EDTX questions viability of "inexorable flow" doctrine of lost profits


The Eastern District of Texas, in Mars, Inc. v. TruRX LLC, No. 6-13-cv-00526 (E.D. Tex. March 14, 2016) (Mag. Judge Nicole Mitchell), questioned whether the "inexorable flow" doctrine of lost profits is viable. The Federal Circuit had previously addressed inexorable flow in an earlier litigation involving Mars. Mars, Inc. v. Coin Acceptors, Inc., 527 F.3d 1359, 1365 (Fed. Cir. 2008) (refusing to award "lost profits" to the patent holder when its subsidiary corporation lost sales due to infringement, but recognizing the possibility of lost profits if the parent-patent holder can prove that the subsidiary's lost profits inexorably flow up to the parent), mandate recalled and amended on other grounds, 557 F.3d 1377 (Fed. Cir. 2009).

In the EDTX Mars/TruRX case, the court addressed defendant's motion for summary judgment challenging Mars's ability to recover lost profits on products sold by its subsidiaries. As with the earlier Federal Circuit decision, the Mars parent, which owned the patents and brought suit, did not make or sell any products. Mars responded citing the inexorable flow doctrine, and contended that it could collect profits lost from alleged infringing conduct because its subsidiaries sold products that competed with the alleged infringing product and "all profits generated by Mars's subsidiaries are transferred daily to Mars's bank account." Slip op. at 11-12. Mars cited the earlier Federal Circuit decision and four district court cases to support its contention that a parent corporation may seeks to recover lost profits of its subsidiary if the latter's profits do flow inexorably up to the parent. Slip op. at 13 (citing Corning Optical Commc'ns Wireless Ltd. v. SOLiD, Inc., No. 5:14-CV-03750-PSG, 2015 WL 5723403, at *7 (N.D. Cal. Sept. 16, 2015); Advanced Fiber Techs. (AFT) Trust v. J & L Fiber Servs., Inc., No. 1:07-CV-1191 (LEK/DEP), 2015 WL 1472015, at *25 (N.D.N.Y. Mar. 31, 2015); Callaway Golf Co. v. Acushnet Co., 691 F. Supp. 2d 566, 575 (D. Del. 2010); Cordis Corp. v. Boston Sci. Corp., No. Civ. 03-027-SLR, 2009 WL 3160270, at *4 (D. Del. Sept. 30, 2009)).

After surveying the law, including additional cases that Mars did not cite, the TruRX court concluded that each of the cases made a "leap" to conclude that the inexorable flow doctrine is accepted law. Slip op. at 16-17. The court also noted that since Mars the Federal Circuit has twice refused to allow a patentee to recover lost profits of a related company as its own under the inexorable flow doctrine. Id. at 17 (citing Spine Solutions, Inc. v. Medtronic Sofamor Danek USA, Inc., 620 F.3d 1305, 1319 (Fed. Cir. 2010); Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F.3d 1365, 1375 (Fed. Cir. 2015), cert. granted, vacated sub nom. on other grounds, Medtronic Sofamor Danek USA, Inc. v. Nuvasive, Inc., No. 15-85, 2016 WL 207240 (U.S. Jan. 19, 2016)).

The TruRX court questioned the viability of the inexorable flow doctrine. It cited the Poly-America case, which the TruRX court characterized as holding that lost profits are only recoverable if they stem from the lost sales or price erosion of a product that the patentee itself is selling. Slip op. at 20. The TruRX court summarized its holding:

Thus, based on the current precedent, it appears that no matter how profits flow between Mars and its subsidiaries, Mars cannot recover lost profits on the [patented products] at issue in this case because Mars itself does not sell those products. This result is also consistent with the Poly-America court's rationale for refusing to allow the plaintiff there to disregard the formalities of its corporate organization. See 383 F.3d at 1311. Here, Mars has chosen to organize the corporate identities and functions of its wholly-owned subsidiaries "to suit its own goals and purposes," and as a result, must take the benefits of that decision with their corresponding burdens. Id. Consequently, Mars may not recover lost profits from products sold by its subsidiaries.

Slip op. at 20-21.