SCOTUS: Damages for Foreign Lost Profits Stemming from US Infringement

by Dennis Crouch

For the most part, U.S. patent law is territorial with U.S. patents only being infringed when the invention is practiced within U.S. borders.  The law does, however, include some fuzzy borders.  One exception is 35 U.S.C. § 271(f), which creates a cause of action for supplying “components” of a patented invention from the U.S.

In WesternGeco v. ION Geophysical, the question before the Supreme Court is the level of damages available for § 271(f) infringement:

Whether … 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).

As presented by WesternGeco, the question presented includes a false assumption –the “combinations” at issue here do not themselves violate any law. Rather, what we are talking about here are combinations that would be prohibited if made on US soil. In its brief, the U.S. Government offers a parallel statement of the question that avoids this problem:

Whether a patent owner that has proved a domestic act of patent infringement may recover lost profits that the patentee would have earned outside the United States if that domestic infringement had not occurred.

In the usual § 271(f) cases, courts are concerned with offending other nations regulating cross-border actions.  As such, the longstanding approach of comity has led to a strong presumption against extraterritorial application of US law.  Here, however, the competition between WesternGeco and the infringer ION Geophysical takes place on the high-seas outside of the coverage of patents. The patents at issue involve marine survey equipment using lateral steering equipment.  See U.S. Patent Nos. 6,691,038; 7,080,607; 7,162,967; and 7,293,520.  A jury awarded $100 million in lost profit damages, which the Federal Circuit decision would dramatically trim.

The Supreme Court has some history with § 271(f).  First, in the pre-271(f) decision of Deepsouth Packing Company v. Laitram Corporation, 406 U.S. 518 (1972), the Supreme Court held that shipping components of an invention from the US was not infringement within the US.  That spurred Congress to amend the statute to create Section 271(f), which includes two overlapping actions:

• (f)(1) Supply Substantial Portion + Induce: suppl[y] in or from the United States all or a substantial portion of the components of a patented invention … as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.
• (f)(2) Supply Special Components + Knowledge: suppl[y] in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention … 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.

In Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007), the Supreme Court held that “components” did not include electronic files shipped abroad. Then, in Life Techs. Corp. v. Promega Corp., 137 S. Ct. 734, 742 (2017), the court held that (f)(1)’s “substantial portion” requirement could not be satisfied by shipment of a single commodity component.

Damages for Patent Infringement: The damages statute for patent infringement is straightforward. A prevailing patentee is entitled to “damages adequate to compensate for the infringement” with a floor of reasonable royalty.

Rather than allowing for full consequential damages in this case, the Federal Circuit applied the general “presumption against extraterritoriality” to hold that Congress did not intend for the U.S. patentee to collect damages for actions that occurred abroad.  Thus, the patentee can collect a reasonable royalty for the export of components, but cannot claim its lost business due to ION’s use of those components outside of the US jurisdiction.  One way to frame this is that the decision finds the foreign actions to be intervening acts that cut-off the proximate cause analysis.

A few Predictions: WesternGeco has asked the Supreme Court to expand-out available damages, and I expect will win here — the Court will likely at least hold that the categorical preclusion goes too far.  Because Section 271(f) is rarely used, most patentees (and potential infringers) will be looking for what the decision says about patent damages in general.

Top Side Briefs have been filed in the case, led by WesternGeco’s merits brief but accompanied by amici, including a strong brief by the U.S. Government.  Briefs in opposition will be filed within the next few weeks.

Petitioner Brief: Paul Clement’s team at Kirkland & Ellis have presented a straightforward brief that challenges the Federal Circuit’s logic:

1. The presumption against extraterritoriality should not apply here because the statutes are clear in terms of both infringement and damages.
2. Even if the presumption applied, it should only apply at the infringement stage, not the damages stage.
3. Concerns regarding overreach are properly limited by traditional proximate cause analysis.

A major difficulty with WesternGeco’s analysis stems from Microsoft (2007) where the court invoked extraterritoriality principle in narrowly interpreting the statute as well as the recent non-patent decision in RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016), holding that a RICO cause of action is not available to persons who suffer only foreign injuries.

U.S. Government Brief:  The US Solicitor’s brief strongly supports WesternGeco’s position – arguing that the Federal Circuit’s prohibition on lost-profits damages is “inconsistent with the text and purpose of Section 284.”  Rather, the Federal Circuit’s rule would “systematically undercompensate[] U.S. patent owners for infringement when the patent owner derives profits from cross-border commerce.”

The US Government Brief includes some linguistic tricks — arguing on the one hand that the statute only regulates U.S. conduct but at the same time that damages should flow based upon actions taken abroad.

Houston IPLA: With help from Prof. Sapna Kumar, the Houston brief disagrees with the DOJ on the foreign conduct – yes foreign conduct is being regulated.  However, the brief argues that such regulation is permissible and fits nicely with the two step test provided in 2016 RJR Nabisco decision.  Further reading, Sapna Kumar, Patent Damages Without Borders, 25 Tex. Intell. Prop. L. J. 73 (2017).

Power Integrations: Power Integrations, Inc., has a “profound interest” in the outcome of this case because it was also barred from pursuing damages in a parallel Federal Circuit decision. Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348, 1371-72 (Fed. Cir. 2013), cert. denied, 134 S. Ct. 900 (2014).  In its brief, the company provides its version of a tutorial on the doctrine of Superseding Causation – something needed based upon the Federal Circuits errors “fundamentally misconstruing the doctrine.”

NYIPLA Brief: The NY brief differs somewhat from Power Integrations – arguing that 2013 Federal Circuit decision did not offer a prohibition on foreign profits, but instead a limit on proximate cause — i.e., causal link must be proven between the infringing acts outlined above and any damage.

Professor Yelderman: Professor Yelderman’s brief walks through several traditional principles of law that should apply here, notably:

• Rightful Position Principle: “The proposition that actual damages should return the plaintiff to the pecuniary position she would have been in but-for the wrong is unimpeachable—it is the founding principle of the compensatory damages remedy.” (Later Yelderman does write “To be sure, the principle that a plaintiff should be restored to her rightful position is not absolute.”)
• Remedial Practice: “Longstanding remedial principles provide no basis for drawing a line at the water’s edge, requiring a factfinder to don blinders against the very real harms Smith may have suffered in foreign markets as the direct result of Jones’s tortious acts in the United States.”

IPLA Chicago: The Chicago Brief supports petitioners position – adding to the argument a statement that the refusal to permit liability will have a significant adverse impact on U.S. businesses.  I would have some debate over that analysis – a decision for the patentee here seems most likely to have the impact of further shifting component manufacture to foreign shores.

Finally, the Law Professor Brief: Professor Tim Holbrook led a law professor brief (joined by Jason Rantanen, et. al) arguing, inter alia, that the presumption against extraterritoriality should apply at multiple levels, including interpreting the damages statute and limiting the scope of proximate cause.  Timothy R. Holbrook, Boundaries, Extraterritoriality, and Patent Infringement Damages, 92 NOTRE DAME L. REV. 1745 (2017).