On June 22, 2018, the US Supreme Court clarified the scope of permissible patent damages awards by holding that when a party is found liable under
35 U.S.C. § 271(f) for exporting components of a patented invention, foreign lost profits may be awarded. Prior to this decision, any damages based on foreign conduct were explicitly excluded. This decision, however, carves out specific foreign conduct that can yield patent damages in a US court and increases the potential liability and risk profile for any entity that supplies a substantial portion of a potentially patented product overseas.

Background on the Dispute between WesternGeco and ION

WesternGeco (a Schlumberger subsidiary) developed an ocean floor surveying system that used “lateral-steering technology” to produce “higher quality data than previous survey systems,” and obtained four patents covering its technology. WesternGeco used its technology to survey for oil and gas companies and opted not to license its technology to others.

In late 2007, ION Geophysical started selling competing ocean floor survey systems that also used “lateral-steering technology.” These systems were apparently indistinguishable from WesternGeco’s systems. However, ION did not manufacture or sell complete survey systems in the US. Instead, ION only manufactured the components in the US and then shipped them abroad for companies to combine the components on-site to make the complete survey system. 

WesternGeco subsequently filed a patent infringement suit against ION that alleged infringement under 35 U.S. C. § 271(f) of the Patent Act. Section 271(f) states that a party is liable as an infringer if (1) it exports a substantial portion of the invention’s components, or (2) it exports components that are especially adapted for an invention. In essence, section 271(f) is designed to prevent what happened here—a party trying to avoid direct infringement of a patent by only manufacturing components in the US instead of the complete product. At trial, the jury found that ION infringed under section 271(f) and awarded WesternGeco damages of (1) $12.5 million in reasonable royalties for use in the US, and (2) $93.4 million in lost profits based on 10 foreign survey contracts that WesternGeco lost due to ION’s infringement. 

ION moved to set aside the award for foreign lost profits because “§271(f) does not apply extraterritorially.” The district court denied this motion. On appeal, the US Court of Appeals for the Federal Circuit reversed the damages award. The Federal Circuit had previously precluded damages based on lost foreign sales for general direct infringement under section 271(a), and the court determined that section 271(f) “should be interpreted the same way.” In response, WesternGeco petitioned for review before the Supreme Court.
 
Supreme Court Majority: The Damages Award for Foreign Lost Profits Was Permissible 

In a 7-2 decision¹, the Supreme Court reversed the Federal Circuit and permitted WesternGeco’s damages award based on lost foreign profits. The Court held that the award of foreign lost profits “was a permissible domestic application” of the damages statute (section 284) of the Patent Act. 

To start, the Court recognized the long-standing presumption that “federal statutes apply only with the territorial jurisdiction of the United States.” The Court then applied its two-step RJR Nabisco test for deciding questions of extraterritoriality of statutes. The first step asks “whether the presumption against extraterritoriality has been rebutted.” The presumption can only be rebutted if the statute provides “a clear indication of an extraterritorial application.” If the presumption is not rebutted, the second step asks “whether the case involves a domestic application of the statute,” which looks to the “statute’s focus” and “asking whether the conduct relevant to that focus occurred in United States territory.” Here, the Court skipped step one and focused solely on step two. 

Under the step two analysis, Court determined that “the conduct relevant to the statutory focus in this case is domestic.” First, the Court looked to section 284 of the Patent Act, which provides a damages remedy for “various types of infringement.” The Court found that “the infringement” is the main focus of the damages statute. Next, the Court looked to the applicable infringement statute, which here was section 271(f). The Court determined that section 271(f) focuses on domestic conduct because it states that a party is liable for infringement if it supplies components of a patented invention “in or from the United States.” Because the statute regulates supplying components “in or from the United States,” the focus is on regulating “domestic conduct.” Applying this logic, the Court held that the conduct in this case—ION’s act of supplying components—was domestic conduct, and “the lost-profits damages that were awarded to WesternGeco were a domestic application of §284.” 
 
Supreme Court Dissent: Patent Act Forecloses Any Claim for Lost Profits.

Justice Neil Gorsuch’s dissent—joined by Justice Stephen Breyer—lambasted the majority for refusing to recognize the inherent scope of the Patent Act. In particular, “a US patent provides a lawful monopoly over the manufacture, use, and sale of an invention within this country only.” And a patent owner who proves infringement is “entitled to receive damages adequate to compensate for the infringement,” i.e., an infringement within the US. Here, Justice Gorsuch argued that WesternGeco was entitled to the reasonable royalty for the infringing products made in the US, but was not entitled to lost profits for use of the invention outside the US because foreign conduct is not infringement under the Patent Act. 

The dissent also recognized that a plaintiff can now recover significantly greater damages when a defendant only exports components—in violation of section 271(f)—instead of directly infringing by exporting a complete product—in violation of section 271(a)—because damages for foreign lost profits are explicitly precluded for direct infringement under section 271(a). For example, if ION had exported complete survey systems for foreign use instead of exporting just the components, WesternGeco would have been precluded from obtaining damages based on foreign lost profits. A defendant’s exposure to damages—for simply supplying a single infringing component from the US—is now exponentially increased because that party is now “responsible for any foreseeable harm its customers cause by using the product to compete [worldwide].”

Potential Impact of the Court’s Decision

The Court’s WesternGeco decision increases the risk profile for companies that export components for a patented invention from the US. Under the dissent’s construction of the majority’s opinion, these companies may be liable for foreign lost profits—worldwide—even if they are not supplying all of the components to the patented invention. To be clear, to obtain a damages award of lost profits, the plaintiff must still prove that the section 271(f) infringement caused the plaintiff to lose profits it otherwise would have made. But the mere fact that foreign lost profits are now a potential option drastically increases a component supplier’s potential exposure and risk.

It is also clear that the decision creates a damages discrepancy between direct infringement under section 271(a) and component infringement under section 271(f). For defendant companies that manufacture and export the components of a product, it will be interesting to see if they change their strategy to exporting whole products to avoid potential foreign damages, or if they simply cease manufacturing components in the United States. And to resolve this discrepancy, it will be interesting to see if the Federal Circuit (or the Supreme Court) reverses course on direct infringement under section 271(a) and allows, in some fashion, damages awards of foreign lost profits similar to infringement under section 271(f). Also of interest will be whether Congress – which created section 271(f) to close a loophole allowing parties to export infringing products in pieces for assembly outside of the United States—will again amend the Patent Act to close any loopholes highlighted by the Supreme Court’s decision here.
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¹ Justice Clarence Thomas delivered the opinion of the Court, in which Justices John Roberts, Anthony Kennedy, Ruth Bader Ginsburg, Samuel Alito, Sonia Sotomayor, and Elena Kagan joined. Justice Gorsuch filed a dissenting opinion, in which Justice Breyer joined.

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