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Article: October 2018: U.S. Supreme Court Expands Rights of Patent Owners to Recover Lost Foreign Profits

Business Litigation Reports

Background
On June 22, 2018, the U.S. Supreme Court in WesternGeco LLC v. Ion GeoPhysical Corp. determined in a 7-2 ruling that patent owners are entitled to their profits that were lost overseas under the general patent infringement damages statute, 35 U.S.C. § 284, if they prove infringement under Section 271(f ) (2) of the Patent Act. Although its 10-page decision was narrow, the courts expanded the rights of certain patent owners.

Procedural Background
WesternGeco (“WesternGeco”) initiated a patent infringement action under Sections 271(f)(1) and (f )(2) of the Patent Act against ION Geophysical Corporation (“ION”) in the Southern District of Texas, asserting four patents related to lateral-steering technology to survey the ocean floor. In its suit, WesternGeco accused ION of manufacturing components for a competing system in the United States before shipping them to companies overseas to be assembled. Notably, WesternGeco did not license or sell its technology but rather used the technology itself to perform surveys for its clients.

Section 271 of the Patent Act covers different types of infringement within the United States. For example, Section 271(a) states that “whoever without authority, makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent.” Section 271(f ) is an exception to the domestic geographic limitation on infringement and provides that any party that supplies components “in or from the United States” and either actively induces (Section 271(f )(1)) or intends (Section 271(f )(2)) the components to be combined outside the United States. If infringement is proven, Section 284 is a remedial provision of the Patent Act that authorizes “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.”

At trial, the jury found that WesternGeco had lost ten survey contracts as result of ION’s infringement and awarded WesternGeco $12.5 million in royalties and $93.4 million in lost profits. The district court subsequently rejected ION’s argument in its motion to set aside the verdict that Section 271(f) precludes patent owners from recovering extraterritorial damages. WesternGeco LLC v. ION Geophysical Corp., 953 F. Supp. 2d 731, 755-56 (S.D. Tex. 2013). ION appealed and a panel majority in the Court of Appeals for the Federal Circuit reversed the $93.4 million award for lost profits based on a prior Federal Circuit decision in Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348 (Fed. Cir. 2013), which held that Section 271(a) precluded recovery of damages from lost foreign profits. WesternGeco LLC v. ION Geophysical Corp., 791 F.3d 1340, 1349-52 (Fed. Cir. 2015). The Supreme Court granted certiorari, vacated, and remanded for further consideration in light of the recently-decided Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (June 13, 2016). The same panel majority in the Federal Circuit again reversed the award of lost foreign profits, and the Supreme Court granted certiorari once more.

Different Theories for Awarding Foreign Lost Profits
WesternGeco argued that it should be able to recover its lost foreign profits, albeit under different legal theories. WesternGeco’s main theory was that the plain text of Sections 271(f) and 284 combined entitled it to recover its lost foreign profits. “Congress specifically focused on the precise quantum of domestic conduct (supply components in or from the United States) and requisite intent (that the components be combined abroad in a manner that would constitute infringement if it occurred domestically)” in Section 271(f). Brief of Petitioner at 21. As a result of the domestic infringement, Section 284 entitled WesternGeco to full compensation for damages caused by the infringement. Id. at 21-22. The fact that the combination and lost sales occurred abroad should not prevent the patent owner from being made whole for ION’s domestic misconduct under Section 271(f)(2). Id. at 21-26.

More specifically, WesternGeco made three arguments as to why the plain text of Sections 271(f) and 284 allowed foreign profits to be recovered. First, the presumption against extraterritoriality, a general presumption that federal statutes do not apply abroad absent “clear, affirmative” congressional intent to do so, id. at 28 (quoting RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2101 (2016)), is inapplicable given the focus of Section 271(f) on domestic conduct that constitutes part of the infringement. Id. at 27, 33 (distinguishing “a statute providing a private cause of action will reach foreign conduct or engender diplomatic friction relative to a statute that can be enforced only by the federal government”). The parties did not dispute that ION supplied the components from the United States with the intent to combine the components abroad; the only remaining dispute was whether WesternGeco was entitled to its lost foreign profits. Id. at 22-23. Because WesternGeco’s claims were focused on the unlawful domestic conduct rather than the unlawful foreign conduct, it contended that the presumption against extraterritoriality was irrelevant here. Id. at 27, 29-30, 34 (characterizing the Federal Circuit’s application of the presumption here to be “simply pounding a square peg into a round hole”)

