18-Year Old Patent Litigation Case Involving Mars, Inc. Anything But a Coin Toss
It was in January 1990 when Mars, Inc. (“Mars”), the maker of popular M&M candy and a host of other products, including pet food (Pedigree) and other food products (Uncle Ben’s), brought a lawsuit against Coin Acceptors, Inc. (“Coinco”) related to technology used in vending machines to authenticate coins. The recent opinion from the United States Court of Appeals for the Federal District (2008 U.S. App. LEXIS 11707) is nearing the final chapter in the case with the court rejecting Mars’ lost profits theory and, instead affirming a royalty rate that has Coinco paying a hefty chunk of change – more than $14 million. However, the court remanded the case for a recalculation of that rate after ruling that Mars lacked standing to enforce infringement rights from 1996 to 2003.
The case involved several complicated twists and turns, but started from a relatively simple set of facts. Mars’s former subsidiary Mars Electronics International, Inc. (“MEI”) manufactured and sold vending machine coin changers with the ability to recognize and authenticate coins electronically. Mars alleged that certain Coinco products infringed on two of Mars’s patents which Mars had licensed to MEI. Coinco counterclaimed that Mars was in fact infringing on four of its own patents.
In 2005, after several years, and several published opinions, the district court found that Coinco was infringing upon Mars’s two patents. It also found that Mars was not infringing upon Coinco’s patents. With the issue of liability clearly behind them, the parties next moved to the damages trial, which would prove equally contentious. Given the length of the litigation, several independent actions occurred that reduced Mars’s damages. First, prior to 1996 MEI had a royalty agreement with Mars under which MEI made payments to Mars based on the gross sales value of coin changers using Mars’s patented technology. The royalty payments were structured as a traditional license agreement so that even if MEI did not make a profit, it was still obligated to pay Mars a royalty.
Next, Mars’s patents at issue expired on March 1, 1992 and July 1, 2003, respectively. In addition, Coinco introduced non-infringing alternative technology for electronic coin authentication in March 1994, thus cutting off Mars’s lost profits for any sales after that date. Another issue related to damages came when Mars entered into a set of agreements (the 1996 Agreements”) with MEI and another Mars subsidiary in the UK (“MEI-UK”) that transferred certain rights from Mars to MEI and established that MEI-UK would pay Mars royalties at agreed-upon diminishing rates beginning at 5% and gradually declining to 2%.
Prior to the damages trial, Coinco filed a summary judgment motion against Mars’s claim of lost profits. The district court granted to motion holding that Mars itself did not lose any sales because it was MEI that sold the coin changers and there was no evidence that profits from MEI’s sales flowed to Mars. Mars received only a royalty payment from MEI. The court also found that since MEI was neither the owner nor the exclusive licensee of the patents at issue, it did not have standing to sue Coinco so subsequently adding MEI as a party to recover its lost profits was not an option. On Mars’s motion for reconsideration, the court modified its ruling holding that the 1996 Agreements assigned all of Mars’s interest in patents to MEI and gave MEI (but not Mars) standing to pursue claims. However, the court found that Mars’s lack of standing for a period after the agreements were signed could be cured by the ‘imminent’ transfer back to Mars of the rights to the patents before final judgment.
Accordingly, on March 1, 2006, Mars and several of its subsidiaries entered into a purchase agreement for the sale of certain parts of the subsidiaries’ businesses to Mars. In addition, Mars and MEI entered into the “Coinco Confirmation Agreement, which acknowledged that Mars owned and retained the right to sue for past infringment of the litigation patents. The district court, treating the confirmation agreement as a transfer of all of MEI’s rights back to Mars, held that MEI now lacked standing to pursue claims for damages, and that Mars was entitled to recover damages during the period when MEI had owned the patents. At trial, the court found that a 7 percent royalty to Coinco’s sales for a total profit of $14,376,062.
On appeal, the United States Court of Appeals for the Federal District, tackled four issues: (1) whether Mars was entitled to lost profits, (2) whether MEI had standing to recover damages incurred prior to the 1996 Agreements; (3) whether Mars had standing to recover damages incurred from after the 1996 Agreements until the time the patents expired in 2003 and (4) whether the 7% royalty was too high.
Lost Profits
The district court granted Coinco’s summary judgment on the issue of lost profits when it concluded that Mars arrangement with MEI was a non-exclusive license arrangement where profits “flow(ed) inexorably from MEI to Mars.” The license non-exclusivity signified that Mars only expected a reasonable royalty rather than lost profits. In affirming the district court’s summary judgment, the Court of Appeals held that since MEI paid Mars a royalty based on gross sales value and not on profits, Mars “profit” were not affected by the infringment and its damages were limited to a reasonable royalty rate.
MEI’s Standing (Prior to 1996)
Only patent owners or an exclusive licensee can have constitutional standing to bring an infringment suit. The district court held that Mars owned the patent and that MEI was a non-exclusive licensee. Mars appealed claiming that MEI was an implied exclusive licensee. The Court of Appeals rejected Mars’s claim and affirmed noting that the 1996 Agreements make clear that both MEI and MEI-UK held “non-exclusive” licenses.
Mars Standing (1996 to 2003)
The District Court held that the 1996 Agreements stripped Mars of standing to pursue claims after January 1, 1996, but gave it a change to cure its error by executing an agreement transferring rights back to Mars prior to final judgment. The Court of Appeal after analyzing the Coinco Confirmation Agreement determined that it did not contain language sufficient to transfer title in the patent at issue back to Mars. Accordingly, Mars lacked standing from 1996 to 2003.
Royalty Rate
The district court determined that a reasonable royalty rate was a blended rate of 7% for both patents. Coinco appealed arguing that Mars’s royalty should be capped at 4% consistent with Mars’s prior representations to the UK Government. Coinco also claimed that the district court erred by relying on Coinco’s incremental profit rather than its operating profit to calculate the royalty. The Court of Appeals affirmed the 7% royalty holding that Coinco’s arguments had no merit. However, Court remanded the case for recalculation of damages in light of Mars’s lack of standing between 1996 and 2003.