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Award of Foreign Lost Profits is Permissible Domestic Application of U.S. Patent Act
On June 22, 2018, the U.S. Supreme Court handed down a 7-2 decision in WesternGeco LLC v. ION Geophysical Corp., No. 16-1011 (opinion by Justice Thomas), holding that a patent owner is entitled to recover lost foreign profits for infringement under 35 U.S.C. § 271(f)(2). Section 271(f)(2) provides for liability for infringement for exporting components of a patented invention that are "especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use" knowing that the components are intended to be combined in a manner that would infringe the patent if the combination had occurred within the United States. Section 284 of the Patent Act further provides that a patentee is entitled to "damages adequate to compensate" for infringement. In WesternGeco, the Supreme Court held that section 284 permits lost-profits damages to be awarded for infringement under section 271(f)(2) notwithstanding the foreign nature of the profits lost.
The WesternGeco patents at issue relate to systems for using sensors that detect sound waves off the ocean floor to produce better seismic surveys. WesternGeco manufactures its systems domestically and performs seismic surveys on the high seas. ION manufactures components of a seismic survey system in the United States and exports them to customers for assembly abroad. At trial, a jury found infringement by ION and awarded WesternGeco $12.5 million in reasonable royalties and $93.4 million in lost profits. ION then moved to vacate the lost profits award as giving improper extraterritorial effect to U.S. law as result of ION's customers making and using the infringing systems abroad. The district court denied the post-trial motion, and the Federal Circuit later reversed the award of lost profits, holding that the contracts lost by WesternGeco were for performing seismic surveys on the high seas, outside the jurisdictional reach of U.S. patent law, and an award of lost profits would contravene the presumption against the extraterritorial application of U.S. law.
In reversing the Federal Circuit, the Supreme Court focused on step two of the two-part test of RJR Nabisco, Inc. v. European Community, 579 U.S. ___ (2016), namely whether the conduct sought to be regulated and the interests sought to be protected are domestic or occur outside the United States. The Court concluded that "the conduct relevant to the statutory focus in this case is domestic." The infringement under section 271(f)(2) is based on domestic conduct, regulating the domestic act of supplying components in or from the United States. "[T]he domestic infringement is 'the object[t] of the statute's solicitude' in this context," and "the lost-profits damages that were awarded . . . were a domestic application of § 284." In addressing ION's arguments, the Court stated that "the damages themselves are merely the means by which the statute achieves its end of remedying infringements" and noted that the "overseas events were merely incidental to the infringement."
The Supreme Court was careful in its analysis not to address step one of the RJR Nabisco test, which asks whether the presumption against extraterritoriality has been rebutted, stating that "[r]esolving that question could implicate many other statutes besides the Patent Act." The Court also did not address section 271(f)(1) of the statute nor analyze the limits of other doctrines, such as proximate cause.
Justice Gorsuch dissented and was joined by Justice Breyer, finding that the Patent Act prohibits the extraterritorial application of lost-profits damages, and WesternGeco was not entitled to damages caused by use of its invention outside the United States. In the majority's view, the dissent conflated "legal injury with the damages arising from the injury."
While the holding in this case is relatively narrow, it confirms that recovery for patent damages under section 284 for infringement under 35 U.S.C. § 271(f)(2) is not limited by where the damages arise for such infringement.
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Sharon A. Israel
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