United States: Supreme Court Rules That Foreign Lost Profits Are Recoverable Under 35 U.S.C. §271(F)(2)

On June 22, 2018, the United States Supreme Court expanded the extraterritorial reach of patent damages with its decision in WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, ruling that a patentee can recover profits from lost foreign sales due to domestic patent infringement under 35 U.S.C. §271(f)(2).

Background

UK-based geophysical services company WesternGeco is the owner of four patents claiming inventions used in surveying the ocean floor to identify promising locations to drill for oil and gas. Ships tow streamers that bounce sound waves off of the bottom of the ocean floor to map the floor and locate the resources. The patented improvements relate to steering technology that controls the lateral motion of the streamers to reduce drift, which, in turn, reduces the risk of tangling and minimizes distortions in the map. WesternGeco sued ION in the U.S. District Court for the Southern District of Texas for infringement under 35 U.S.C. §§271(f)(1) and (f)(2), which respectively prohibit (i) supplying all or a substantial portion of the components of a patented invention "in or from the United States" in a manner that induces another to combine the components abroad in a manner that would infringe in the U.S., and (ii) supplying "in or from the United States" a component of a patented invention that is specially made for, or adapted for use in, an invention and is not suitable for a substantial non-infringing use, intending the component to be combined outside the U.S. in a manner that would infringe if combined within the U.S. WesternGeco alleged that it lost 10 specific survey contracts as a result of ION's infringement.

After trial, the jury found that ION infringed under both sections 271(f)(1) and (f)(2), and awarded WesternGeco both a reasonable royalty ($12.5 million USD) and lost profits ($93.4 million USD) based on foreign sales of the infringing products. ION appealed both the jury's finding of legal liability and the damages award. The Federal Circuit, in a 2-1 decision, affirmed the infringement finding under section 271(f)(2) but reversed the award of lost profits based on the foreign sales. In reaching this conclusion, the Federal Circuit quoted Power Integrations, Inc. v. Fairchild Semiconductor International, Inc., 711 F.3d 1348 (Fed. Cir. 2013), which stated that U.S. patents "do not thereby provide compensation for a defendant's foreign exploitation of a patented invention, which is not infringement at all." Id. at 1350. WesternGeco appealed to the Supreme Court.

Decision

In a 7-2 decision, Justice Clarence Thomas, writing for the majority, explained that a "damages award for lost profits was a permissible domestic application of [35 U.S.C.] §284," even if the lost profits concern foreign sales, because the "focus" of section 271(f)(2) is on the "act of exporting components from the United States." No. 16-1011, slip op. at 7-8, 10. The Court reasoned that the "overriding purpose" of the statutory provision for damages "is to 'affor[d] patent owners complete compensation' for infringement." Id. at 6 (quoting General Motors Corp. v. Devex Corp., 461 U.S. 648, 655 (1983)). Further, the relevant conduct (i.e., the infringement) is the domestic act of supplying and exporting the infringing components from the United States. The damages under section 284, the Court found, are "merely the means by which the statute achieves its end of remedying infringements." Id. at 8. 

The majority distinguished prior decisions in which the substantive cause of action occurred abroad, whereas "the conduct relevant to the statutory focus in this case is domestic." Id. at 6. In WesternGeco, the cause of action is the exportation of the components of the patented invention, and section 271(f)(2) focuses on the domestic act of exporting components from the United States. Id. at 7. The damages that flow from the act can occur outside the United States, in which case the patent owner can recover "lost foreign profits when the patent owner proves infringement under §271(f)(2)." Id. at 9.

Dissent

Justices Neil Gorsuch and Stephen Breyer dissented from the majority decision, arguing that "the Patent Act forecloses WesternGeco's claim for lost profits." Dissent at 1. The dissent cautioned that the majority's decision allows for a greater recovery when a defendant exports a patented component under section 271(f) than when it exports the entire invention under section 271(a). Id. at 7. The dissent reasoned that the majority's holding allowed a party to "conver[t] a single act of supply from the United States into a springboard for liability." Id. (quoting Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 456 (2007)). The dissent further noted the imbalance of the outcome, enabling WesternGeco to recover $93.4 million USD in lost profits from 10 foreign surveys in which the infringing system was used, compared with only $12.5 million USD in a reasonable royalty from 2,500 U.S.-made products that were exported. Id. The dissent also worried that the majority decision would invite foreign courts to apply foreign patent laws extraterritorially, to capture lost profits based on U.S. sales of products that infringe foreign patents, for example when components manufactured overseas are imported into the United States. Id. at 8.

Analysis

The Court's decision in WesternGeco is, on its face, expressly limited to infringement under section 271(f)(2). The scope of the decision may be the subject of future cases, including cases involving infringement under section 271(f)(1). The decision does not eliminate general principles of extraterritoriality, or expressly address damages that can be recovered under section 271(a). Indeed, both the majority and the dissent recognized that WesternGeco's claim for foreign lost profits does not "offend the judicially created presumption against the extraterritorial application of statutes." Dissent at 1. The dissent, however, asserted that the Patent Act itself prohibited an award of such profits. Id. The majority opinion expressly acknowledged the Federal Circuit's decision prohibiting recovery of foreign lost profits for infringement under section 271(a) in Power Integrations and did not contradict or overrule it, but instead deemed it inapplicable in the context of section 271(f)(2). 

WesternGeco Is likely to renew the focus on the intent of the Patent Act to place patent owners "'in as good a position as [they] would have been in had the infringer' not infringed." Slip op. at 9 (quoting General Motors, 461 U.S. at 655). While damages theories will continue to focus on domestic infringement, WesternGeco holds that—at least under section 271(f)—damages and liability are not subject to the same extraterritoriality analysis. It remains to be seen whether WesternGeco will lead to the erosion of other limits on the scope of recoverable damages, or whether patentees may cite this decision more broadly in seeking to tie foreign damages to domestic acts of patent infringement.

Conversely, alleged infringers are likely to seize upon footnote 3 of the majority opinion. In that footnote, Justice Thomas expressly clarified that the majority declined to "address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases." Slip op. at 9 n.3. Accordingly, disputes concerning causation and proximate cause seem likely in future cases. Meanwhile, other general principles—including the statutory presumption against extraterritoriality—will continue to apply based on the facts and law of each case.

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