Schreiber Foods, Inc. v. Beatrice Cheese, Inc.
| Decision Date | 20 February 2004 |
| Docket Number | No. 97-C-566.,No. 97-C-11.,97-C-11.,97-C-566. |
| Citation | 305 F.Supp.2d 939 |
| Court | U.S. District Court — Eastern District of Wisconsin |
| Parties | SCHREIBER FOODS, INC., Plaintiff, v. BEATRICE CHEESE, INC. and Kustner Industries, S.A., Defendants. Schreiber Foods, Inc., Plaintiff, v. Great Lakes Cheese Co., Inc., Great Lakes Cheese of La Crosse Wisconsin, Inc., and Great Lakes Cheese of Wisconsin, Inc., Defendants. |
Michael Mazza, Richard, Megley, Jr., Thomas Scavone, Chicago, IL, Paul Vickery for Plaintiff.
James Quarles, William Lee, William McElawain, Washington, DC, for Defendants.
DECISION AND ORDER
Plaintiff Schreiber Foods, Inc. ("Schreiber Foods"), a corporation located in Green Bay, Wisconsin, brought patent infringement actions against defendants Kustner Industries, S.C. ("Kustner") and the Great Lakes Cheese Co., Inc. and several companies associated with it (collectively "Great Lakes") alleging infringement of U.S. Patent No. 5,440,860 ("'860"), which covers machinery for packaging processed cheese in hermetically sealed slices.1 While the actions were pending, Schreiber Foods added claims of infringement of U.S. Patent 5,701,724 ("'724") to both suits. Prior to trial, the actions against Kustner and Great Lakes were consolidated, and in August 1998 a jury found that both defendants had infringed both patents and awarded Schreiber Foods over $26 million in damages. After various post-verdict motions and an appeal, on September 12, 2002, I entered judgment for Schreiber Foods.
Pursuant to Fed.R.Civ.P. 59 and 60, defendants now move to vacate the judgment on the ground that this court lacked jurisdiction to enter it and, alternatively, on the grounds that the judgment was obtained through misrepresentation and that defendants have recently discovered new evidence. Defendants' motions arise out of their post-judgment discovery that while the action against Kustner was pending and before the action against Great Lakes was commenced, Schreiber Foods assigned the '860 patent to a subsidiary and took back a non-exclusive license. Defendants argue that as a non-exclusive licensee, Schreiber Foods lacked standing to bring the infringement actions and that, as a result, the action against Kustner became moot, and the court never acquired jurisdiction of the action against Great Lakes. Defendants also contend that Schreiber Foods's failure to disclose the assignment and licensing agreement was a prejudicial misrepresentation and that the assignment and licensing agreement constitute newly discovered evidence.
On August 5, 1995, the United States Patent and Trademark Office ("PTO") issued the '860 patent to Schreiber Foods. On January 7, 1997, Schreiber Foods sued Kustner for infringement of the '860. On March 31, 1997, while the action was pending, Schreiber Foods assigned the '860 to its subsidiary, Schreiber Technologies, Inc. ("Schreiber Tech"), a passive investment corporation ("pic"), and took a non-exclusive license in the patent.
Corporations establish pics for the purpose of reducing their state taxes. A corporation will establish a pic in a state with either no corporate income tax or a minimal tax and assign its intellectual property, such as patents, to the pic in exchange for stock. Pamela S. Chestek, Control of Trademarks by the Intellectual Property Holding Company, 41 IDEA 1, 2 (2001). The exchange of patents for stock is a non-taxable transfer under 26 U.S.C. § 351. The pic then grants back to the parent a non-exclusive license to use the patents in return for a specified royalty. Chestek, supra, at 2. One reason that the parent takes back a non-exclusive rather than an exclusive license is to avoid the appearance of a sham transaction, which might draw the attention of state tax authorities. Robert A. Matthews, Jr., A Potential Hidden Cost of a Patent-Holding Company: The Loss of Lost-Profit Damages, 32 AIPLA Q.J. (forthcoming Fall 2004); Robert A. Matthews Jr., Patent-holding Companies Hold Risks, Nat. L.J., June 16, 2003, at S7.
The royalty payments that the parent pays to the pic are a business expense to the parent and therefore tax deductible. Chestek, supra, at 2. By relying on the corporate distinctness of the pic and the obligation to pay a royalty, the parent enjoys a tax deduction even though, as the sole shareholder of the pic, the parent effectively pays itself the royalty. Matthews, supra. By establishing the pic in a no or low tax state, the pic's income from the royalty payments is also untaxed or only minimally taxed. Chestek, supra, at 2. Further, the pic's income is later funneled back to the parent, its sole stockholder, in the form of non-taxable dividends. Id. Thus, the net effect of creating a pic can be a substantial reduction in state taxes for the corporate enterprise.
