By Kevin E. Noonan and George "Trey" Lyons, III —

On Friday, the Supreme Court reversed the judgment of the Federal Circuit in WesternGeco LLC v. ION Geophysical Corp.  Justice Thomas (joined by Chief Justice Roberts and Justices Kennedy, Ginsburg, Alito, Sotomayor, and Kagan) held that, based on the "focus" of 35 U.S.C. § 284 of the Patent Act (the general damages provision) when read in light of domestic infringement under 35 U.S.C. § 271(f)(2) (barring exportation of components specifically adapted for a patented invention), a patent owner could recover lost foreign profits.  The decision overruled the Federal Circuit's general practice of interpreting damages under § 271(f)(2) in the same fashion as § 271(a) (the general infringement provision, which does not allow patent owners to recover lost foreign profits).

Background

The case arose over patent owner WesternGeco LLC's four patents relating to positioning systems for marine seismic streamer technology deployed behind ships to create three-dimensional maps of the ocean floor to facilitate natural resource exploration and management.  See U.S. Patent No. 7,293,520; 7,162,967; 7,080,607; and 6,691,038.  WesternGeco uses the technology to perform services for oil and gas companies based on these three-dimensional maps both domestically and abroad, but does not sell or license this technology.

In 2007, ION Geophysical Corp. began selling a competing system by manufacturing the system components in the U.S. and shipping them to companies to assemble abroad.  Once assembled, ION's competing system performed services indistinguishable from WesternGeco's and thus was able to successfully compete with WesternGeco in foreign markets.

In 2009, WesternGeco sued ION in the Southern District of Texas for infringing all four patents under §§ 271(f)(1) and (f)(2).  At trial, WesternGeco proved that it had lost at least ten specific survey contracts due to ION's infringement.  After a three and a half week trial, the jury returned a verdict in favor of WesternGeco, finding that ION had infringed all four patents under §§ 271(f)(1) and (2) and awarded $93.4 million in lost profits based on the foreign contracts and a reasonable royalty of $12.5 million for the patented article.  ION's post-trial motion to set aside the $93.4 million in foreign lost profits portion of the verdict led to the instant appeal, where ION argued that WesternGeco could not recover damages for lost profits because § 271(f) does not apply extraterritorially.

The District Court denied the motion but the U.S. Court of Appeals for the Federal Circuit reversed the award of lost-profits damages, citing its previous precedent in Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc., 711 F. 3d 1348 (Fed. Cir. 2013), barring the recovery of lost foreign profits under § 271(a).  Specifically, the majority of the appellate panel (Judges Dyk and Hughes) reasoned that § 271(f) should be interpreted similarly to how the Court had interpreted § 271(a), as both were "designed" to put patent infringers "in a similar position" under § 284.  Judge Wallach dissented, noting that the majority's view was unduly rigid for the foreign impact of domestic infringement under § 271(f), as it barred the District Court from "considering foreign lost profits even when those lost profits bear a sufficient relationship to domestic infringement," which "encourages market inefficiency[] and threatens to deprive plaintiffs of deserved compensation in appropriate cases."[1]  WesternGeco successfully petitioned for certiorari.

Judge Wallach's criticism of the rigidity with which the Federal Circuit applied this rule, when read in context of what § 271(f)(2) was crafted to address (end-around foreign assembly and infringement of U.S.-exported components), was pervasive in the cert. petition and the proceedings before the Court.  Of particular impact was the focusing of domestic infringement under § 271(f)(2) that led to domestic harm to U.S. patent owners in foreign markets.  An important analogy that focused the Court's attention at oral argument (and one that may well have carried the day), was given by Zachary Tripp, Assistant to the U.S. Solicitor General, in which he argued that a hypothetical French tourist left unable to work in France due to injuries sustained while visiting the U.S. would still be able to recover damages under U.S. tort law—even though the lost wages would occur in France.[2]

The Majority

In line with this reasoning, as well as Judge Wallach's criticisms of the rigidity of the Federal Circuit's analysis of § 271(f)(2), the Supreme Court reversed the Federal Circuit's decision below.  In its decision, despite the "presumption against extraterritoriality" in the enforcement of federal statutes, the majority exercised its discretion to bypass the first prong of RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090, 2101 (2016) ("whether the presumption against extraterritoriality has been rebutted"), and found under the second prong ("whether the case involves a domestic application of the statute"), that foreign lost profits due to domestic acts of infringement under § 271(f)(2) should not be categorically barred.

