The U.S. Supreme Court recently agreed to consider whether a patentee may recover foreign lost profits resulting from infringement of a United States patent.
In WesternGeco LLC v. ION Geophysical Corp., the Federal Circuit vacated the lost profits portion of a damages award because the profits resulted from activity on the high seas, outside the territorial reach of United States patent law. 791 F.3d 1340, 1349 (Fed. Cir. 2015) [WesternGeco I], vacated on other grounds, 136 S. Ct. 2486 (2016). The majority opinion billed the decision as largely dictated by settled precedent, but the Supreme Court granted certiorari this January to review the holding.
The specific issue is whether profits earned overseas with a patented invention may be recovered by the patentee if components of that invention were exported from the United States in violation of Section 271(f). The Supreme Court’s agreement to consider the case could signal an impending expansion of the territorial damages in patent cases. A decision is expected by the end of June.
Incurring Liability for ‘Overseas’ Infringement
At the center of a typical patent infringement case usually lie allegations of infringement under 35 U.S.C. §271(a), which provides that making, using, offering to sell, or selling a patented invention within the United States is infringement of a patent. To establish infringement under that commonly invoked provision, a patentee must prove unauthorized products or processes in the United States that meet each element of a patent claim — for example, the sale of a device in California that meets each limitation of an apparatus claim or the use of a process in New York that uses each step of a method claim.
The focus in WesternGeco, however, is Section 271(f), a more esoteric rule. That provision prohibits exporting from the United States certain sufficiently important components of a patented invention. Under Section 271(f)(1), it is patent infringement to supply “all or a substantial portion of the components of a patented invention,” while, under Section 271(f)(2), it is patent infringement to supply “any component of a patented invention that is especially made or especially adapted for use in the invention.” Both paragraphs have been read to require different levels of intent that are not immediately relevant here. Neither paragraph, however, requires the complete embodiment of a patented invention ever to touch the United States.
Section 271(f)’s prohibition on supplying mere components was enacted by Congress to plug a perceived loophole after the Supreme Court held that Section 271(a) does not cover devices that are never assembled into an infringing whole in the United States. In Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 518 (1972), the district court enjoined Deepsouth from “distribution and use” of culinary devices found to infringe plaintiff Laitram’s patent claims under Section 271(a). Unprepared to abandon its business completely, however, Deepsouth changed its shipping practices: it began supplying the infringing devices to customers only overseas, and only in parts. Since Deepsouth was not combining the parts into an infringing product in the United States, it argued that it was not making, using, or selling a patented invention in violation of the patent laws. In view of the language in Section 271(a) at the time, the Supreme Court agreed.
Because shipping an otherwise infringing product for assembly abroad seemed like an end-run around patent rights, Congress enacted Section 271(f) in the wake of Deepsouth to change what the Court itself acknowledged could be criticized as “too narrow and technical” a definition of patent infringement. See, Deepsouth, 406 U.S. at 529; Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 444 (2007). Section 271(f) was thus meant to beef up American patents against extraterritorial abuses.
Measuring Damages for the Infringement
Although the conduct that creates liability under Section 271(f) is well defined by the statute, the scope of the associated damages is not. Section 271(f) itself is silent on that issue, and 35 U.S.C. §284 tells us only that a patentee is entitled to “damages adequate to compensate for the infringement … in no event less than a reasonable royalty for the use made of the invention by the infringer.” The statute sets a floor — the reasonable royalty — but it does little to bound more creative damages theories. These limits have over the years largely been left to the courts.
The Damages at Issue in WesternGeco
In many cases, Section 284 is used to compensate the patentee for profits lost as a result of the infringement, a measure that is typically higher than the reasonable royalty. The WesternGeco case is testing the limits of how creative a lost profits theory can be for liability arising under Section 271(f), at least when it comes to geography.
The Trial Court Looks Overseas to Compute Damages
WesternGeco’s patents relate to marine seismic exploration, the art (and science) of locating petroleum reserves and other interesting phenomena underwater with acoustic energy. In a typical marine survey, one or more vessels tow airguns and lengthy cables outfitted with acoustic sensors across a body of water, gathering recorded reflections of the airgun pulses to generate three-dimensional maps of the geologic structures under the seafloor. The patents at issue in the WesternGeco case relate to the cables, called streamers, and their control systems. The technology is typically used on the high seas.
ION manufactures components of streamers and their control systems, many of which are purchased by WesternGeco’s competitors. In 2009, WesternGeco sued ION for infringement of its patents, and a jury found ION liable under both provisions of Section 271(f) for exporting certain streamer system components to WesternGeco’s competitors from the United States.
As one measure of damages for that infringing supply of components, WesternGeco sought profits from 10 surveys conducted by its competitors. ION did not conduct those surveys, because it is only a manufacturer of survey equipment, not a surveyor. But Section 271(a) does not govern the high seas, where WesternGeco’s competitors actually allegedly used the patented inventions — so a cause of action was not available against those actors. As a result, WesternGeco decided to pursue ION.
WesternGeco argued that its competitors only won the survey contracts because they received components of its patented technology from ION in violation of Section 271(f). Absent that infringement, the surveys would instead have gone to WesternGeco. The jury was persuaded and awarded WesternGeco the overseas profits.
The Federal Circuit Enforces a Territorial Line
The Federal Circuit, however, did not agree. In a 2-1 decision, it held that the profits associated with the overseas surveys are not recoverable as lost profits under Section 284 because they result from purely extraterritorial activities.
