SCOTUS Watch: Patent Damages Extends to Foreign Lost Profits

On June 22, 2018, the United States Supreme Court handed down its decision in the case, WesternGeco LLC v. ION Geophysical Corp.,[1] which will change the landscape for patent damages because foreign lost profits can now be assessed in patent infringement judgments.

The facts are as follows.

WesternGeco owns four patents directed to systems for ocean floor surveying focused on oil and gas exploration.  It does not sell or license its technology.  In 2007, ION began selling a competing system.  ION manufactured the components in the U.S., then shipped the components abroad to customers who then combined the components to produce nearly identical systems to WesternGeco’s product.  WesternGeco sued for patent infringement under 35 U.S.C. §271(f)(1) and 35 U.S.C. §271(f)(2).  Infringement was proven at trial, and the jury awarded WesternGeco $12.5 million in royalties and more than $93 million in lost profits.

ION moved to set aside the verdict, arguing that the lost profits damages were non-recoverable because §271(f) does not apply extraterritorially.  The district court denied the motion, and ION appealed.  The Court of Appeals for the Federal Circuit reversed the lost profits damages, holding that the general patent infringement provision under §271(a) disallowed lost foreign sales.[2]  WesternGeco petitioned for writ of certiorari, and the Supreme Court granted review, vacated the Fed Circuit ruling, and remanded for further consideration of the recently-decided Halo[3] decision.  Upon remand, the Fed Circuit reinstated its decision on extraterritoriality under §271(f).  ION then petitioned for writ of certiorari, and the Supreme Court granted review.

35 U.S.C. §271(f)(1) states:

Whoever without authority supplies or causes to be supplied in or from the United States allow a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such 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, shall be liable as an infringer.

Meanwhile, 35 U.S.C. §271(f)(2) states:

Whoever without authority supplies or causes to be supplied in or from the United States any component of patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

The Supreme Court opinion only analyzes §271(f)(2), and not §271(f)(1) since that provision was not addressed by petititioner’s petition for writ of certiorari.  Therefore, the opinion is limited to only the act of exporting components specifically adapted for the invention at-issue.  If patent infringement is proven at trial, patent owners are then entitled to damages under 35 U.S.C. §284, which a court may award compensatory damages that reflects a “reasonable royalty for the use made of the invention by the infringer.”

Justice Thomas wrote the majority opinion, in which Chief Justice Roberts, and Justices Kennedy, Ginsburg, Alito, Sotomayor, and Kagan joined.  Justice Thomas noted that the RJR Nabisco[4] two-step test for extraterritoriality governed in this case.  The first-step requires whether the presumption against extraterritoriality has been rebutted.  If the presumption is not rebutted, then the second step requires whether the case involves a domestic application of the statute at-issue.  Justice Thomas enunciated that the Court’s opinion only analyzed the case at step two because if the presumption against extraterritoriality applied to statutes, it would necessarily negate a general damages award even though Congressional intent declared that a particular conduct was unlawful.  Justice Thomas then turned to the specifics of §271(f)(2).  He noted that the statute focused on domestic conduct, if a would-be infringer supplies the components which leads to the infringement of the product that has occurred abroad.

[T]he focus of §284, in a case involving infringement under §271(f)(2), is on the act of exporting components from the United States.  In other words, the domestic infringement is the “object of the statute’s solicitude” in this context.  The conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents.  Thus, the lost-profits damages that were awarded to WesternGeco were a domestic application of §284.[5]

Justice Gorsuch dissented, in which Justice Breyer joined.  He opined that §271(f) was not codified so broadly that allows patent owners to recoup foreign lost profits for infringing acts conducted abroad.  Specifically, he argued:

[T]he [Patent] Act proceeds to explain that to “infringe the patent” someone must “without authority mak[e], us[e], offe[r] to sell, or sel[l] [the] patented invention, within the United States (emphasis added).  §271(a).  So, making, using, or selling a patented invention inside the United States invites a claim for infringement.  But those same acts outside the United States do not infringe a U.S. patent right.[6]

There are two criticisms of the opinion, both majority and dissent.  First, Justice Thomas’ majority finds that an initial components manufacture conducted in the U.S. can justify a damage award for infringement conducted abroad.  However, is that initial act a proximate cause to justify every instance of infringement anywhere in the world?  The ruling is broadly worded that it could provide enough precedence for any enhanced damages awarded by a district court.  Second, there is Justice Gorsuch’s dissent, in which he argued that the ruling would “invite other countries to use their own patent laws and courts to assert control over our economy.”[7]  However, patent law is jurisdictional and countries have historically used patents and other IPs as bargaining chips in trade conflicts with other nations.  This argument might be “much ado about nothing.”

The implications of WesternGeco may be limited.  It is not certain future domestic patent filers will change their prosecution habits and emphasize U.S. patent applications over foreign filings because they can now recover foreign damages in a U.S. court.

There is one practical issue facing WesternGeco.  Earlier last month, the Fed Circuit upheld the invalidation of the four patents at-issue in this case, which were the subject of the lost profits damages.  We discussed the possible implication on this blog.  WesternGeco will be hard-pressed to recover its $93 million in lost profits when the patents in which the award depend upon were all invalidated by the PTAB.  If there are any further developments in this case, we will report it on the blog.

[1] 953 F. Supp. 2d 731 (S.D. Tex. 2013), rev’d, 791 F.3d 1340 (Fed. Cir. 2015), vacated and remanded, 579 U.S.___, 136 S. Ct. 2486 (2016), vacated as to enhanced dam. but reinstated earlier ruling, 837 F.3d 1358 (Fed. Cir. 2016), cert. granted, 583 U.S.___ (2018), rev’d, 585 U.S.___ (2018) (slip op.).

[2] See 791 F.3d at 1350-51.

[3] See Halo Elecs., Inc. v. Pulse Elecs., Inc., 579 U.S.___, 136 S. Ct. 1923 (2016).  Halo held that under §284, patent owners could recover enhanced damages by a showing of preponderance of the evidence that the infringement was reckless.  Id. at 1934.

[4] See RJR Nabisco, Inc. v. European Community, 579 U.S.___, 136 S. Ct. 2090 (2016).

[5] See WesternGeco, supra (slip op. at 7-8).

[6] Id. (slip op. at 2) (Gorsuch, J., dissenting).

[7] Id.