Prior to creating Schreiber Tech, Schreiber Foods received advice from the accounting firm, Ernst & Young ("Ernst"), concerning how to establish and contract with a pic so as to be able to defend the arrangement against a challenge from state tax authorities. Ernst advised Schreiber Foods that it could not retain any rights in the patents transferred to the pic. Ernst also stated that it was essential that the pic have corporate substance, and that it be located in a state other than Delaware or Nevada, which were so closely associated with pics that locating it there would raise a red flag for tax collectors.
Schreiber Foods decided to establish a pic and engaged a Milwaukee law firm to assist with the transaction. The law firm incorporated Schreiber Tech in Minnesota. Schreiber Foods assigned the '860 and other patents to Schreiber Tech and took back a non-exclusive license to use the patented invention in return for a royalty of 1.5 percent of net sales of products resulting from the patent. Under the terms of the license, Schreiber Tech retained the sole right to initiate and control any action for infringement of the patent, including for infringement occurring prior to the assignment. Further, the licensing agreement could only be modified in writing.
On May 13, 1997, after it had assigned the '860 patent to Schreiber Tech and become a non-exclusive licensee, Schreiber Foods commenced an action against Great Lakes for infringement of the '860.
At about the same time, Schreiber Foods applied to the PTO for what was to become the '724 patent. The PTO initially rejected the application on the ground that the requested patent was obvious in light of the '860, and that issuance of it would constitute double patenting. However, the PTO subsequently agreed to issue the patent if Schreiber Foods filed a terminal disclaimer agreeing that the patent would be enforceable only as long as it was commonly owned with the '860. On July 10, 1997, Schreiber Foods filed such a disclaimer. When it filed the terminal disclaimer, Schreiber Foods did not disclose to the PTO that it had already assigned the '860 patent to Schreiber Tech and become a non-exclusive licensee. On December 30, 1997, the PTO issued the '724 patent to Schreiber Foods. Schreiber Foods did not assign the '724 to Schreiber Tech. In January 1998, Schreiber Foods added claims of infringement of the '724 to its suits against Kustner and Great Lakes.
In its infringement actions against defendants, Schreiber Foods did not name Schreiber Tech as a party. Moreover, at no time in the course of the litigation did Schreiber Foods disclose to defendants that it had assigned the '860 to Schreiber Tech and taken a non-exclusive license in the patent. During discovery, defendants asked Schreiber Foods for documents relating to agreements or licenses that it had entered into involving the patents in suit. In response, Schreiber Foods produced no documents and affirmatively represented that no licenses pertaining to the patents were in effect.
At trial, Thomas Badciong, a Schreiber Foods director who was present at a meeting nine months previous at which the Schreiber Foods board approved the assignment of the '860 patent to Schreiber Tech, testified as follows:
Q. Let me show you, Mr. Badciong, what have been marked as Plaintiff's Exhibit 1 and 2. Can you identify those for the jury, please?
A. Yes, I can.
Q. And what are the two exhibits? What's Exhibit 1?
A. Exhibit 1 is a copy of the — or is the '860 patent.
Q. And Exhibit 2?
A. It's the '724 patent.
Q. These patents are owned by Schreiber Foods; is that right?
A. Yes, they are.
Q. And for what period of time did Schreiber own those patents?
A. Since we received them.
Q. Since they were issued by the Patent Office?
A. Yes, since they were issued by the Patent Office.
Schreiber Foods's damage expert, Joseph Gemini, testified at trial concerning the damages that Schreiber Foods incurred as the result of defendants' infringement of the patents in suit. His estimate was based on the assumption that Schreiber Foods held legal title to the '860 patent and that the '724 patent was enforceable. He testified that Schreiber Foods was entitled to damages for lost profits and a royalty at a rate of about nine percent — approximately six times the 1.5 percent paid by Schreiber Foods to Schreiber Tech.
Schreiber Foods's trial attorneys state that during the trial they were not aware that Schreiber Foods had assigned the '860 to Schreiber Tech and became a non-exclusive licensee, but that they discovered such facts about five weeks after the trial. They chose not to disclose the information to defendants or to the court. However, they advised Schreiber Foods to terminate the licensing agreement and have Schreiber Tech reassign the patent to it. On April 21, 1999, Schreiber Tech cancelled the licensing agreement with Schreiber Foods and reassigned the patent to it.
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