Few in the gaming industry have avoided the effects of the current economic climate, with many experiencing a decline in revenues. Yet, as is often the case in a down economy, many companies are relying on their innovative talents to develop new products and then utilize the patent system to protect any resultant inventions.1 Companies that introduce innovative products into the market are often better equipped to compete when down economies recover. Indeed, new players have recently entered the gaming industry with business plans premised on their own innovations. Similarly, existing gaming companies have emphasized research and development in an effort to introduce new patentable products into the industry.
In addition to the increase in innovation, others in the gaming industry have enlisted the courts to help protect the value of their already patented innovations by filing patent infringement actions to stop the unauthorized use of their technology and to seek compensation for such improper use. For example, in a recently decided case, Japan Cash Machine Co. Ltd. (JCM) sued MEI Inc. for infringement of a patent relating to a cash exchange machine with a bill validator feature.2 After trial, a jury awarded JCM more than $11 million in damages to compensate for MEI’s infringement. The court also entered an injunction preventing further infringement by MEI.
This example highlights the significant monetary value a strong patent can provide to its owner. Patents also have value to their owners in the form of the leverage they can provide in the marketplace. Yet, because patents are considered an intellectual property, they are not valued the same way as a companies’ tangible property. As such, companies often look for ways to advantageously reflect patents on their financial statements, but companies need to be aware that such actions can negatively affect their ownership rights in their patents.
While companies use a variety of ways to take advantage of the significant financial benefits patents can afford, appropriate steps should be taken to maintain their ownership rights in these patents. For example, companies often transfer ownership of their patents to a related entity created to hold the patents and then license them to the original owner or other subsidiaries, as this arrangement can provide significant tax benefits. Patent owners also sometimes transfer all or some of their rights to an unrelated third party for revenue generation. Moreover, in view of the current economic situation, companies have recently sold or transferred rights in certain patents to other third parties to raise capital. Patent rights have also been transferred as part of bankruptcy proceedings, either alone or in connection with other assets, which also affects ownership rights. Given the steps companies employ to advantageously treat patents for financial and tax purposes, it is important to track and record any ownership changes resulting from this treatment. The failure to track these ownership changes can create significant problems later.
This point was illustrated clearly in a couple of lawsuits involving companies in the gaming industry. In the first lawsuit, Mars Inc., a subsidiary of MEI, sued JCM for infringement of two patents relating to the cover portions of document handlers, such as bill validators, which could appear in vending machines, gaming machines and other devices requiring validation of paper currency.3 In 2008, more than three years after Mars filed the lawsuit, the court was informed that Mars did not own the patents and thus did not have standing to bring the lawsuit. The court found that Mars had assigned its rights in these two patents to MEI—which was not a party to the lawsuit—in 1996. Thus, the court dismissed the present action.4
This decision came on the heels of the dismissal of a second patent infringement action brought by Mars against Coin Acceptors Inc. (Coinco) for infringement of four of Mars’ patents.5 The court found that Coinco infringed these patents and was liable for more than $14 million in damages. Later, the court became aware of various agreements between Mars and MEI that transferred ownership rights in the patents at various times for tax purposes, including the 1996 agreement, referenced above. The court thus found that, despite the fact that Coinco infringed these patents, Mars lacked standing to recover any damages for infringement during a seven-year period when it did not own the patents. This significantly reduced the damages claim.
These cases illustrate the perils to a company that fails to properly track ownership of its patents. Put simply, by failing to file lawsuits in the name of the actual patent owner, Mars lost out on significant damages to which it would have otherwise been entitled and spent significant attorneys’ fees pursuing claims it had no legal right to bring.
Companies in the gaming industry that elect to invest in innovation may enjoy significant advantages, including exclusive new product offerings, which often results in increased revenues and/or market share and the ability to obtain significant damages awards against non-innovative companies that copy their patented developments. While not a new concept, the ability to innovate is what will likely set companies apart when the economic downturn points in the other direction. However, as a company innovates, it should employ procedures to track ownership of the patents it obtains in order to prevent a negative impact on the value of these assets.
Footnotes:
1 The U.S. Patent System derives its origins from the Constitution, which provides that “The Congress shall have the power … to promote the progress of the Science … by securing for limited times to … inventors the exclusive right to their … discoveries.” Article I, Section 8, Clause 8. The framers of the Constitution believed that innovation would be the lifeblood of the U.S. economy. This logic applies equally today, particularly in the global gaming industry.
2 Japan Cash Machine Co. v. MEI Inc., Civil Action No. 05-cv-01433 (D. Nev.).
3 Mars, Inc. v. JCM American Corp., Civil Action No. 05-cv-03165 (D. N.J.).
4 JCM filed a motion with the court asking for an award of $3 million to compensate it for the attorneys’ fees it had spent defending an action that Mars had no standing to bring in the first place. The court granted the motion but only required Mars to pay JCM about $70,000.
5 Mars Inc. v. Coin Acceptors Inc., Civil Action No. 91-cv-00094 (D. N.J.).
John S. Artz is a member of dickinson Wright PLLC and also a member of the Dickinson Wright Gaming Law Group. He can be reached at jsartz[at]dickinsonwright.com.
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