Starting with the premise that a presumption against extraterritorial application of United States law “applies with particular force in patent” cases, WesternGeco I, 791 F.3d at 1350 (quoting Microsoft, 550 U.S. at 454-55), the majority opinion noted that even if Section 271(f) could be viewed as reaching foreign activities in view of its enactment after Deepsouth, that reach must be construed narrowly. The court saw “no indication” that, in enacting Section 271(f), “Congress intended to extend the United States patent law to cover uses abroad of the articles created from the exported components.” WesternGeco I, 791 F.3d at 1350 (emphasis added).
The actual conduct giving rise to liability under Section 271(f) is the supply of components from the United States, and that supply must be performed domestically by the very terms of the statute. Profits from such a supply need not inherently be earned overseas; and it is widely accepted that where a patentee cannot prove recoverable lost profits — for example, because it does not practice its patents — it is limited to a reasonable royalty.
The majority regarded the Federal Circuit’s decision in Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348 (Fed. Cir. 2013), as controlling. In that case, the district court remitted a damages award partially based on foreign sales of infringing products by the defendant. The plaintiff argued that it would have won those foreign sales but for the defendant’s Section 271(a) infringement in the United States — an argument closely analogous to the one WesternGeco is advancing — but the Federal Circuit upheld the remittitur. “[A]cts of direct infringement in the United States,” it held, do not allow a plaintiff to “recover damages for [the defendant’s] worldwide sales of the patented invention,” even if “those foreign sales were the direct, foreseeable result of [the] domestic infringement.” Id. at 1371. Because Deepsouth enacted Section 271(f) only “to put domestic entities who export components … in a similar position to domestic manufacturers who sell the final product domestically or export the final product,” the opinion reasoned, it would be odd to hold infringing exporters of components to a broader damages doctrine than infringing sellers of the whole, finished product. See, WesternGeco I, 791 F.3d at 1351.
Judge Wallach Dissents
Judge Wallach dissented. Because of the procedural path taken by the appeal, he actually penned two dissents; the first in response to the majority’s opinion in WesternGeco I, and the second in response to the majority reinstating its lost profits analysis after the case returned on remand for reconsideration of a separate issue. See, 837 F.3d 1358 (Fed. Cir. 2016) [WesternGeco II], cert. granted, 2018 U.S. LEXIS 819, 2018 WL 386561.
Both dissents emphasize a single salient theme: the distinction between conduct giving rise to liability, on the one hand, and conduct leading to damages, on the other. The two need not be the same, Judge Wallach argues, so long as there is sufficient causal nexus between them — and the majority’s substitution of a blanket extraterritoriality rule was erroneous. Power Integrations, he argues, was about insufficient causal nexus, not an outright bar to damages flowing from overseas conduct. WesternGeco I, 791 F.3d at 1360 (Wallach, J., dissenting). Though “formulating the proper proximity standard … is no easy task,” he reviews Supreme Court precedents admitting aspects of extraterritorial conduct to damages computations and concludes that there is no blanket rule against recovering extraterritorial damages with a sufficient nexus to liable conduct under Section 271. WesternGeco II, 837 F.3d at 1367 (Wallach, J., dissenting).
What Is the Supreme Court Going to Do?
The conflict between Supreme Court precedent and WesternGeco “should serve as a red flag,” the dissent cautioned, “indicating that the approach taken by the panel may belong to the class of ‘unduly rigid’ rules the Supreme Court has repeatedly cautioned against.” WesternGeco II, 837 F.3d at 1366 (Wallach, J., dissenting). Indeed, the Supreme Court has a history of tossing clear-cut tests formulated by the Federal Circuit where they depart from the broad text of a statute. See, e.g., Octane Fitness, LLC v. Icon Health & Fitness, Inc., 135 S. Ct. 1749, 1756 (2014) (reversing the Federal Circuit’s framework for evaluating exceptional cases for purposes of 35 U.S.C. §285 as “overly rigid”); Bilski v. Kappos, 561 U.S. 593, 605, 612 (“declin[ing] to impose limitations on the Patent Act that are inconsistent with the Act’s text” and reversing the Federal Circuit’s holding that the machine-or-transformation test is the sole test for patentability under 35 U.S.C. §101) (2010); eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 394 (2006) (reversing the Federal Circuit’s “general rule” for permanent injunctions in favor of “the traditional four-factor framework that governs the award of injunctive relief”).
And now the Court has turned its attention to the clear-cut rule against extraterritorial damages.
Though bounded by intent requirements, Section 271(f) is an expansive provision that never requires an infringer to assemble a complete invention. Consider, for instance, that pursuant to the Supreme Court’s analysis in Microsoft Corp. v. AT&T Corp., tangible copies of a software program — which can perform infinitely many critical functions in infinitely many inventions — may qualify as “components” under Section 271(f). 550 U.S. at 451-52. Moreover, according to the Federal Circuit’s own observations about the paradox of holding exporters and domestic sellers to different damages standards in view of Power Integrations, any new nuances to the extraterritoriality rule in Section 271(f) damages could expand the damages universe available for infringement under the intent-free Section 271(a), the main course of most patent cases today.
No one knows what the Supreme Court will decide, but it does not often grant certiorari to affirm a single Circuit. The Court’s review of WesternGeco has the potential to cause a seismic shift in how patent litigants think about damages in many cases.
***** Morgan Chu is a partner in the Los Angeles office of Irell & Manella LLP, where he is presently Chair of the Litigation Group. As lead trial counsel, Mr. Chu has obtained payments of more than $5 billion from jury verdicts, judgments, and settlements. He has also received awards for Top Ten Defense Verdicts. Dominik Slusarczyk is a litigation associate in the Los Angeles office of Irell & Manella LLP, where his practice focuses on patent litigation.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.