Foreign Lost Profits Recoverable from the US Supplier

On June 22, 2018, the Supreme Court issued its decision in WesternGeco LLC v. ION Geophysical Corp. holding that the damages provision of § 284 of the Patent Act permits recovery of foreign lost profits when infringement is found under § 271(f)(2) of the Patent Act.

Case Background

WesternGeco develops technology for surveying the ocean floor. WesternGeco does not sell its technology or license it to competitors. Instead, it uses the technology itself, performing surveys for oil and gas companies. In 2007, ION began manufacturing components for a competing surveying system and shipping them abroad to various companies that would subsequently combine the components to form a system that was indistinguishable from WesternGeco’s system.

WesternGeco sued for infringement under Sections 271(f)(1) and 271(f)(2) of the Patent Act. At trial, WesternGeco proved that it lost 10 specific survey contracts due to ION’s infringement. The jury verdict found ION liable, awarding WesternGeco $12.5 million in royalties and $93.4 million in lost profits. In post-trial motions, ION sought to set aside the verdict, arguing WesternGeco was precluded from recovering lost profits as a matter of law because Section 271(f) does not apply extraterritorially. The district court denied the motions, finding ION’s arguments unpersuasive. ION appealed to the Federal Circuit.

The Federal Circuit affirmed the district court’s infringement finding under § 271(f)(1), but reversed the award of lost profits under § 271(f)(2). (IP Update, Vol. 19, No. 10 and Vol. 18, No. 8). Relying on prior holdings stating that § 271(a)’s general infringement provision does not allow patent owners to recover foreign lost profits, the Federal Court found § 271(f) should be interpreted the same way because it was designed to put patent infringers in a similar position. WesternGeco appealed to the Supreme Court.

Petition for Certiorari

The precise question presented to the Supreme Court was whether the general damages provision of 35 USC § 284 permits recovery of foreign lost profits for infringement under § 271(f)(2).

In a 7-2 decision, the Supreme Court reversed and remanded the Federal Circuit’s decision, holding that § 284 of the Patent Act permits recovery of lost profits for infringement under § 271(f)(2).

The majority opinion, authored by Justice Clarence Thomas, first acknowledged the general presumption that a statute applies only within the territorial jurisdiction of the United States. However, this presumption is rebuttable under a two-step inquiry. The first step asks whether the presumption against extraterritoriality is rebutted. If the presumption has not been rebutted, step two determines whether a particular case involves a “domestic application of a statute” and whether the conduct relevant to the statute’s domestic focus occurred in the territorial United States. If the answer to the second question is yes, then the case embodies a permissible domestic application of a statute sufficient to authorize extraterritorial application. Notably, courts are within their discretion to forego step one in “appropriate cases” that involve “difficult questions” and instead proceed directly to step two. In this case, the Court applied this discretion and conducted its analysis beginning with step two.

In undertaking the analysis of § 284 under step two, the Court noted that this analysis cannot be conducted in a vacuum and must be viewed in concert with other relevant provisions. Applying that principle to this case, the Court found the focus of § 284 to be on “the infringement” because the overriding purpose of § 284 is to “affor[d] patent owners complete compensation” for infringement. The Court explained that due to the various types of conduct constituting infringement, each alternate act of infringement must be individually assessed for its domestic application.

Here, ION’s infringement was based on § 271(f)(2) and the Court held that such an act of infringement occurs within the United States and qualifies as a domestic act. Under § 271(f)(2), an accused infringer is liable if they supply or cause to be supplied “from the United States any component of a patented invention that is especially made or adapted for use in the invention and not a staple article or commodity of commerce . . . knowing that such component is so made or adapted and intending that such component will be combined outside of the United States” in an infringing manner. Accordingly, the statute’s own words provide a specific limitation on the conduct that qualifies as infringement – conduct occurring inside the territorial United States. Since ION’s domestic activity of supplying infringing components overseas gave rise to its liability, awarding foreign lost profits was a domestic application of § 284 compensating for a domestic act of infringement.

The dissent, authored by Justice Gorsuch and joined by Justice Breyer, was concerned that “permitting damages of this sort [will] effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets,” warning that this attitude toward the sovereignty of other nation’s laws may cause a domino effect where other countries use their patent laws to assert control over the US economy. The dissent further argued that courts in other countries could award damages for sales of a product in the United States, “even though the foreign patent lacks any legal force here.” In response, the majority stated that the dissent wrongly conflates legal injury with the damages arising from the injury, stating that patent owners are entitled to recover the total sum lost from the infringement based on the monetary position a patent owner would be in without the infringement, which under the framework of § 271(f)(2) infringement includes foreign lost profits.

Practice Note

Moving forward, it remains to be determined how broad the overall effects of this decision will be. Much of the reasoning employed by the Court to justify foreign lost profit recovery under § 271(f)(2) can be applied to other contexts. For example, a patented method in the United States that is based on the internet can be infringed under § 271(a) and subsequently sent via steaming signal overseas where it is then directly infringed by a foreign third party. While this internet based method would not be a component, the harm being felt near identical to § 271(f)(2) since both involve the illicit exportation of patented technology to a foreign country. Additionally, the majority’s focus on the distinction between “legal injury” and “damages arising from that injury” may prove significant in future related litigation. Patent owners are likely to rely on this decision to support an award of foreign lost profits if companies can formulate arguments showing that a domestic act of infringement resulted in the loss of a foreign sale. While these questions are not yet resolved, it is clear that this decision is a win for patent owners by permitting recovering of proving damages occurring in foreign countries.

We would also like to thank Paul S. St. Marie Jr. for his contributions to this article.