U.S. Supreme Court Allows Patentee to Recover Lost Foreign Profits Where Domestic Components of Patented Invention Are Assembled Abroad
June 22, 2018
Today, in WesternGeco LLC v. Ion Geophysical Corp., the U.S. Supreme Court ruled that a patent owner who proves infringement under one subsection of the Patent Act, 35 U.S.C. § 271(f)(2), may recover lost foreign profits, although the Court did not address the extent to which a proximate causal connection or other precepts may bar or limit the amount of such foreign lost profits.
As opposed to statutorily defined domestic acts of direct or indirect infringement under Sections 271(a)-(c), Section 271(f)(2) expands the definition of an act of infringement to include supplying, in or "in or from the United States" certain components of a patented invention with the intent that they will be combined outside of the United States in a manner that would infringe if done domestically. Thus, infringement liability under Section 271(f) expressly requires a domestic act (i.e., supply of components) together with a foreign act (i.e., combination of components outside if the United States).
Petitioner-patent owner WesternGeco owned four U.S. patents relating to a system that it developed for surveying the ocean floor. WesternGeco did not sell or license its technology, but instead used it to perform surveys for oil and gas companies. Respondent ION Geophysical manufactured a competing system. Instead of manufacturing and shipping the complete system abroad, ION manufactured components in the United States and shipped them to foreign companies who assembled the competing systems. Using ION's systems, those companies competed with WesternGeco, which caused WesternGeco to lose 10 specific survey contracts. At trial, a jury found ION liable and awarded $12.5 million in royalties and $93.4 million in lost profits. The district court denied ION's motion to set aside the verdict, arguing that WesternGeco could not recover damages for lost profits because Section 271(f) does not apply extraterritoriality. On appeal, following its Section 271(a) precedent that a patent owner cannot recover lost profits for foreign sales, the Federal Circuit reversed the jury's award of lost profits. After a few additional procedural steps, the Supreme Court granted certiorari.
The Court's Analysis
Writing for the majority, Justice Thomas first analyzed whether the presumption against extraterritoriality applied to Section 271(f)(2) under the Court's two-step approach. Skipping the first step—"whether the presumption against extraterritoriality has been rebutted"—Justice Thomas answered the second step—"whether the case involves a domestic application of the statute," which requires identification of the "statute's focus."1 "If the conduct relevant to the statute's focus occurred in the United States, then the case involves a permissible domestic application of the statute, even if other conduct occurred abroad. But if the relevant conduct occurred in another country, 'then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.'"2
Upon reviewing Section 284 in conjunction with Section 271(f)(2),3 the Court concluded that ION's conduct relevant to the statutory focus was domestic. Recognizing first that the "overriding purpose of §284 is to afford patent owners complete compensation for infringements,"4 the Court noted that "infringement is plainly the focus of §284."5 However, because the "Patent Act identifies several ways that a patent can be infringed," it was also necessary "to look to the type of infringement that occurred to resolve the question."6
Justice Thomas thus turned to Section 271(f)(2), which was the basis for WesternGeco's infringement claim and lost profits damages award. Finding that Section 271(f)(2) focuses on domestic conduct (i.e., regulating the "suppl[ying] in or from the United States"), and ION's conduct fell within that focus, the Court determined that that the second step was met—"the lost-profits damages that were awarded to WesternGeco were a domestic application of §284."7
Justice Thomas specifically rejected ION's arguments that the statutory focus is on the award of damages. Despite Section 284's authorization of damages, Justice Thomas noted that "what a statute authorizes is not necessarily its focus."8 "Rather, the focus is 'the objec[t] of the statute's solicitude'—which can turn on the 'conduct,' 'parties,' or interests that it regulates or protects. Here, the damages themselves are merely the means by which the statute achieves its end of remedying infringements."9 Next, Justice Thomas rejected ION's assertion that the case involves an extraterritorial application of Section 284 simply because lost-profits damages occurred extraterritorially, and foreign conduct subsequent to ION's infringement was necessary to give rise to the injury. According to Justice Thomas, "[t]hose overseas acts were merely incidental to the infringement. . . . [and] do not have 'primacy' for purposes of the extraterritoriality analysis."10 Last, Justice Thomas rejected ION's proposed rule, extrapolated from RJR Nabisco,11 that "damages awards for foreign injuries are always an extraterritorial application of a damages provision."12 Correcting ION's view of RJR Nabisco, Justice Thomas noted that RJR Nabisco "appl[ied] the presumption against extraterritoriality to interpret the scope of 1964(c)'s injury requirement; it did not make any statements about damages—a separate legal requirement."13
Justice Thomas made a similar observation—separateness of legal injury and damages arising from that injury—when addressing Justice Gorsuch's dissent, which would have affirmed the Federal Circuit's opinion because the Patent Act's "terms prohibit lost profits sought in this case, whatever the general presumption against extraterritoriality applicable to all statutes might allow."14 Justice Gorsuch viewed WesternGeco as seeking lost profits for uses of its invention beyond the United States, where its patents had no legal force. Not only would this allow a domestic patent owner to extend its monopoly to foreign markets, according to Justice Gorsuch, it "would invite other countries to use their own patent laws and courts to assert control over our economy."15 Unperturbed by Justice Gorsuch's arguments, Justice Thomas summarized his view of Section 271(f)(2) and Section 284.
Taken together, §271(f)(2) and §284 allow the patent owner to recover for lost foreign profits. Under §284, damages are "adequate" to compensate for infringement when they "plac[e] [the patent owner] in as good a position as he would have been in" if the patent had not been infringed. Specifically, a patent owner is entitled to recover "'the difference between [its] pecuniary condition after the infringement, and what [its] condition would have been if the infringement had not occurred.'" This recovery can include lost profits. And, as we hold today, it can include lost foreign profits when the patent owner proves infringement under §271(f)(2).16
The Court's decision confirms that a patent owner may recover for lost foreign profits under Section 284 based on infringement under Section 271(f)(2). Nevertheless, the decision does not resolve what, if any, causal connection and other factors are necessary to establish lost profits. One can expect that existing patent law on recovery of lost profits will be informative.
The Court's opinion reflects that Section 271(f) is distinguished from other Section 271 sections, including direct infringement under Section 271(a), which, under the Halo Electronics, Inc. v. Pulse Electronics, Inc.17 decision, does not permit recovery of lost foreign sales. Further, the Federal Circuit's holdings in the Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc.18 and Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd.19 ostensibly bar extraterritorial damages even if Section 271(a) infringement causes further infringement abroad.
For more information about the Supreme Court's ruling, please contact any member of the patent litigation practice at Wilson Sonsini Goodrich & Rosati.