Specifically, the majority reiterated the facts presented and that "the focus of § 284, in a case involving infringement under § 271(f)(2), is on the act of exporting components from the United States."  WesternGeco, at 7 (emphasis added).  In this context, because the infringing act happens domestically, any lost profits (foreign or otherwise) based on that domestic infringement were merely a domestic application of § 284.  Id. at 7-8 ("domestic infringement [under § 271(f)(2)] is 'the objec[t] of the statute's solicitude' in this context . . . [and t]he conduct in this case that is relevant to that focus clearly occurred in the United States . . . [t]hus, the lost-profits damages . . . were a domestic application of § 284").

Furthermore, in the majority's view, to receive adequate compensation for such domestic acts of infringement under § 284, patent owners such as WesternGeco can and should recover damages that "'plac[e] [the patent owner] in as good a position as he would have been in' if the patent had not been infringed"—i.e., "the difference between [its] pecuniary condition after the infringement, and what [its] condition would have been if the infringement had not occurred."  Id. at 9.  Thus, because WesternGeco demonstrated the loss of at least ten specific foreign contracts based on ION's domestic act of supplying the components that infringed WesternGeco's patents, the Court held that the foreign lost-profits damages that were awarded to WesternGeco were permissible—as a domestic application of § 284 vis-à-vis § 271(f)(2).  Id. at 9-10.

The majority, however, emphasized the narrowness of the holding by expressly declining to address the permissibility of such damages due to extraterritorial inducement (i.e., the intersection of § 284 and § 271(f)(1)) and/or "the extent to which other doctrines, such as proximate cause, could limit or preclude damages in [this or other] cases."  See, e.g., id. at 3 n.1, 7 n.2, and 9 n.3.

The Dissent

None of the current Supreme Court Justices can fairly be said to be particularly pro-patent; indeed, it seems that the Justices are more comfortable with the pervasive effect of antitrust principles, particularly academic ones, and their application to patent law analysis (see, e.g., FTC v. Actavis).  Justice Gorsuch, the newest Justice, evinced the same penchant for construing patent law within the narrow confines of its antitrust boundaries in his dissent to Justice Thomas's majority opinion in WesternGeco LLC v. Ion Geophysical Corp., in his reasoning, his diction, and his partner in dissent, Justice Breyer (who authored, among other decisions, Actavis and Mayo Collaborative Services v. Prometheus Laboratories, Inc.).

The dissent is just slightly shorter than the majority opinion (albeit not by much), and in it Justices Gorsuch and Breyer take issue with the majority's decision permitting a patentee to be sued for damages for the use abroad of a patented article infringed under the provisions of 35 U.S.C. § 271(f)(2).  His language evokes the classic concerns about the effect of patents on competition, writing, inter alia, that "[a] U. S. patent provides a lawful monopoly" in the U.S. only, and that WesternGeco "assumes it could have charged monopoly rents abroad" based on its U.S. patent.  "Permitting damages of this sort would effectively allow U. S. patent owners to use American courts to extend their monopolies to foreign markets," he warns, and this "would invite other countries to use their own patent laws and courts to assert control over our economy" (a legitimate worry if this is indeed the impact of the majority's decision).  Justice Gorsuch believes the majority erred, despite the Congressional intent that § 271(f) impose patent infringement liability for acts occurring abroad that have the statutory predicate basis in activities occurring within the U.S.

As in the majority opinion, the dissent looks to other provisions of the patent statute for support for Justice Gorsuch's position.  And of course the Justice finds such support, because but for the § 271(f) exception, the Patent Act is replete with limitations against extraterritorial extension of U.S. law, both implicit and explicit.  The real issue between the majority and the dissent is whether the damages accruing from Ion Geographic's infringement find a patent law remedy.  The majority believes that the predicate infringement under § 271(f)(2) entitles WesternGeco to those ancillary damages; Justices Gorsuch and Breyer do not.

