Is it a prudent business strategy for a holding company (Company H) to own the patent assets used by Company A in manufacturing products sold by Company A?
Perhaps, let’s consider the following scenario:
- Company A has been in business for several years and has an impressive twenty percent market share for its Widget.
- The Widget generates one-half of Company A’s profits.
- Company A has a superb engineering staff that has patented various improvements of the Widget invention creating a profitable patent portfolio for Company A.
- Company A also generates royalties from its patent license agreements with other companies.
Supply Chain Problems
- For several years, SupplyCo provided Company A with 99% pure Critical Composition to manufacture its Widgets, but due to temporary utility power supply limitations, Company A was able to deliver only 96% pure Critical Composition to Company A.
- To meet pressing needs of its customers, Company A shipped 20 tons of Widgets made with 96% pure Critical Composition.
- During the subsequent six week period, due to the number of injuries to the users of the Widgets manufactured with 96% pure Critical Composition, a national recall of the 20 tons of Widgets was initiated by Company A.
- Unable to weather the recall and the pending lawsuits, Company A was forced to declare bankruptcy and the Widget patent portfolio was eventually sold in liquidation by the bankruptcy trustee.
Could the Sale of Company A’s Patent Portfolio been Avoided?
Generally – Yes – as long as the transactions between Company A and Company H are arms’ length dealings.
To minimize devaluation of an intellectual property portfolio, management can use one or more holding companies in their business strategy, such as limited liability companies to stabilize the value of the portfolio in the event the “unthinkable” occurs.
Advantages of Using a Holding Company for Intellectual Property
If Company H had owned the Widget patent portfolio and granted Company A an exclusive license to make, use and sale the patented Widgets, then:
- The Widget patent portfolio would not have been part of Company A’s bankruptcy and liquidated by the bankruptcy trustee.
- Company H would remain in business and could grant an exclusive license to Company X to make, use and sale the profitable Widgets.
- Company H could sell the valuable Widget patent portfolio to Company Y.
- It is likely that royalty income to Company H would be deemed as passive income.
- It is probable than any sale of the Widget patent portfolio to Company Y would be determined to be a long term capital gain.
Other Considerations for Using a Holding Company as a Business Strategy
- Better supply and manufacturing quality control – thereby avoiding the Widget recall and the ultimate demise of Company A.
- Remove Company A’s engineering department from Company A and setup Company E to do business with Company H, identified above, to better take advantage of the tax code’s provisions for intellectual properties.
- Company E can provide special enticements for its engineering staff to better retain and recruit the best engineering staff that will create subsequent generations of better and more profitable Widgets for licensing by Company H to Company A.
- Special enticements for the engineering staff apply only to Company E – not Companies H or A.
- Company E can be easily located in an area where Company E takes maximum advantage of governmental tax incentives.
- Regardless of what happens to Company A utilizing this business strategy, Companies H and E remain viable entities.
As you can see, there are many different business strategies which o utilize corporate structures to maximize profits and reward the best efforts of employees. This illustration provides only a few of those options.
Contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.
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