Second, even if the presumption against extraterritoriality applied to Section 271(f), WesternGeco argued that it was still entitled to its lost foreign profits because “Congress enacted §271(f) with transnational considerations firmly in mind and prohibited specific domestic conduct if and only if subsequent foreign combinations of components were intended.” Id. at 34 (emphasis in original). WesternGeco also argued that the Congress enacted Section 271(f) to close the loophole created by Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972), which further supported WesternGeco’s position that Congress intended patent owners to recover lost foreign profits under Section 271(f). Brief of Petitioner at 36-39. For context, the Supreme Court in Deepsouth had ruled that patent owners could not recover foreign lost profits under Section 271(a) from a manufacturer that shipped components overseas to be assembled because there was no domestic direct infringement. Id. at 36. WesternGeco pointed out that the Congress could have chosen to close the loophole created by Deepsouth by making the foreign combination unlawful, to which the presumption would apply, but instead chose to create an exception under Section 271(f) to render the domestic supply of components with the intent of foreign combination a form of infringement. Id. at 36-37. Thus, “any extraterritorial effect of § 271(f) was fully intended.” Id. at 27.

Finally, WesternGeco contended that the presumption against extraterritoriality is not properly applied to damages provisions because Congress is not required to specify that damages are recoverable for extraterritorial conduct in damages provisions. Id. at 40-41 (“This Court requires clarity, not redundancy, to overcome the presumption”); see also id. at 54 (“Expecting a specific indication in § 284 that Congress intended damages to extend to foreign lost profits is to look for the wrong thing in the wrong place.”). In support, WesternGeco pointed to several instances in which the Supreme Court and other federal courts have awarded lost foreign profits due to domestic violations. Id. at 41-46. Rather than using extraterritoriality to limit damages, WesternGeco argued that the doctrine of proximate causation and related doctrines can “keep damages awards within their proper scope.” Id. at 52-53.

The United States, for its part, filed an amicus brief in support of the Petitioner, rejecting the Federal Circuit’s “categorical rule precluding an award of patent-infringement damages for profits that would have been earned outside the United States.” Brief of the United States at 15. The United States stepped through the two-step framework “for identifying impermissible extraterritorial applications of federal statutes” that the Supreme Court had refined in its 2016 RJR Nabisco decision, where it is first determined whether the presumption against extraterritorial application of U.S. law has been rebutted by “a clear, affirmative indication” that the statute should be applied extraterritorially and if so, then whether the “extraterritorial application of the statute is permissible.” Id. at 24 (citation and quotation marks omitted). But if the presumption has not been rebutted, the Court will determine “whether the case involves a domestic application of the statue by looking at the statute’s focus.” Id. (citation and quotation marks omitted).

Applying the two-step framework here, the United States found that the presumption against extraterritoriality applied to Section 284, which did not contain any “clear, affirmative indication that [it] applies extraterritorially,” id. at 25 (citation and quotation marks omitted). The United States determined, however, that Section 284 “does not regulate conduct abroad” and is limited to territorial applications in order to ensure that “a U.S. patentee is adequately compensated for domestic infringement of its rights under U.S. law.” Id. at 25. Notably, the United States pointed out that the foreign conduct that the Federal Circuit determined to trigger the presumption against extraterritoriality (the surveys performed by ION’s customers) is not expressly referenced in Section 284 and is therefore not the focus of Section 284. Id. at 31. In contrast, ION’s domestic supply of the components is the legal injury suffered by WesternGeco and the focus of Section 284. Id. at 33. As a result, the United States concluded that “Section 284’s text and purpose thus reflect the provision’s domestic focus, even in cases where the consequences of infringing conduct include the loss of profits that the patentee otherwise would have earned overseas.” Id.

