Legal Question in Business Law in California

Amazingly risky and dangerous scenario. Triple damages available for patent infringement. Patent pending does not mean it is not protected. Use of an LLC to shield an individual from liability can result in forfeiting the LLC protection and allowing direct suit of the members. Don't do it! (That was shouted, not whispered by the way!) In this scenario, you have to hire my office to protect you at the cost of a Harvard education from the School of Hard Knocks. Just so we don't end on a negative note - A better scenario is to approach the patent applicant/holder and negotiate a distribution agreement where you pay him/her/it a small royalty and you legally retain the lion's share for your fabulously genius marketing and/or manufacturing efforts. Next, in my imagination, they decide that you're so brilliant that they entrust you with other shared responsibilities in making the patented product supremely successful in the marketplace and you retire millionaires. Alternative 2 - the patent wasn't so strong in the first place and you're able to do something similar but not infringing? Of course, I get to prepare all the multi-million dollar agreements since I love negotiating happy ending deals! (sigh)

Yes it may be patent infringement. Paying out profits to the partners raises the issue of whether or not the partners may be sued outside of the LLC. I could only give a reliable opinion after researching the issue for a reasonable fee. Contact me directly.

I answered much the same question under a different topic heading earlier today. Here is the essence of my earlier answer:

As to #1, YES.

As to #2, the LLC would be the primary target of an infringement lawsuit, and a judgment obtained against it would require it to fork over the money, etc. in the LLC's bank accounts and the other assets capable of levy and seizure. The three LLC members could also be named as parties to the lawsuit, either on an "alter ego" (veil piercing) theory, or on a theory that these individuals personally acted wrongly in their individual capacities. This may sound like legal hair-splitting, and in a way it is, but establishing liability on an alter ego theory is often difficult or impossible when the company was well-run otherwise but its officers caused it to violate the law in a particular area. Further, 35 U.S.C.A. 271(b) says "Whoever actively induces infringement of a patent shall be liable as an infringer." There is case law holding that this applies to officers, managers and directors of infringing companies, since these control persons "actively induce" the business entity to run its business in the way it does. See, for example, Int'l. Mfg. Co, v. Landon, Inc. (1964) 336 F.2d 723 - corporate officer liable without regard to alter ego theory.

Further, with respect to #3, corporations, LLCs and other organizations that overcompensate insiders, whether through salaries, dividends or bonuses, in an attempt to place cash and other resources out of the grasp of creditors, are probably making fraudulent transfers or otherwise violating the law in doing so, and could be forced to give back the monies.