Supreme Court Rules That § 284 Permits Lost Profits Damages Based on Lost Foreign Sales

Monday, June 25, 2018

In a decision considering the extraterritorial effect of the U.S. Patent Act, the Supreme Court has ruled that damages for patent infringement under 35 U.S.C. § 271(f)(2) can – in at least some cases – include damages for lost profits suffered outside the United States. The decision raises the possibility that foreign market damages may be available for infringement claims under other provisions of the Act, but the Court’s decision leaves unanswered questions about applying the ruling in future cases. WesternGeco LLC v. ION Geophysical Corp., No. 16-1011 (U.S. June 22, 2018).

 

Background:

WesternGeco LLC, a unit of Schlumberger Ltd., owns patents covering technologies for surveying the ocean floor. It filed suit in the U.S. District Court for the Southern District of Texas, alleging that ION Geophysical Corp. infringed the patents under § 271(f)(2), by manufacturing in the U.S. and supplying for use outside the U.S., critical components of the patented system. Section 271(f)(2) states that:

Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

At trial, a jury found that ION infringed the patents and awarded lost profits damages of $12.5 million, based on lost contracts for the patented systems, which would have been made and performed overseas. The Federal Circuit reversed the damage award based on an earlier case, Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F. 3d 1348 (Fed. Cir. 2013). In that case, dealing with direct and induced infringement, the Federal Circuit ruled that a patent owner having established direct infringement in the United States, may not recover damages for the defendant's worldwide sales of the patented invention as the direct, foreseeable result of domestic infringement.

 

Supreme Court Rules That Territoriality Concerns Do Not Bar Damages for Foreign Lost Sales Under § 271(f)(2)

In a 7-2 decision, the Supreme Court reversed the Federal Circuit. Justice Thomas, writing for the majority, noted that U.S. statutes are presumed to only apply to conduct within the boundaries of the United States. A two-step test is applied to determine whether a statute has extraterritorial effect. The first step is to consider whether the text of the statute provides a “clear indication of an extraterritorial application.” Morrison v. National Australia Bank Ltd., 561 U. S. 247, 255 (2010). The second step is to evaluate “whether the case involves a domestic application of the statute.” RJR Nabisco, Inc. v. European Community, 579 U. S. ___ (U.S. 2016). “Courts make this determination by identifying the statute’s ‘focus’ and asking whether the conduct relevant to that focus occurred in United States territory. If it did, then the case involves a permissible domestic application of the statute.” Slip op. at 5 (citation and quotation omitted).

In this case, the Court skipped the first step, and applied only the second step, exercising its discretion to do so when “addressing step one would require resolving difficult questions that do not change the outcome of the case, but could have far-reaching effects in future cases.” Slip op. at 5 (citation and quotation omitted). The Court concluded that the statutory focus of 35 U.S.C. § 284, considered in the context of § 271(f)(2), is domestic. First, the Court noted that § 284 “provides a general damages remedy for the various types of patent infringement identified in the Patent Act. . . .  We conclude that ‘the infringement’ is the focus[.]”

Second, the Court looked to the focus of § 271(f)(2):

We thus turn to §271(f)(2), which was the basis for WesternGeco’s infringement claim and the lost-profits damages that it received. Section 271(f)(2) focuses on domestic conduct. It provides that 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.” The conduct that §271(f)(2) regulates—i.e., its focus—is the domestic act of “suppl[ying] in or from the United States.”

Slip op. at 7. As a result, the Court concluded that § 284 is focused on domestic activity, and damages awarded for infringement under § 271(f)(2) may include lost profits related to injuries outside the United States:

In sum, the focus of §284, in a case involving infringement under §271(f)(2), is on the act of exporting components from the United States. In other words, the domestic infringement is “the objec[t] of the statute’s solicitude” in this context. The conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents. Thus, the lost-profits damages that were awarded to WesternGeco were a domestic application of §284.

Slip op. at (citation omitted)(emphasis added).

The Court rejected ION’s argument, consistent with Power Integrations, that damages under the Patent Act are not available for infringing conduct outside the U.S, because those acts were not themselves infringement of the U.S. patent. The Court stated that “ION is mistaken to assert that this case involves an extraterritorial application of § 284 simply because ‘lost-profits damages occurred extraterritorially, and foreign conduct subsequent to [ION’s] infringement was necessary to give rise to the injury.’ Those overseas events were merely incidental to the infringement.” Slip op. at 8.

Although the Court held that WesternGeco’s damages award for lost profits was a permissible domestic application of §284, the Court did not address the standard governing foreign lost profits in patent infringement cases, such as causation and the evidence necessary to establish such damages. Instead, the decision expressly did “not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.” Slip op. at 9, n.3.

Justice Gorsuch dissented, joined by Justice Breyer.  The dissent argued that the extraterritorial actions that resulted in WesternGeco’s lost profits occurred in jurisdictions where the U.S. patents had no effect. “Permitting damages of this sort would effectively allow U. S. patent owners to use American courts to extend their monopolies to foreign markets. That, in turn, would invite other countries to use their own patent laws and courts to assert control over our economy.”

 

Practical Significance

Although the WesternGeco decision is limited to lost profits damages awarded for infringement under 35 U.S.C. §  271(f)(2), the Court’s reasoning may be extended to damages in other types of cases. Economic consequences from infringement, manifested in overseas markets, also may support damages based on reasonable royalty or price erosion theories. In addition, while the Court only considered infringement under § 271(f)(2), which contemplates the supplying of components from the United States, plaintiff asserting infringement claims under other subsections may argue for damages suffered in overseas markets, since § 284 requires “damages adequate to compensate for the infringement,” and (as the WesternGeco Court explained) the “overseas events were merely incidental to the infringement.”

Thus, the case establishes that foreign damages are potentially available, but leaves unresolved the applicable standards for winning those damages. Those issues, including causation and the proper calculation of reasonable royalty and lost profits damages, are likely to be addressed in future cases.