Important New Patent Decision on Successor Liability

September.09.2010

In a recent decision, the Federal Circuit held that a U.S. subsidiary of Daewoo Electronics was the successor-in-interest to a now-defunct U.S. subsidiary whose business it continued. Funai Electric Co., Ltd. v. Daewoo Electronics Corp. et al., Nos. 2009-1225, 2009-1244. The Federal Circuit applied state successor liability law, notwithstanding the fact that the business was transferred as part of an agreement executed solely between parent companies in South Korea, the law of which does not recognize successor liability that is not expressly assumed by contract. As successor-in-interest, the present Daewoo subsidiary was held liable for an $8 million default judgment against the predecessor, in addition to damages for infringing sales it made after the transfer of the business.

Background

In 2002, Daewoo Electronics Company Ltd. ("DECL") and Daewoo Electronics Corporation ("DEC"), entered into an "Agreement for Sale and Purchase of Assets" governed by South Korea law. DECL sold its VCR business to DEC. As a part of the same asset transfer, Daewoo Electronics Company of America ("DECA"), a California Corporation, transferred its entire business to Daewoo Electronics America, Inc. ("DEAM"), a Florida corporation. After the transaction was concluded, DEAM began running the business formerly carried out by DECA, using the same New Jersey facility, personnel, management and equipment. There was no evidence of any agreement directly between the U.S. subsidiaries other than the sale of the New Jersey facility from DECA to DEAM.

In 2004, Funai Electric Company, Ltd. sued all four Daewoo entities in the Northern District of California for patent infringement. Funai sought damages from DECL and DECA for the period preceding the asset sale in 2002, and from DEC and DEAM from 2002 forward.

In 2005, DECL and DECA ceased all participation in the litigation. A default judgment of $8,066,112 was ultimately entered against them, jointly and severally. Funai then sought to collect this default judgment from the present companies DEC and DEAM, alleging they were successors-in-interest to the liability.

The district court held that neither DEC nor DEAM was liable to pay the default judgment on the ground that South Korea law does not permit successor liability that is not expressly assumed by contract.

Analysis of the Opinion

The Federal Circuit reversed, holding that the U.S. has "an overriding interest in the integrity of judgments of its courts with respect to violations of United States law by entities doing business in the United States." As a result, U.S. law and relevant state law applies to the transfer between the U.S. subsidiaries

The Court applied the successor liability law of New Jersey, the principal place of business of both DECA and DEAM. Funai argued that the DECA-DEAM transfer was both a de facto merger and a "mere continuation," either of which would suffice to find successor liability under New Jersey law. The Federal Circuit agreed, and found that DEAM was simply a "new hat" for DECA, evidencing an intent on the companies' part to effectuate a merger or consolidation rather than a sale of assets. After this decision, U.S. subsidiaries of foreign companies can be held to U.S. successor liability law even when a sales transaction between their parent organizations is executed in another country, under the laws of that country.