WesternGeco LLC v. ION Geophysical Corp.
On June 22, 2018, the U.S. Supreme Court, in a 7-2 decision, concluded a patent owner may recover lost profit damages based on foreign activities when an accused infringer violates 35 U.S.C. § 271(f)(2) by supplying from the United States components especially made or adapted for use in infringing a U.S. patent and intending that the components will be combined abroad in an infringing manner. WesternGeco LLC v. ION Geophysical Corp., 585 U.S. ___, No. 16-1011 (June 22, 2018). The dissent would not have allowed recovery for non-infringing "use" of a U.S. patent beyond American borders.
The Supreme Court Decision: Foreign Lost Profits Recoverable
The issue before the Court in WesternGeco was whether a patent owner could recover foreign lost profits under 35 U.S.C. § 271(f)(2), which makes it an act of infringement to supply components specially made or adapted for use in a patented invention overseas to be assembled there. In the case, patent owner WesternGeco sued accused infringer ION for manufacturing components of a patented ocean floor surveying system in the U.S. and then exporting the components for assembly and use. The trial court found infringement and awarded $12.5 million in royalties and $93.4 million in foreign lost profits that WesternGeco would have made by using the patented technology to perform surveys abroad. On appeal to the Federal Circuit, ION challenged the award of foreign lost profits, arguing that because the U.S. patent laws do not apply extraterritorially, they do not permit recovery for use of an invention abroad. The Federal Circuit agreed and reversed the award of foreign lost profits.
On appeal, the Supreme Court reversed the Federal Circuit's decision, finding that the foreign lost profits award did not constitute an extraterritorial application of § 271(f)(2). The relevant part of the test for deciding "questions of extraterritoriality" asks "whether the case involves a domestic application of the statute [at issue]," which is determined by "'identifying the statute's focus' and asking whether the conduct relevant to that focus occurred in [the U.S.]" Justice Thomas began his analysis for the Court by emphasizing the purpose of the patent damages statute, § 284, is to "'affor[d] patent owners complete compensation' for infringement..." and to put patent owners in the same position they would have been in absent the infringement. Accordingly, the Court found the focus of the patent damages statute is the infringement that occurred. Analyzing the issue through the lens of infringement, the Court concluded § 271(f)(2) regulates an entirely domestic act: supplying from the U.S. components of a patented invention for assembly outside the U.S. Justice Thomas rejected ION's argument that the relevant statutory focus was the "award of damages," finding instead that any overseas use which gave rise to foreign lost profits were merely incidental to the domestic act of infringing by supplying the patented components from the U.S. The majority also faulted the dissent for conflating the legal injury of infringement with the damages that flow from that injury by use of the invention abroad. The Court noted, however, that its decision finding foreign lost profits recoverable under § 271(f)(2), does not preclude the application of "other doctrines, such as proximate cause," that may limit or prevent recovery in particular cases.
The Dissent: Damages for Foreign "Use" of a U.S. Patent Should Not be Recoverable
Justices Gorsuch and Breyer dissented. They argued the majority's opinion wrongly extends the monopoly created by a U.S. patent beyond American borders by awarding lost profit damages for "use" of the invention abroad, not merely the damages that may have accrued because the components were supplied from the U.S. "Foreign use," they argued, is not a type of conduct the U.S. patent laws can prohibit because it is non-infringing. They also argued the majority's decision is bad policy because it invites foreign countries to allow their citizens to recover damages for "use" of a foreign patent within the U.S.
It is unclear how far reaching the direct effects of WesternGeco will be in practice, because lost profits are proving increasingly difficult to obtain in today's multi-competitor marketplaces, but the Court's decision appears to open the door to larger patent damages awards based on foreign activities. Foreign lost profits are now recoverable under § 271(f)(2) when a specially made or adapted components of a patented invention is exported (and possibly also under § 271(f)(1), which prohibits supplying from the U.S. all or a substantial portion of the components of a patented invention in a manner that induces the combination of those components outside the U.S. to infringe a U.S. patent). Patent owners will likely try to apply Justice Thomas's reasoning in other cases to seek larger damages awards by connecting domestic acts of infringement to foreign activities. Accused infringers, on the other hand, will likely argue the analysis in WesternGeco applies only to § 271(f)(2) (and (f)(1)), and that damages based on foreign activities are unavailable for all other acts of infringement. The Court also left the door open for parties to argue that proximate cause (and other theories, such as patent exhaustion) may limit or prevent recovery in certain factual situations.
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