In a 7-2 decision, its first to address the extraterritorial scope of patent damages since passage of the modern patent act, the U.S. Supreme Court in WesternGeco LLC v. Ion Geophysical Corp., No. 16-1011 (June 22, 2018), held a patentee can recover its foreign lost profits as damages.
Reversing the Federal Circuit's damages decision, WesternGeco LLC v. Ion Geophysical Corp., 791 F.3d 1340 (Fed. Cir. 2015), reinstated after remand, 837 F.3d 1358 (Fed. Cir. 2016), the Supreme Court ruled that WesternGeco was entitled to profits lost from overseas contracts that it would have obtained absent Ion's patent infringement. While the Court limited its opinion to recovery of damages due to a particular type of infringement, the decision is an apparent harbinger of courts considering extraterritorial sales in patent infringement damage determinations generally.
Because of the territorial nature of patents, liability for patent infringement has traditionally been confined to activity solely within the United States. The basic infringement provision, 35 USC §271(a), defines patent infringement as making, using, offering for sale or selling any patented invention within the United States or importing a patented invention into the United States. Over time, patent infringement has grown to encompass certain foreign activity as well.
The patent section at issue in WesternGeco, §271(f), was enacted in 1984 to overrule an earlier Supreme Court decision limiting liability under §271(a) to the U.S. manufacture and U.S. assembly of components of a patented invention. Addressing the "gap" in enforcement represented by that holding, §271(f) expanded liability to the supplying of a patented invention's components from the United States for combination outside the United States, provided the infringer induced, or knew of, the intended foreign combination and that the combination would infringe. Thus, §271(f) specifically contemplates foreign conduct as part of the infringing activity.
WesternGeco developed and patented systems for mapping the ocean floor and performed surveys for oil companies using its patented systems. It sued Ion for infringing four patents covering these systems based on Ion's manufacture and sale of system components to customers, who then assembled the systems for use on the high seas. After trial, a jury found Ion liable for infringement of all four WesternGeco patents. As damages, the jury awarded WesternGeco $93.4 million for the loss of profits from ten specific contracts to Ion's customers. In addition, the jury awarded WesternGeco $10.5 million as a reasonable royalty, taking the foreign sales into consideration in calculating the royalty amount.
On appeal, the Federal Circuit (with one dissent) rejected the lost profits award as improperly relying upon extraterritorial damages.
The Supreme Court granted cert and reversed.
The patent damages statute, §284, states "the court shall award damages adequate to compensate for infringement but in no event less than a reasonable royalty" but is silent on the location of the damages. Applying the framework for deciding extraterritoriality, Justice Thomas found the focus of §284 to be infringement and its purpose to provide the patent owner complete compensation for infringement, while the focus of §271(f) is the act of exporting components from the United States. Because the relevant conduct clearly occurred in the United States, the Court held the lost profits damages were a domestic application of §284. It emphasized that patent damages are supposed to put the patentee in as good a position as if the patent had not been infringed. Accordingly, the majority concluded lost foreign profits are recoverable as damages for infringement under §271(f).
In a dissenting opinion, Justices Gorsuch and Breyer warned that extending the reach of U.S. patents to foreign markets invited foreign countries to respond in kind. The dissent also noted the anomaly of affording greater damages for exporting components for assembly outside the country than for exporting the entire patent invention from the United States in violation of §271(a).
The U.S. government took an active interest in the case. The Solicitor General argued as an amicus that foreign lost profits should be available for all types of patent infringement. Both the government and Justice Ginsburg also noted that foreign profits are available for domestic copyright infringement. Although the Supreme Court's holding is narrower, the majority's analysis seems broadly applicable to §271(a) as well as §271(f). All of this suggests WesternGeco is likely to be cited by prevailing patentees as support for obtaining foreign lost profits without regard to the type of infringement. One probable limitation on such recovery will be the need to show the infringement was the proximate cause of the foreign profits, an issue specifically left unaddressed by Justice Thomas.
As a final irony, WesternGeco likely will never recover much of the damages awarded. In a recent decision, the Federal Circuit affirmed a Patent Trial and Appeal Board decision invalidating three of the four WesternGeco patents at issue in the Supreme Court action. The Federal Circuit has now denied a request to rehear that decision, and Ion is seeking a new trial on the proper damage award for infringement of the one remaining patent. A patentee often must prevail not only in Federal District Court (here the Supreme Court) but in a parallel Patent Office proceeding as well.