United States: Supreme Court To Examine 35 U.S.C. § 271(f) Issues

Is the Federal Circuit's Holding that the Presumption Against Extraterritoriality Making Unavailable Damages Based on a Patentee's Foreign Lost Profits from Patent Infringement Consistent with 35 U.S.C. § 271(f)?

Case at a Glance: The Court will consider whether the text of 35 U.S.C. § 271(f) imposes liability on those supplying from the United States components of a patented invention "in such a manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States," and whether that liability also relates to the issuance of full compensatory damages where such infringement is found. Section 271(f) specifically targets domestic conduct (supplying components in or from the United States) with an intent that the components will be assembled abroad. The jury here found that respondents violated Section 271(f) by shipping components of petitioners' patented invention for assembly and use abroad. Because the intended foreign combination occurred and caused petitioners reasonably foreseeable harms, the jury awarded over $93 million in lost profits. The Federal Circuit, however, through application of the presumption against extraterritoriality, reversed the award of lost profits that would have been earned abroad. The Supreme Court will now consider whether the Federal Circuit's holding that lost profits arising from prohibited combinations occurring outside of the United States are unavailable in cases in which patent infringement is proven under Section 271(f) is proper under the statute.

Issue

Did the Federal Circuit err in holding that lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases in which patent infringement is proven under 35 U.S.C. § 271(f)?

Introduction

By statute, patent owners who prove infringement are entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." 35 U.S.C. § 284 (emphasis added). What damages are "adequate to compensate for the infringement" depends on the application of general tort principles to the facts of each case and can include lost profits in appropriate cases. Section 284 applies to damages for infringement under Section 271(f).

Congress adopted Section 271(f) in response to the Supreme Court's decision in Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972). In Deepsouth, the defendant sold a machine covered by a patent, but never assembled the full machine in the United States. Instead, the defendant shipped components in three boxes to customers abroad, who could assemble the machine within an hour. By a 5–4 vote, the Court held that the defendant could not be liable for infringement under then-existing Section 271 because the defendant's customers' acts all took place abroad and the defendant did not make, use, sell, or offer to sell the entire patented machine in the United States, nor induce or contribute to such acts occurring in the United States. Congress enacted Section 271(f) to close what it viewed as "a loop-hole" in patent law. 130 Cong. Rec. H10525 (1984). The Senate Report accompanying the final bill described Section 271(f) as a "reversal of Deepsouth." S. Rep. No. 98-663 (1984).

As enacted, Section 271(f) defined liability as an infringer for whoever, with the requisite mental state, exports components of a patented invention from the United States for combination "outside of the United States in a manner that would infringe the patent if such combination occurred within the United States." In enacting Section 271(f), Congress treated a specific action within the United States (exporting from the United States with the intent to combine abroad) as sufficient to impose liability, knowing full well that the combination and ultimate use would occur abroad. The Court has previously described Section 271(f) as an "exception" to "the general rule under United States patent law that no infringement occurs when a patented product is made and sold in another country." Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007).

The instant case requires the Court to assess whether the Federal Circuit's adoption of a presumption against extraterritoriality in denying lost profit damages arising from proven infringement by prohibited combinations occurring outside of the United States is consistent with the statutory text and intent of 35 U.S.C. § 271(f).

Facts

WesternGeco LLC. v. ION Geophysical Corp. (WesternGeco II), 791 F.3d 1340 (Fed. Cir. 2015), addressed a patent infringement suit by WesternGeco LLC (petitioner) against ION Geophysical Corp. (respondent) for infringement of, inter alia, United States Patent Nos. 6,691,038, 7,080,607, 7,162,967, and 7,293,520. WesternGeco's patents relate to marine seismic surveys, which are used to search for oil and gas beneath the ocean floor. WesternGeco's patents cover a system for controlling the movement of towed streamers in a manner that produces more efficient surveys and higher-quality data. ION manufactures components of a similar survey system in the United States that, when assembled, embodies WesternGeco's patented invention and exported the components to customers abroad, who assembled the system and used it to perform surveys on the high seas in competition with petitioner.

The jury found infringement and no invalidity as to all asserted claims and awarded WesternGeco $93.4 million in lost profits and a reasonable royalty of $12.5 million. The jury also found that ION's infringement had been subjectively reckless under the "subjective" prong of the then-prevailing two-part test articulated in In re Seagate, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc).

After trial, WesternGeco moved for enhanced damages for willful infringement under 35 U.S.C. § 284, and ION moved for judgment as a matter of law of no willful infringement, contending that WesternGeco had failed to prove that it was either objectively or subjectively reckless in its infringement. The district court held that ION was not a willful infringer, finding that ION's positions were reasonable and not objectively baseless and thus that the objective prong of the Seagate test had not been satisfied.

Upon appeal, the Federal Circuit, relying primarily on the presumption against extraterritoriality and an earlier Federal Court decision, Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc., 711 F.3d 1348 (Fed. Cir. 2013), reversed the lost-profits award, holding that WesternGeco was not entitled to lost profits resulting from foreign uses of its patented invention. The majority panel found that WesternGeco was entitled to a reasonable royalty, but eliminated the $93.4 million lost-profit damage award. In dissent, Judge Evan Wallach argued that the majority misread Power Integrations and conflated damages with liability to create a "near absolute bar to the consideration of a patentee's foreign lost profits [that] is contrary to the precedent of both of this court and of the Supreme Court."

WesternGeco subsequently petitioned for rehearing en banc, which the Federal circuit denied. In dissent, Judges Wallach, Pauline Newman, and Jimmie Reyna (the author of Power Integrations) reaffirmed the points made in Judge Wallach's panel dissent and added that the majority decision was "at odds with the longstanding and analogous 'predicate act' doctrine in the copyright context[, which] holds that a copyright owner 'is entitled to recover damages flowing from the exploitation abroad of...domestic acts of infringement.'"

In response, WesternGeco petitioned for certiorari, raising two questions: whether the court of appeals erred in holding that damages based on a patentee's so-called "foreign lost profits" are categorically unavailable in cases of patent infringement under Section 271(f); and whether the Supreme Court should hold the instant petition for Halo Electronics, Inc. v. Pulse Electronics, Inc., No. 14-1513, and Stryker Corp. v. Zimmer, No. 14-1520. After the Court decided Halo and Stryker, it granted WesternGeco's petition and issued an order remanding the case to the Federal Circuit for further consideration in light of the Supreme Court's decision in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016).

On remand, the Federal Circuit panel majority vacated the district court's judgment solely as to the denial of enhanced damages and remanded that limited issue "for further proceedings consistent with this opinion and with the Supreme Court's decision in Halo." In all other respects, the Federal Circuit reinstated its earlier opinion and judgment including as to lost-profit damages. Judge Wallach again dissented in part, objecting to the majority's formulation of a "rigid rule barring the district court from considering foreign lost profits even when those lost profits bear a sufficient relationship to domestic infringement."

WesternGeco petitioned to the Court for a writ of certiorari on February 17, 2017, and, on January 12, 2018, the Court granted the petition.

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