by Hershel R. Chapin
IP-holding companies (IPHCs) are important tools for protecting high value intangible property (IP) rights. To maximize their usefulness, transactional lawyers consider numerous issues in light of their clients’ idiosyncrasies.
Liability can be determined by whether an IPHC holds title to IP or is a mere licensee to operate the IP. “If the operating company does not own the intellectual property, then it may not be joined as a party in the litigation. Furthermore, if the IPHC owns the intellectual property, then… it will likely be immune from countersuit because the IPHC does not exploit the intellectual property.” Mark Cowan, Warren Newberry, Reevaluating the Intellectual Property Company. Boise State University ScholarWorks (Apr. 1, 2013), p.30.
An IPHC that owns IP outright can shelter personal assets of the IP’s operator. A multi-national organization can insulate against infringement disputes with competitors. “If the patent is registered in one country and not also in another, the branch in the other country cannot make use of the patent in the country where it is registered without infringing on the branch that has registered such.” Smit & Van Wyk, Why create a Patent Holding Company? (Accessed 10/6/16) Available online at: http://www.svw.co.za/patent-holding-company. p.1. “When properly administered, product-liability claims can be limited to a single subsidiary’s assets.” William Jackson, Thomas Kammerait, Advantages for Holding Company Structures for Owner-Operated Businesses, The National Law Review (Nov. 10, 2013), p.2.
Pooling IP can help smaller companies capture business efficiencies and save money on multistate regulatory compliance through joint management. The use of subsidiaries can also make the trading of IP a breeze. “Without the holding company structure, a sale [or license] may require more extensive due diligence for the buyer or may reveal trade secrets unrelated to the product or service line.” Id. p.2.
IPHCs sometimes offer tax advantages. Wholly owned subsidiaries can be treated as disregarded entities. Through IPHCs, taxpayers can move profits across state lines through the use of incorporation in states that do not have royalty taxes or corporate income taxes. Currently, a handful of states offer favorable tax treatment to IPHCs including: Delaware, Nevada, and Wyoming. But tax reasons alone probably should not guide IPHCs’ implementation. Texas reduces the tax benefits of IPHCs by requiring affiliated entities engaged in the same business to file a combined tax return. Other states have enacted add-back statutes to disallow beneficial deductions for royalties or interest payments to affiliated IPHCs. In computing franchise tax, Texas IPHCs must apportion gross receipts from in-state use of “patent, copyright, trademark, franchise, or license,” but not from other forms of IP. See Tex. Tax Code § 171.103; TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432 (Tex. 2011).
A concern for IPHCs is standing: “[A] patent-holding company may not claim the lost profits of a separate corporation as its own merely because the patentee has a relationship with the corporation.” Robert Matthews, Legal Nuances When a Patent Holding Company Seeks to Enforce a U.S. Patent. IDEA – The Intellectual Property Law Review. Vol. 49 (Jun 11, 2009), p.553. An exclusive license is ordinarily required for a patentee to join a patent holding company in an infringement action. However, “[t]he Federal Circuit appeared willing to consider the patentee’s contention that if the profits of the subsidiary/nonexclusive licensee ‘flow inexorably up to the parent,’ the patentee may recover those profits.” Id., p.555 (citation omitted).
IPHC structure could present procedural challenges and opportunities. For instance, the jurisdictional contacts of affiliated companies do not necessarily benefit one another. IPHCs that do not maintain a substantial operational presence in certain states may find themselves losing motions to transfer venue to a more preferable forum. In “obtaining an injunctive remedy for patent infringement, patent holding companies may have a more difficult time in proving entitlement to an injunction than a patentee who makes and sells a product that directly competes with the accused infringer’s product.” Id., p.558. “[N]o district court, in a published opinion, granted a permanent injunction to a non-practicing entity whose business model consisted solely of acquiring and licensing patents...” Id., p.565.
The degree and geography of the IP’s intended use matter greatly. “[When] patent-holding companies do not practice the patented technology, courts may find that the holding company will not suffer undue prejudice from a delay of an infringement suit [precluding awards of damages and prejudgment interest].” Id. p.577. “If an IPHC does not use the trademark itself, the trademark is susceptible to removal… for nonuse.” Cowan & Newberry, Reevaluating… p.31. Lastly, anti-assignability encumbrances on IP could add additional layers of complexity to IHPC organizational structures. These rights may or may not be triggered by successions-by-merger or successions-by-acquisition depending on how they are defined. 11 U.S.C. § 356(c)(1) restricts the assignment of non-assumable rights of IPHCs seeking to restructure through Chapter 11 bankruptcy.
For these reasons and more, setting up IPHCs is a process that requires extensive familiarity with the client’s business affairs and goals.
Hershel R. Chapin is the managing attorney of H. R. Chapin, Attorney & Counselor, PLLC and can be reached at firstname.lastname@example.org. Michelle Tullos provided invaluable assistance in researching this article.