U.S. District Court Denies Foreign Company From Seeking Lost Profits Based on Sales Lost by its U.S. Subsidiary

In Fujitsu Limited v. Tellabs, Inc., Case No. 09 C 4530 (N.D. Ill. May 23, 2013), Fujitsu Limited (“Fujitsu”), a Japanese corporation that solely owns two US patents related to telecommunications systems, filed a patent infringement action against Tellabs, Inc. (“Tellabs”). Fujitsu sought to recover the profits that were lost by its domestic subsidiary, Fujitsu Network Communications (“FNC”), due to Tellabs’ sales of the allegedly infringing systems. But Tellabs filed a motion with the District Court for the Northern District of Illinois for summary judgment on the issue of lost profits where the court had to decide whether a parent company patent owner can be compensated under the damages theory of lost profits for its wholly-owned subsidiary’s lost sales. Tellabs contends in its motion "that (1) Fujitsu Limited is not entitled to damages in the form of the lost profits because it sells no products in the United States and (2) Fujitsu Limited cannot claim the lost profits of its North American subsidiary and non-exclusive licensee, Fujitsu Network Communications, Inc." To analyze whether Fujitsu could seek lost profits in this situation, the District Court focused on “whether the subsidiary’s profits “flowed inexorably” to the patent-owner parent” and stated that “the mere fact the subsidiary’s lost sales may have caused harm to the parent company is not sufficient, by itself, to establish lost profits damages.” Focusing on the facts of this case, the court notes, “Fujitsu Limited, a Japanese corporation, owns the patents-in-suit. FNC, a California corporation headquartered in Texas, is a separate entity from Fujitsu Limited but is its wholly-owned subsidiary. The sales in the United States of the Fujitsu FLASHWAVE 7500 operating system at issue are made only by FNC. FNC is a non-exclusive licensee of the Fujitsu Limited patents-in-suit. Fujitsu Limited has also licensed the patents-in-suit to IBM, Texas Instruments, and AT&T in the United States, as well as Hitachi and Nippon Telegraph and Telephone Corporation in Japan. Fujitsu Limited has never received any corporate dividends from FNC.” Further, the court found that there was no transfer or “flow” of profits as Justice Holderman notes, “The fact that Fujitsu Limited assigns 20 to 30 employees to work at FNC at all levels of FNC's operations, and the fact that customers or others do not appear to differentiate between Fujitsu Limited and FNC are not material to the lost profits issue. Moreover, the fee paid by FNC to Fujitsu Limited for use of the "Fujitsu" brand and the manufacturing royalty paid by FNC for photonics components that FNC does not purchase from Fujitsu Limited is more of an agreed upon inter-corporate penalty rather than the flow of profit.” Lastly, Fujitsu’s tax avoidance strategy designed to minimize taxes of Fujitsu and FNC did not constitute transfer of profits from FNC to Fujitsu. Accordingly, the District Court granted Tellabs’ motion based on the fact that Fujitsu Limited does not sell any telecommunications systems in the United States and that sales of the patented technology are made by its non-exclusive licensee and wholly-owned subsidiary FNC. However, the court certified the lost profit issue to the Federal Circuit to provide additional guiding precedent on this issue. Summary by: Sumaiya Sharmeen