Guest Post: Deconstructing the Question Presented in WesternGeco

Guest post by Prof. Timothy Holbrook of Emory Law.  Professor Holbrook has written extensively on extraterritoriality and patents.  In the interest of full disclosure, he anticipates that this post will likely form the basis of an amicus brief.

Patent law remains hot at the Supreme Court.  The Court on January 14, 2018, agreed to review WesternGeco LLC v. ION Geophysical Corp.  WesternGeco joins two other patent cases at the Supreme Court (so far) for its October 2017 term.

WesternGeco is interesting because it is the third time in the since the October 2006 term that the Court has reviewed a fairly esoteric patent law provision, 35 U.S.C. § 271(f).  The Court addressed this provision in Microsoft Corp. v. AT & T Corp. and, just last term, in Life Technologies Corporation v. Promega Corporation. Section 271(f) creates a form of patent infringement that is extraterritorial in nature.  This provision makes a party liable for patent infringement when it exports all or a substantial portion of the components of the patented invention, or a component with no substantial non-infringing uses, where the party intends to assemble the invention outside of the United States.  Through the territorial nexus of supplying the components in the United States, the provision allows a patent owner to regulate foreign markets.

Given the extraterritorial nature of this provision, these cases fall into the line of cases at the Supreme Court addressing the extraterritorial reach of U.S. law generally, most recently in RJR Nabisco, Inc. v. European Community. The question in WesternGeco is different from all of these earlier patent and non-patent cases, however.  The issue is not liability but instead damages.  The question presented is “Whether the U.S. Court of Appeals for the Federal Circuit erred in holding that lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases in which patent infringement is proven under 35 U.S.C. § 271(f)?”

WesternGeco is the third in a trilogy of cases from the Federal Circuit that grafted a strict territorial limit onto patent damages doctrine.  In two earlier cases, Power Integrations, Inc. v. Fairchild Semiconductor International, Inc. and Carnegie Mellon University v. Marvell Technology Group, Ltd., the Federal Circuit denied lost profits and a reasonable royalty, respectively, for foreseeable, overseas damages that arose from an act of domestic infringement.  Power Integreations and Carnegie Mellon both involved damages for infringement under 35 U.S.C. § 271(a), which requires the acts of infringement to take place within the United States.  The result of these casesis that the Federal Circuit created a regime of strict territoriality for patent infringement damages.

WesternGeco, therefore, reflects a direct challenge to this territorial regime.  In fact, the Solicitor General’s brief that recommended the Supreme Court take the case focused on all three of these cases, and not merely WesternGeco.  Indeed, there is a bit of dispute over how to correctly frame the questions presented, as highlighted earlier on this blog.  As such, the issue in WesternGeco bears some deconstruction to see what is truly at issue here.

The issue in WesternGeco presents two distinct, if related, issues: (1) does the presumption against extraterritoriality apply to damages and other remedial provisions generally and (2) what is the relationship between the proximate cause aspect of damages and extraterritoriality? Each of these issues bear further exploration.

Does the presumption against extraterritoriality apply to damages and other remedial provisions?  A threshold issue the Court should address is whether the presumption against extraterritoriality should apply to remedial provisions in a statute at all.  The Supreme Court has articulated a two-step process for assessing the extraterritorial reach of U.S. laws.  In RJR Nabisco, Inc. v. European Community, the Supreme Court formalized a two-step methodology for assessing the extraterritoriality reach of a statute.  At step one, a court asks “whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially.”  If the presumption has not been rebutted, a court continues to step two, where it determines the focus of the statute.  “If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad….”

The focus on conduct suggests that the concern is with liability, not remedies.   One could argue that the presumption should simply be inapplicable to damages.  If one follows RJR Nabisco’s two step analysis with respect to liability, then by definition there is no concern with extraterritoriality as it comes to remedies and damages.  As the petition for certiorari argued, requiring two-passes through the RJR Nabisco framework – one for liability and one for damages – should be unnecessary.  The Solicitor General’s brief implicitly makes this argument when it argues that background principles of proximate cause should govern the damages inquiry and not the presumption, although the Solicitor General also views the RJR Nabisco framework with being consistent with permitting the award of damages for the lost profits in this case.

