On June 22, 2018, the U.S. Supreme Court issued a significant decision regarding the recovery of lost profits for foreign uses of a U.S. patented invention. Specifically, in WesternGeco LLC v. Ion Geophysical Corp., No. 16-1011, the Court reversed the Federal Circuit’s previous judgment, held that 35 U.S.C. §§ 271(f)(2) and 284 allow a patent owner to recover for lost profits resulting from an infringer’s customer’s use abroad of the U.S. patented invention, and remanded the case to the Federal Circuit for further proceedings. The Court’s 7-2 opinion was written by Justice Thomas, with a dissenting opinion by Justice Gorsuch, joined by Justice Breyer.
The patent owner, WesternGeco, manufactured a commercial embodiment of the patented system but did not sell that system. Instead, it sold services using the patented system to companies abroad. The infringer, Ion Geophysical, manufactured components of the patented system in the United States and sold those components for assembly to customers overseas. Ion’s customers then, in competition with WesternGeco, used the assembled system to perform services.
WesternGeco brought suit against Ion for infringement under 35 U.S.C §§ 271(f)(1) and (f)(2), directed to supplying or exporting from the United States components of a patented invention that are combined outside the United States. The district court found the patents were infringed and not invalid, and the jury awarded under 35 U.S.C. § 284, the patent damages statute, $93 million in lost profits (for service contracts performed abroad by Ion’s customers) and $12.5 million in reasonable royalties (for accused components that were not used in the services for which lost profits were awarded). Ion appealed, inter alia, the award of lost profits and, in a divided opinion, the Federal Circuit reversed, holding that lost profits could not be awarded for foreign uses of a patented invention.
The Supreme Court Decision
The Supreme Court found that the presumption that federal statutes apply only within the territorial jurisdiction of the United States did not prohibit the award of lost profits to WesternGeco. The Court, however, expressly declined to decide the broad applicability of the presumption against extraterritoriality to statutes, like § 284, that provide a general damages remedy for unlawful conduct because “that question could implicate many other statutes besides the Patent Act.” WesternGeco, slip op. at 5. Instead, the Court focused on the second step of the extraterritoriality analysis framework, identifying the statute’s focus and determining whether the conduct relevant to that focus occurred in the United States. Id. The Court concluded that infringement was the focus of § 284, and infringement under § 271(f)(2) focuses on the domestic conduct of supplying or exporting components of a patented invention in or from the United States. Id. at 7. The lost profits damages awarded to WesternGeco, therefore, were a permissible domestic application of § 284. The Court dismissed Ion’s arguments to the contrary, stating that the foreign conduct subsequent to Ion’s infringement was “merely incidental to the infringement” and does “not have ‘primacy’ for purposes of the extraterritoriality analysis.” Id. at 8.
Justice Gorsuch, writing in dissent, agreed that WesternGeco’s lost profits claim did not violate the presumption against extraterritoriality, but disagreed that the Patent Act permits an award of lost profits for the use of an invention outside of the United States. Id., slip op. at 2 (Gorsuch, J., dissenting). He reasoned that a U.S. patent provides a lawful monopoly over the manufacture, use and sale of an invention only within the United States; consequently, foreign conduct is not infringement and cannot be a proper basis for awarding compensation. Id. at 2-3. Although § 271(f)(2) expands what qualifies as making an invention in the United States, it “does nothing to suggest that U.S. patents protect against—much less guarantee compensation for—uses abroad.” Id. at 6. It is an “anomalous result” to “allow greater recovery when a defendant exports a component of an invention in violation of § 271(f)(2) than when a defendant exports the entire invention in violation of 271(a).” Id. at 7. The dissent also expressed concern that the majority “invite[s] other countries to use their own patent laws and courts to assert control over our economy,” and “principles of comity counsel against an interpretation of our patent laws that would interfere so dramatically with the rights of other nations to regulate their own economies.” Id. at 2 and 8.
The majority opinion characterized the dissent as “wrongly conflat[ing] legal injury with the damages arising from that injury,” and stated that lost foreign profits are permissible when the patent owner proves infringement under § 271(f)(2) to place the patent owner in as good a position as he would have been in if the patent had not been infringed. Id., slip op. at 9. The Court notably specifically declined to “address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.” Id. at 9, n.3.
Further proceedings will occur on remand. The damages award may be impacted by a Patent Trial and Appeal Board determination, affirmed on appeal by the Federal Circuit, that three of the four WesternGeco patents found to be infringed by Ion are unpatentable. Ion may raise additional arguments challenging the damages award on remand.
While the Supreme Court’s decision in WesternGeco v. Ion Geophysical provides guidance regarding damages awards under § 284 based on lost sales occurring outside the United States resulting from infringement under § 271(f)(2), many open questions remain regarding the applicability of the Court’s holding in particular cases, the extent to which other damages doctrines, such as proximate cause, may limit damages awards, and whether Justice Gorsuch’s concerns regarding foreign comity will come to pass.
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