Lost profits of a patent owner's subsidiary: can they be recovered?

I've just picked up this item on Lexology: it's a note ("Parent company denied recovery for lost profits of subsidiary") by Philip C. Canelli, from the New York office of McDermott Will & Emery. This note explains the reasoning of the US Court of Appeals for the Federal Circuit in upholding a summary judgment in Mars, Inc. v. Coin Acceptors, Inc.,Case No. 07-1409,-1436 in which a patent infringement claim for damages in respect of a subsidiary's lost profits was dismissed (pdf of full 26-page decision here).

Mars claimed, as long ago as January 1990, that certain products made by Coin Acceptors infringed its coin authentication patents. Coin Acceptors was found to have infringed and was ordered to pay a reasonable royalty of 7 percent from 1996 till the expiry of the last Mars patent in 2003. The court however refused to allow Mars to recover profits lost by its former subsidiary/non-exclusive licensee Mars Electronics International, Inc. since that company lacked standing to seek damages in its own right.

On the issue of lost profits the Federal Circuit, noting that Mars did not make or sell any of the patented machines and that its subsidiary paid it on a straight per-use basis rather than on the basis of any profits, found that its profits did not flow inexorably to Mars.

The Federal Circuit also upheld the 7 percent reasonable royalty rate even though it was higher than the cost that Coin Acceptors would have incurred if it had used non-infringing alternatives. This is because reasonable royalty damages are not capped at the cost of implementing the cheapest available, acceptable, non-infringing alternative.

The notion that a subsidiary's loss of profits cannot be recovered unless it flowed inexorably from licensee to licensor would seem broadly analogous to the position in the UK after Gerber Garments v Lectra, in which the Court of Appeal appeared to require a clear causative link between the infringement and the subsidiary's loss.

Calculating patent damages in the US

Via NERA Economic Consulting I've just come across an article, "Patent Damages and Real Options: How Judicial Characterization of Non-Infringing Alternatives Reduces Incentives to Innovate", by the triumvirate of Gregory Leonard, Jerry Hausman J. Gregory Sidak -- all US academics with impressive credentials. According the note on NERA,

"The legal framework under which patent damages are calculated changed substantially after the Federal Circuit decided Grain Processing Corp. v American Maize-Products Co. in 1999. Grain Processing eased the restriction on the set of non-infringing substitutes available in the but-for world by allowing an infringer to claim that it would have offered a non-infringing product that, although not actually sold in the marketplace, was technically feasible at the time and could have been made commercially available relatively quickly.

[The authors] examine a factor that the authors see as one of the decision's most important economic ramifications: the grant of a free option to the infringer. Although it is widely appreciated how Grain Processing has made it more difficult for patent holders to claim lost profits damages, it is less well understood how Grain Processing has affected the incentives of companies to risk litigation by using patented technology (without a license) rather than to avoid infringement by using an economically inferior non-infringing technology".

This decision presumably contrasts unfavourably for patent owners, when compared with the position in the European Union following the implementation in 2006 of the IP Enforcement Directive, which makes it easier for patent claimants to obtain lost profits damages and has incentivised them to invest in litigation.
Abstract here.