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Archived updates for Wednesday, April 13, 2005

Spin-Off Leads to $500 Million Patent Infringement Liability in Bankruptcy

In a 138-page ruling on Lambert v. Weyerhaeuser Co., No. 99-6470., U.S. Bankruptcy Judge Margaret H. Murphy is reported to have levied a $457.8 million judgment, plus millions more in attorney fees and interest, against Weyerhaeuser Co. for violating patent infringement warranties when it spun off its disposable diaper division as a "liability-laden subsidiary."

According to the Fulton County Daily Report on April 13, 2005, Judge Murphy wrote that "the gravamen of Weyerhaeuser's liability is that, in addition to the funds that Weyerhaeuser received in connection with the IPO, the primary benefit of the bargain to Weyerhaeuser was divorcing itself from what it knew to be an enormous potential patent infringement liability that was substantially certain to occur. Additionally, Weyerhaeuser was able to reap the benefit of an unpredictably successful IPO. To reward Weyerhaeuser's strategic divestment by limiting damages ... would encourage other large corporations to evade liabilities by transferring assets to a subsidiary and divesting themselves of their liability-laden subsidiaries."

In December 1991, P&G notified Weyerhaeuser that its diaper infringed on P&G disposable diaper patents and in-house patent counsel advised the company's general counsel that Weyerhaeuser's chances of winning a patent infringement suit were "no better than 50/50." At that time, Weyerhaeuser General Counsel Bob Lane advised company auditor Arthur Andersen that the damages arising from such a claim could be "enormous," according to the order.

Three months later, Weyerhaeuser decided to dispose of the division by creating a subsidiary, headed by diaper division employees, and then spinning it off with an IPO. At least one corporate investment bank had advised that the division "might not be saleable at anything better than a ‘fire sale' price."

Weyerhaeuser sold 11.5 million shares of Paragon to the public at $19 a share, netting more than $215 million. After going public in 1993, Paragon, within a year, found itself the target of a patent infringement suit by Procter & Gamble. A Delaware judge levied a $178 million judgment against Paragon on Jan. 6, 1998. Paragon filed for bankruptcy in Georgia the same day.
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