The Supreme Court has never addressed whether the presumption applies to remedial provisions.  In order to address the question presented, it needs to explicitly consider whether the presumption applies to damages provisions separately from the related liability provisions in a given statute.  As Sapna Kumar recognized in a forthcoming piece, Patent Damages Without Borders, the Court in RJR Nabisco did apply the presumption twice to the same statute for the same acts in the case, suggesting that the presumption may apply to both substantive and remedial provisions of a statute separately. Consequently, WesternGeco takes on far greater significance, beyond patent law.

As I’ve argued in Boundaries, Extraterritoriality, and Patent Damages in the Notre Dame Law Review, I think the presumption should apply both to liability and to damages provisions.  The reason can be seen in the patent statute itself.  Section 284, the damages provision of the Patent Act, is silent as to any territorial limits.  Instead it refers only to “damages adequate to compensate for the infringement,” which means the provision is inextricably tethered to § 271’s definitions of infringement.  For § 271(a), there is a strict territorial requirement that the acts take place within the United States.  Such language shows the presumption has not been rebutted at step one of RJR Nabisco.  It also suggests the focus of the statute are acts within the United States, meaning that damages should be tied to those acts.  In contrast, § 271(f) satisfies RJR Nabisco’s first step because it is extraterritorial in nature.  Thus, in my view, lost profits should generally be available for infringement under that provision.  If a court declined to apply the presumption to damages, this differentiated outcome could be missed.

For example, in Carnegie Mellon, the infringing use of the patented method undisputedly was within the United States. If the presumption were applied only as to liability, then the issue of extraterritoriality in the case would would never present itself. The court would find liability then shift directly to remedies without pausing to consider extraterritoriality of the damages. If we take seriously the concern of the extraterritoriall reach of U.S. law, we should recognize that an award of damages can have similar effects as a finding of liability based on extraterritorial activity. Ultimately, the patent holder is attempting to regulate activity outside of the United States.

What is the relationship between proximate cause and territoriality?  Even if one disagrees with me and considers the presumption to be inapplicable to damages, it still is an open question as to the relationship between proximate cause and territoriality.

The Federal Circuit treated the two concepts as distinct.  In other words, even though the damages in the trilogy of cases were seemingly all foreseeable, the court nevertheless rejected extraterritorial damages.  The court viewed territoriality as an exogenous limit on damages.

But that need not be the case: perhaps foreseeability and territoriality are both part of the complex analysis involved in proximate cause.  Foreseeability, of course, is not necessarily the sine qua non of proximate cause.  The Federal Circuit articulated the foreseeability principle in its seminal en banc decision, Rite Hite Corp. v. Kelley Co., which held that patentees could recover the profits for lost sales of devices not covered by the patent.  But the court recognized that proximate cause is flexible policy lever: “the question of legal compensability is one ‘to be determined on the facts of each case upon mixed considerations of logic, common sense, justice, policy and precedent.”  Simply because certain damages may be foreseeable in an economic sense does not mandate that they should be recoverable as a matter of proximate cause in all circumstances.

As I suggested in Boundaries, Extraterritoriality, and Patent Damages, the presumption against extraterritoriality in the damages context could be considered part of the proximate cause analysis, even if the presumption does not apply to damages formally.  The impact of awarding damages for activity outside of the United States could properly be considered part of the “mixed considerations” involved in evaluating whether domestic acts of infringement are the proximate cause of damages arising outside of the United States.

Indeed, WesternGeco presents a fairly unique question of damages.  The lost profits sought are not for the lost sales of the patented invention.  Instead, the patentee is seeking profits for lost sales of services that use the patented invention.  Thus, there is an interesting proximate cause even absent any possible territorial limits on damages.

WesternGeco to some may appear to be a relatively unimportant case, with the Supreme Court addressing a seemingly narrow patent provision of little import.  Within patent law, however, WesternGeco portends some important elaborations of U.S. patent law with respect to the territorial limits on damages generally and potentially on proximate cause.  Additionally, the case likely will have significant repercussions for the Court’s development of the presumption against extraterritoriality more broadly because the Court will have to answer the question of whether the presumption applies to remedies.