A total of eleven amicus briefs were filed in WesternGeco, nine supporting Petitioners and two supporting Respondent. Quinn Emanuel filed an amici brief on behalf of Fairchild Semiconductor International, Inc., The Internet Association, SAS Institute Inc., Symmetry, LLC, and Xilinx, Inc. in support of ION, arguing, inter alia, that the traditional presumption against extraterritoriality in U.S. patent law applies to both damages and liability, especially without a clear statement of congressional intent to the contrary. Brief of Amici Curiae of Fairchild Semiconductor International, Inc. at 4-7, 11-22.

Respondent Argued That Presumption Against Extraterritoriality Applied to Remedial Provision
ION unsurprisingly agreed with the Federal Circuit that the presumption against extraterritoriality applied to Section 284 and that Congress did not intend Section 284 to rebut this presumption. In support, ION relied on the absence of “clear, affirmative indication” in Section 284 that the presumption does not apply as well as the nature of damages, which ION characterized to be foreign in nature. Brief of Respondent at 12. “[A] damages provision that provides for ‘adequate’ compensation does not clearly and unmistakably indicate an intent to provide compensation for foreign injuries based on foreign activities.” Id. at 20-21. ION disputed that the injury occurred domestically, asserting that injury only occurred “after foreign entities won the contracts and petitioner thereby lost a foreign stream of profits because of the foreign entities’ foreign use of [the accused product].” Id. at 23. ION also disagreed with WesternGeco’s position that the presumption against extraterritoriality did not apply to Section 271(f)(2). Id. at 25-32. Based on WesternGeco’s position that patent owners may recover lost foreign profits, ION raised concerns of comity, warning that any act of domestic infringement would act as a springboard for worldwide patent damages to be awarded by American juries. Id. at 50.

The Supreme Court’s 7-2 Decision in Favor of Recovery of Lost Foreign Profits
Writing for the majority, Justice Thomas appears to be receptive to the “two-step framework for deciding questions of extraterritoriality” but skipped step one and resolved the case at step two. 138 S. Ct. 2129, slip op. at 5 (June 22, 2018) (exercising discretion to not resolve issues, such as whether the presumption applies to remedial provisions may have “far-reaching effects in future cases,” that would not change the outcome of the case). Justice Thomas analyzed Section 284 in tandem with Section 271(f)(2) and determined that “the conduct relevant to the statutory focus in this case is domestic.” Id. at 6. In particular, “the focus of § 284, in a case involving infringement under § 271(f)(2), is on the act of exporting components from the United States.” Id. at 7-8. The majority inserted a footnote near the end of its opinion making clear that its holding does not address any other doctrines that were argued before the Court. Id. at 9 n.3 (“In reaching this holding, we do not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.”).

Justice Gorsuch, in the dissenting opinion joined by Justice Breyer, opined that allowing lost foreign profits “would effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets,” which “would invite other countries to use their own patent laws and courts to assert control over our economy.” Id., dissenting slip op. at 1-2 (Gorsuch, J., dissenting). The majority, however, dismissed Justice Gorsuch’s concerns, stating that “the overseas events were merely incidental to the infringement,” id., slip op. at 8, and criticized Justice Gorsuch for “wrongly conflat[ing] legal injury with the damages arising from that injury.” Id. at 9.

As a result, the Supreme Court reversed and remanded the Federal Circuit’s decision for further proceedings. Since then, however, the Federal Circuit has ruled that three of the asserted patents are invalid, which will affect the amount of lost foreign profits recoverable. ION, for its part, plans to seek a new damages trial based on the invalidity of the three asserted patents and further plans to argue on remand before the Federal Circuit that “WesternGeco is not entitled to lost profits because the two companies are not direct competitors, a position the Federal circuit did not rule on.” See “Justices Say Patent Owners Can Recover Foreign Damages”, Law360 (June 22, 2018, 10:34 AM EDT), available at https://www.law360.com/articles/1047357. In sum, the Court’s narrow ruling in WesternGeco expanded patent owners’ rights to recover lost foreign profits for infringement under Section 271(f)(2) in certain circumstances, but recovery may still be uncertain if other damages prerequisites, such as proximate cause, are disputed.