Supreme Court: Patent Owners’ Infringement Damages Can Include Extraterritorial Lost Profits

On June 22, 2018, the Supreme Court decided WesternGeco LLC v. ION Geophysical Corp. No. 16-1011 and held that patent owners may recover lost profits damages under § 284 of the Patent Act based on infringement under § 271(f)(2) due to reconstruction and sales activities that occur outside the United States. The Court held a party liable for damages where patent infringement occurred in the United States through the supply of components of a patented invention outside the United States, such that the combination of these components would infringe a patent had the combination occurred in the United States.

Background

Competitors WesternGeco and ION Geophysical Corporation develop and sell ocean surveying systems. WesternGeco developed and patented a novel ocean surveying system. ION began manufacturing a knock-off system and supplied the disassembled components to companies outside the United States. Once reassembled, ION’s surveying system was indistinguishable from WesternGeco’s patented system.

WesternGeco sued ION for patent infringement under §§271(f)(1) and (f)(2) of the Patent Act. At trial, WesternGeco proved that it had lost 10 specific survey contracts due to ION’s infringement. The jury found ION liable for infringement and awarded WesternGeco damages of $12.5 million in royalties and $93.4 million in lost profits pursuant to 35 U.S.C. §284, the patent damages statute. ION filed a post-trial motion to set aside the verdict, arguing that WesternGeco could not recover damages for lost profits because §271(f) does not apply extraterritorially. The district court denied the motion. 953 F. Supp. 2d 731, 755–756 (SD Tex. 2013).

On appeal, the United States Court of Appeals for the Federal Circuit affirmed the finding of infringement under §271(f)(1) but reversed the award of lost-profits damages under §271(f)(2). WesternGeco LLC v. ION Geophysical Corp., 791 F. 3d 1340 (2015). The Federal Circuit held that the Patent Act did not allow for the recovery of lost profits due to the presumption against extraterritoriality, which states that “patent law operates only domestically and does not extend to foreign activities.” Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 454-455 (2007).

WesternGeco successfully petitioned for certiorari on the matter of its lost profits.

The Supreme Court Decision

The Supreme Court acknowledged that courts ordinarily presume that statutes apply only within the territorial jurisdiction of the United States, quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949). The Court then noted that there is an established two-step framework to decide questions of extraterritoriality. RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090 (2016). The first step asks whether the presumption of extraterritoriality has been rebutted. This presumption can be rebutted only if the text provides a “clear indication” of an extraterritorial application. If the presumption has not been rebutted, the second step asks whether the case involves a domestic application of a statute, and whether the conduct relevant to that focus occurred in the United States. If the relevant conduct did occur in the United States, then the case involves a permissible domestic application of the statute.

The Court elected to resolve this case at step two because addressing step one “could have far-reaching effects in future cases,” and “could implicate many other statutes besides the Patent Act.” (Internal citations omitted). Turning to step two, the Court concluded that “the conduct relevant to the statutory focus in this case is domestic.” The Court reasoned that the purpose of § 284 is to provide patent owners “complete compensation” for patent infringements, that § 271 in turn identifies “several ways that a patent can be infringed,” and that § 271(f)(2) “focuses on domestic conduct.”

The Court concluded:

[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.’” Aro Mfg. Co., supra, at 507. This recovery can include lost profits. See Yale Lock Mfg. Co. v. Sargent, 117 U. S. 536, 552–553 (1886). And, as we hold today, it can include lost foreign profits when the patent owner proves infringement under §271(f)(2).

Justice Gorsuch dissented, joined by Justice Breyer. According to the dissent the Patent Act itself does not “permit awards of this kind” because “[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 use of its invention beyond our borders.” Justice Thomas, writing for the majority, disagreed with the dissent and reasoned that the dissent “wrongly conflates legal injury with the damages arising from that injury.”

Practice Pointer

The Supreme Court’s determination that extraterritorial sales of component products may create damages liability under § 284 opens a new avenue for potential damages under cases of infringement under § 271(f)(2). Patent owners should examine whether an infringer’s sales have a demonstrable effect to support a damages analysis. In WesternGeco, the patent owner had a defined set of contracts to support its damages assertion. Future plaintiffs should similarly seek to support the damages inquiry with concrete proof of damages.