By Fritz Klantschi
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The U.S. Supreme Court recently upheld a lost profits award of $93.4 million in a patent infringement suit, finding that profits lost by a patent owner outside the United States are recoverable in a patent infringement suit in the U.S.
Background
The case, WesternGeco LLC v. ION Geophysical, 138 S Ct 2129, 201 L Ed 2d 584 [2018], involves competitors in the field of ocean floor surveying systems.
ION manufactured the components to its infringing system in the U.S. and shipped them to companies abroad for assembly. Once ION’s components were assembled, the ION system was indistinguishable from the WesternGeco system. At trial, the jury found ION liable for patent infringement and awarded WesternGeco damages in royalties ($12.5 million) and lost profits ($93.4 million). ION appealed to have the verdict set aside, arguing that WesternGeco could not recover damages for lost profits because the relevant statute, 35 U.S.C. § 271(f)(1) of the patent law, does not apply to damages outside the U.S. Section 271(f) addresses patent infringement for exporting uncombined components of a patented invention and interacts with another provision of the patent statute, § 284, which provides 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.”
There is a presumption against the extraterritorial effect of U.S. laws. When dealing with questions of extraterritoriality, the Supreme Court in RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090, 195 L.Ed.2d 476 (2016) established a two-step test. The first step asks “whether the presumption against extraterritoriality has been rebutted.” Id. at 2101. If the presumption against extraterritoriality has not been rebutted, the second step asks “whether the case involves a domestic application of the statute.” Id. To make this determination it is necessary to identify the statute’s focus,”and whether the conduct relevant to that focus occurred in the U.S. If it did, that would allow a permissible domestic application of the statute. WesternGeco at 2136.
The Decision
In a 7 to 2 decision, Justice Thomas, writing for the majority, held that WesternGeco’s damages award for lost profits was a permissible domestic application of § 284. Id. at 2139.
The Court addressed step two of the extraterritorial test first and held that § 284 provides a general remedy for patent infringement. The focus of § 284 is determined by the type of infringement that occurred. The Court considered § 271(f)(2), the basis of WesternGeco’s infringement claim and the lost-profits damages that the jury awarded. The focus of § 271(f)(2) is on domestic conduct and states a “company shall be liable as an infringer if it supplies certain components of a patented invention in or from the United States with the intent that they will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.” Id. at 2137 – 2138 (internal quotes omitted).
The Court ultimately determined that § 284, in a case involving infringement under § 271(f)(2), addresses the act of exporting components of a patented invention from the United States. In the present case, ION exported components that infringed WesternGeco’s patents from the United States. Taking § 271(f)(2) and § 284 together, a patent owner can recover for lost foreign profits because under § 284, “damages are adequate to compensate for infringement when they place the patent owner in as good a position as he would have been in if the patent had not been infringed.” Id. at 2139 (citing General Motors Corp. v. Devex Corp., 461 U.S. 648, 655, 103 S.Ct. 2058, 76 L.Ed.2d 211 (1983), internal quotes omitted). Hence, damages awarded to WesternGeco can include lost foreign profits under a domestic application of § 284. Id.
The Dissent
Justice Gorsuch joined by Justice Breyer dissented. The dissent disagreed with the majority that the Patent Act permitted WesternGeco’s claim for lost profits because a U.S. patent provides a lawful monopoly on the manufacture, use and sale of an invention in the U.S. whereas WesternGeco’s lost profits were derived from uses outside of the U.S. According to the dissent, the effect of WesternGeco’s lost profit is that WesternGeco can charge monopoly rates abroad based on a U.S. patent that has no legal force abroad. To allow this would permit patent owners to use American courts to extend their monopolies to foreign markets. Justice Gorsuch’s concern is that other countries would use their patent laws and courts to assert control over the U.S. economy. Id.
Takeaway
The takeaway from this decision is that the focus of the Patent Act’s damages section, § 284, in a case involving infringement under § 271(f)(2) is on the act of supplying/exporting components of a patented invention from the U.S. If those components are combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States then a patent owner can recover lost foreign profits as a permissible domestic application of § 284. On January 11. 2019, the Federal Circuit remanded the case back to the district court to decide whether to hold a new trial to determine if WesternGeco can recover from ION $93.4 million in lost profits.