Medtronic Part Deux: The Best Method Is Yet To Come?

• Published date: 30 September 2022
• Subject Matter: Intellectual Property, Tax, Patent, Trademark, Income Tax, Transfer Pricing
• Law Firm: Ruchelman PLLC
• Author: Mr Michael Peggs

INTRODUCTION

The purpose of the most recent decision in the Medtronic saga¹ extends and refines the prior analysis of one of five connected controlled transactions within Medtronic's controlled group of multinational medical device producers and suppliers. The transactions may be described as follows:

1. Medtronic licensed patented and unpatented intangible property related to the design and production of sophisticated medical devices to a controlled Puerto Rican subsidiary ("MPROC"), which served as the manufacturer. The intangible property related to (i) implantable pacemakers cardioverter defibrillators, cardiac resynchronization devices neurostimulation devices, and (ii) connective leads.
2. Medtronic licensed its trademark intangible assets to MPROC.
3. Medtronic sold manufactured product components and sub-assemblies to MPROC.
4. MPROC sold finished medical devices to a U.S. group company for resale worldwide.
5. Medtronic licensed the same intangible assets related to products (i) and (ii) described above to a controlled Swiss manufacturer that began device and leads production operations after MPROC. The Swiss affiliate paid royalties at the same rates as MPROC to Medtronic.²

The first two transactions - license of manufacturing intangible property and license of trademarks - were the main subject of a period of examination controversy that concluded with the I.R.S. adjusting the royalty income of the U.S. Medtronic licensor for tax years 2005 and 2006. The adjustments included additional income necessary for the royalty to be arm's length as determined under the comparable profits method ("C.P.M.") analyses performed by the I.R.S.

Medtronic's 2005 and 2006 position originated in an M.O.U. settlement with the I.R.S. involving the same transactions and issues, but in respect of Medtronic's 2002 tax year. That settlement was based on an agreed division of profit between the U.S. and MPROC but not on a specific transfer pricing method. The settlement outcome nonetheless informed the transfer pricing position of Medtronic for the tax years 2005 and 2006. Medtronic applied the comparable uncontrolled transaction ("C.U.T.") method to determine its 2005 and 2006 non-trademark income using a licensing agreement between Medtronic and Pacesetter, a Siemens group company active in the cardiac rhythm disease management business, concluded for the purpose of settling a medical device patent litigation matter between the two competing companies in the early 1990's...