The Justice points out that the Court has decided against permitting extraterritorial extensions of U.S. patent law before, all occurring before passage of § 271(f).  These include Brown v. Duchesne, 19 How. 183 (1857) (infringement happening on board a ship on the high seas), despite unavailing argument to the contrary by the Solicitor General ("I am unpersuaded," Justice Gorsuch writes, in a footnote); Birdsall v. Coolidge, 93 U. S. 64 (1876); and Yale Lock Mfg. Co. v. Sargent, 117 U. S. 536 (1886) ("the leading case on lost profits damages").  Justice Gorsuch also rejects the argument that § 271(f)(2) provides an exception; the Justice thinks that the statute merely "modifies the circumstances when the law will treat an invention as having been made within the United States" but does not broaden the scope of activities for which a patentee can seek compensation in damages.  The dissent characterizes as a "bedrock rule that foreign uses of an invention (even an invention made in this country) do not infringe a U. S. patent" (emphasis in the dissent) and that § 271(f)(2) does not (and cannot) change that.

In further support of his argument, Justice Gorsuch then sets forth a "parade of horribles" that he envisions could arise in the wake of the majority's decision.  These include instances where there could be "greater recovery when a defendant exports a component of an invention in violation of §271(f)(2) [in the Justice's example, a chip for use in a cell phone] than when a defendant exports the entire invention in violation of §271(a)."  Calling it "some springboard" for potential liability, Justice Gorsuch posits that "supplying a single infringing product from the United States would make ION responsible for any foreseeable harm its customers cause by using the product to compete against WesternGeco worldwide, even though WesternGeco's U. S. patent doesn't protect it from such competition," as evidenced the disparity between the damages the jury awarded here for lost profits ($93.4 million) and royalties ($12.5 million).  Warming to the topic, Justice Gorsuch speculates regarding a situation where a patented prototype chip is made in the U.S. and all further activities occur abroad:

Under the terms of the Patent Act, the developer commits an act of infringement by creating the prototype here, but the additional chips it makes and sells outside the United States do not qualify as infringement.  Under WesternGeco's approach, however, the patent owner could recover any profits it lost to that foreign competition—or even three times as much, see §284— effectively giving the patent owner a monopoly over foreign markets through its U. S. patent.

This (over)application is an invitation for foreign patentees to act reciprocally against U.S. industries, creating infringement liability enforced by foreign courts that will harm the U.S. economy.

There is certainly some validity in Justice Gorsuch's apprehension of how the inferior courts might improperly expand the majority's opinion beyond its scope.  That has certainly been the case regarding the Court's recent decisions on other provisions of the statute (see Ariosa Diagnostics, Inc. v. Sequenom, Inc., for example).  But in many ways this case is an outlier, wherein infringement of the claimed device gave the infringer the ability to compete with the patentee for services rather than for sales of the infringing article.  And this distinction may make all the difference in whether Justice Gorsuch's apprehensions come to pass.

Conclusion

For the time being, one practical consequence of this decision is that U.S. patent owners may now recover foreign lost profits tied to domestic acts of infringement under § 271(f)(2).

WesternGeco LLC v. ION Geophysical Corp. (2018)
Opinion by Justice Thomas, joined by Chief Justice Roberts and Justices Kennedy, Ginsburg, Alito, Sotomayor, and Kagan; dissenting opinion by Justice Gorsuch, joined by Justice Breyer

[1] WesternGeco L.L.C. v. ION Geophysical Corp., 837 F.3d 1358, 1369 (Fed. Cir. 2016) (Wallach, J. dissenting), cert. granted sub nom, WesternGeco LLC v. ION Geophysical Corp., 138 S. Ct. 734 (2018), and rev'd sub nom, WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, 2018 WL 3073503 (U.S. June 22, 2018).

[2] For further analysis on this point, see, e.g., Dennis Crouch, WesternGeco v. Ion Geophysical: Foreign Damages and a French Tourist, PatentlyO (April 17, 2018).