Patent Owners May Recover Lost Foreign Profits When Exporting Components from the U.S.

July 6th, 2018

In WesternGeco LLC v. ION Geophysical Corp., No. 16-1011 (U.S. Jun. 22, 2018), the Supreme Court of the United States (“the Supreme Court”) ruled that a patent owner is entitled to seek lost foreign profits as part of damages relief under 35 U.S.C. § 284 (2011) when its patent is infringed under 35 U.S.C. § 271(f)(2) (2010).  This subsection of the statute pertains to infringement in situations when a company “ships components of a patented invention overseas to be assembled there.”  Id., slip op. at 1.  The Supreme Court’s 7-2 majority opinion, written by Justice Thomas, held that the presumption against extraterritoriality did not apply in this case because WesternGeco’s award for lost profits was a permissible domestic application of § 284 of the Patent Act.  Id. at 9-10.

35 U.S.C. § 271 of the Patent Act outlines several types of conduct that can result in infringement of a U.S. patent.  “The general infringement provision, §271(a), covers most infringements that occur ‘within the United States.’  The subsection at issue in this case, §271(f) ‘expands the definition of infringement to include supplying from the United States a patented invention’s components.’”  Id. at 1 (quoting Microsoft Corp v. AT&T Corp., 550 U.S. 437, 444-45 (2007)).  The remedies sought by a patent owner proving infringement under one or more of these sections can include “damages adequate to compensate for the infringement.”  35 U.S.C. § 284.  “[W]hether these statutes allow the patent owner to recover for lost foreign profits” is the specific issue addressed by the Supreme Court in this case.  WesternGeco, slip op. at 1.

Patent Owner, WesternGeco LLC (“WesternGeco”), sued ION Geophysical Corp. (“ION”) in the Southern District of Texas for infringement of four patents covering systems that WesternGeco used for surveying the ocean floor. Id. at 1-2. ION sold a competing system whose components were manufactured in the United States and then shipped to companies abroad.  Id. at 2.  After assembly by those overseas companies, ION’s resultant surveying system was “indistinguishable from WesternGeco’s.”  Id.  At trial, a jury found ION liable for infringement under § 271(f)(2), resulting in an award of royalties and lost profits.  Id.  The District Court denied ION’s motion to set aside damages for foreign lost profits, ION arguing that §271(f) does not apply extraterritorially.  Id.  This case is the second time the Supreme Court granted certiorari to address reversal by the Court of Appeals for the Federal Circuit (the “Federal Circuit”) of the District Court’s denial to set aside damages. Id. at 3-4 (the Federal Circuit reversed the award for lost-profits damages in WesternGeco LLC v. ION Geophysical Corp., 791 F. 3d 1340, 1343 (2015); the Supreme Court reversed and remanded in WesternGeco LLC v. ION Geophysical Corp., 136 S. Ct. 2486 (2016); on remand the Federal Circuit reinstated a portion of its decision in WesternGeco L.L.C. v. ION Geophysical Corp., 837 F.3d 1358 (Fed. Cir., Sept. 21, 2016); and the Supreme Court granted certiorari again to review in the present case).

In analyzing the damages question here, the Supreme Court described the common legal principle that there is generally a “presumption against extraterritoriality.”  Id. at 4.  This principle more particularly sets forth a presumption “that federal statutes ‘apply only within the territorial jurisdiction of the United States.’”  Id. (quoting Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949)).  This legislative focus on domestic concerns is intended to help prevent inadvertent legal clashes with other nations and maintain international harmony.  Id.  The Court also unpacked its “two-step framework for deciding questions on extraterritoriality” as set forth in RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2101 (2016).  Id. at 5.  The first step of the framework asks “whether the presumption against extraterritoriality has been rebutted,” while the second step asks “whether the case involves a domestic application of the statute.”  Id. (quoting RJR Nabisco, 136 S. Ct. at 2101).  However, the Court also noted that in some instances such as the present case, the first step of the framework may be omitted. Id.

The Supreme Court held that the lost-profits damages awarded to WesternGeco were a permissible domestic application of § 284 based on an analysis of the second step of the extraterritoriality framework.  Id. at 5-7.  In considering this step, courts should determine (1) a statute’s focus and (2) whether conduct relevant to that focus occurred within United States territory.  Id. at 5.  A determination of the focus of the statute can include several factors, such as the conduct it seeks to regulate, the parties and interests it seeks to protect, and an assessment of other relevant statutory provisions.  Id. at 6.  The Supreme Court found the pertinent focus of § 284 of the Patent Act to be infringement.  Id.  Here, infringement occurred under § 271(f)(2). Id.  As stated by the Court:

[This subsection] provides that a company “shall be liable as an infringer” if it “supplies” certain components of a patented invention “in or from the United States” with the intent that they “will be combined outside the United States in a manner that would infringe the patent if such combination occurred within the United States.”  The conduct that §271(f)(2) regulates – i.e., it’s focus – is the domestic act of “supply[ing] in or from the United States.”

Id. at 7 (quoting 35 U.S.C. §271(f)(2)).  Because the focus of § 284 in a case involving infringement under §271(f)(2) is on the act of exporting components from the United States, ION’s domestic act of supplying the components that infringed WesternGeco’s patents was found to be a domestic application of §284.  Id. at 6-7.

The dissenting opinion in this case, written by Justice Gorsuch, agrees with the Federal Circuit’s conclusion that “the Patent Act forecloses WesternGeco’s claim for lost profits.”  Id. at 1 (Gorsuch, J., dissenting).  Justice Gorsuch’s primary contention is that “[a] U.S. patent provides a lawful monopoly over the manufacture, use and sale of an invention within this country only . . . [and] WesternGeco seeks lost profits for uses of its invention beyond our borders.”  Id.  However, the majority opinion notes that this interpretation of the Patent Act “wrongly conflates legal injury with the damages arising from that injury.”  Id. at 9 (majority opinion).  More particularly, a patent owner is entitled to seek damages to compensate for infringement that places the patent owner in as good a position as he would have been in if the patent had not been infringed.  Id.  In conclusion, the Supreme Court holds that “[t]aken together, §271(f)(2) and §284 allow the patent owner to recover for lost foreign profits” since such a remedy helps a patent owner “recover ‘the difference between [its] pecuniary condition after the infringement, and what [its] condition would have been if the infringement had not occurred.’”  Id. at 9 (quoting Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476, 507 (1964)).

The Supreme Court appears to provide some limitations on its holding that would prevent a broader expansion of foreign lost profits as potential damages in patent infringement cases.  Notably, the Supreme Court limits their analysis to findings of infringement under §271(f)(2), leaving open the question of whether foreign lost-profits damages can be pursued in cases of infringement under §271(f)(1), directed to exporting a substantial portion of an invention’s components.  Id. at 2, 7.  In addition, the Court does “not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.”  Id. at 9.  As such, the possibility of recovering lost foreign profits seems available to patent owners when exporting components from the U.S. is clearly found to be the proximate cause of infringement under 35 U.S.C. §271(f)(2).

Takeaway:  Lost foreign profits may be an available form of damages under 35 U.S.C. §284 when exporting components from the United States is a proximate cause of infringement under 35 U.S.C. §271(f)(2).  Whether the holding applies to infringement under 35 U.S.C. §271(f)(2) remains open to question.