Google saved over $3 billion dollars in corporate income tax expenses between 2007 and 2010 through a transfer tax strategy known as the “Double Irish with a Dutch Sandwich.” But Google isn’t the only offender, most companies with intellectual property engage in this strategy, and it is estimated that it costs the U.S. Treasury up to $90 billion a year. So how do they get away with it? In brief, the key to the strategy is exploiting flexibility in determining the value of a company’s intellectual property. Being intangible, there are many ways to value intellectual property; companies utilizing the Double Irish strategy claim that their IP is not very valuable for income tax purposes. This seems counterintuitive. Companies invest millions of dollars acquiring, litigating, and defending their intellectual property—in essence, asserting that it is very valuable. And indeed it is; in many cases, intellectual property accounts for more of the book value of a company than all other assets in the company combined. Under the Double Irish strategy, companies minimize the value of their intellectual property for income tax purposes, but seek to maximize its value for patent infringement damages. Companies should not be able to benefit in both facets by changing what they claim their assets are worth.
This article proposes a litigation strategy whereby a defendant in patent litigation could exploit plaintiff inter-company patent licenses to minimize damages. Inter-company licenses are used to minimize income taxes, but should also be used to minimize claimable damages. This note begins by introducing a basic understanding of the corporate entity and intellectual property licensing structure (“Tax Structure”). A basic understanding of how the Tax Structure functions is important to understanding why there is inherent risk in the way companies currently do business. Section I will also discuss patent litigation, how patent infringement damages are determined, and finally will briefly discuss whistleblower laws. Section II will discuss some of the currently known risks to the Tax Structure, such as standing, forfeiture of lost profits damages, and the discoverability of these corporate secrets. Section III will introduce novel patent litigation defense strategies that could be used against these companies; much to the benefit of defendants, and to the detriment of tech companies seeking to assert their patents. Finally, Section IV discusses some of the legal challenges that one would face when installing these strategies.