vein, i.e., formal corporate control through ownership, rather than the specialized definition in Section 5. The court of appeals corrected the misinterpretation and found that there was enough evidence of Coll's control over the services offered by the non-profits to avoid summary judgment against the estate.

The district court's conclusion was wrong in a second way not discussed by the court of appeals, which is the conclusion that Coll could be a registrant but the non-profits the true owners of the marks. Under Section 1 of the Lanham Act an application must be filed by the "owner" of the mark; if Coll was not the owner then the registrations were invalid.

The estate had advertised a meeting of the Board of Directors for the "Inner Peace Movement®" at the same time the Board of Directors meeting for IPM was scheduled. The district court enjoined the estate's meeting and the estate was ordered to pay for corrective mailings to sort out the confusion. Perhaps counter-intuitively this was upheld by the court of appeals, despite the fact that it reversed on the trademark ownership claim. The court of appeals was right, though; the estate was using its trademark in a way that created confusion for the corporation, actionable under the expansive language of Section 43(a).

The relationship between the non-profits and the estate looks like it's soured. If the conflict continues it could be interesting sorting out the trade name/trademark confusion problem. Four trademark registrations, Reg. Nos. 1806494, 1801163, 1894364 and 1899284, were assigned to Inner Peace Movement, Inc. and Peace Community Church, Inc. because of the district court order. In the usual related company situation, i.e., a standard licensor-licensee relationship, the contract generally requires cessation of the use of the trademark and any confusingly similar trade name at the end of the relationship. With the court of appeals holding that the estate owns the trademark, rather than there being a unity of ownership of the trademarks and trade names, the larger battle about who gets to use what names and marks in the future could be just beginning. The web site at innerpeacemovement.org (last modified in 2006) both uses the ® symbol and states it is a 501(c)(3) non-profit corporation.

Estate of Coll-Monge v. Inner Peace Movement, Inc., 524 F.3d 1341 (D.C. Cir. 2008), available here (Findlaw, free subscription required).

Bratz!

A blog on IP ownership appropriately starts with Bryant v. Mattel, Case 2:04-cv-09049-SGL-RNB in the Central District of California, otherwise known as Mattel v. MGA Entertainment. This, of course, is the case about Bratz dolls - seems the designer, Carter Bryant, worked at Mattel twice and claims to have designed the dolls between his gigs with Mattel, even shopping them around during his second stint with Mattel.

Bryant had an agreement with Mattel that it claims gave it the ownership of his designs. Mattel filed a motion for summary judgment on ownership of at least some of the designs on a contract theory. The language of the contract is quoted here starting at page 4; it could be clearer that it covered copyrighted works as well as patentable inventions. There's no mention in the motion about Mattel's potential ownership as a work made for hire under section 101 of the Copyright Act (defining a work made for hire as "a work prepared by an employee within the scope of his or her employment"; Bryant apparently designed for the Barbie line of dolls). Query whether Mattel is making this claim at trial instead or why it elected not to -- although the case has thousands of docket entries and a number of related cases, which I didn't review. The case started as a declaratory judgment action by Bryant in 2004, so the argument may already have been made and rejected somewhere else along the way.

As of today the trial is still going on. Don't miss the highlight so far, Bryant's use of a software program called "The Evidence Eliminator" two days before investigators copied his hard drive. Bryant invoked the deleting porn justification as his reason.