IP Holding Companies, Part II

by Mark Malek

In a previous post, we discussed the importance of forming an intellectual property holding company to own your IP.  That previous post established that starting an IP holding company is necessary.  This post will focus on the details.

Talk to any lawyer, and one of their primary goals for their clients is managing their liabilities.  This generally includes separating assets so that liabilities do not cross over.  For example, suppose you own your IP personally, i.e., it is titled in your name personally.  Now imagine that a thief breaks into your house, slips on your floor, sues you for having a slippery floor, and somehow gets a judgment against you (here is a story about a burglar that sued the homeowner that shot him).  What happens if your homeowner’s insurance does not cover the judgment?  The crazy thief is going to look somewhere for the deficiency and will probably engage in some post-judgment discovery to find out what you own.  During the discovery, the crazy thief may find a bank account or two, but eventually, the thief’s attorney is going to uncover a patent that you own.  Turns out that you started a company last year that manufactures products covered by the patents, but the company does not pay you a royalty, and there is no agreement in place between you and the company.  Guess what — You can bet that the crazy thief’s attorney is now going to seek ownership of that patent to satisfy the judgment.  There is a strong chance that the crazy thief’s attorney will be able to get your patent transferred to his client.

Any guesses on the first thing that the crazy thief does once he has ownership in the patent?  That’s right; he will now demand that you pay royalties for manufacturing the product that is covered by the patent.  If you do not agree to the royalty, the next step is filing a patent infringement suit in Federal Court.  Do you see how this is spiraling downward now?

Simply transferring your IP into an IP holding company, however, is not enough.  It is essential to keep everything separated.  Here’s the next example of how the crazy thief’s attorney will try to get a hold of your IP.  Suppose you did place the patent in a holding company.  Also suppose, however, that you have paid for every expense associated with that company out of your personal bank account or, even worse, with funds from the company that manufactures the product that is protected by the company.  Now you have comingled all your funds, and a court will likely find that you have used your IP holding company as your “alter-ego” thereby allowing the crazy thief’s attorney to “pierce the corporate veil” and start collection efforts against your IP holding company.

The moral of the story is that not only is it important to keep all of your IP separated from anything else that you may own, but it is also important to make sure it is done properly.  This will include taking the steps of forming a corporate entity (in FL, we recommend an LLC), starting a bank account for that company, paying for your IP expenses out of that bank account only, holding annual meetings (yes, even if you are the only member of the LLC, you need to hold an annual meeting, which will be discussed in another post), and generally ensuring that you never comingle the property of the IP holding company with any other property.