Justices to consider lost profits, extraterritoriality

OCTOBER 2017 TERM

On Jan. 12, in WesternGeco LLC v. ION Geophysical Corp., 16-1011, the U.S. Supreme Court granted certiorari to review whether lost profits can be awarded in patent cases based on use of patented systems occurring outside the United States where the system's components were exported in violation of 35 U.S.C. Section 271(f).

The case involves systems for surveying ocean floors by oil companies looking to extract oil from the sea floor. Petitioner WesternGeco LLC owns patents on streamers used in these surveys that are pulled behind oil exploration vessels. The streamers can be miles in length and are equipped with sensors that pick up sound waves that are bounced off the ocean floor. WesternGeco makes a product using its patented system in the United States and performs ocean surveys on behalf of its customers. The respondent, ION Geophysical Corp., was found liable by a jury of patent infringement under 35 U.S.C. 271(f). ION exported components of WesternGeco's patented system abroad intending that they be assembled by ION's customers, who then used them to perform their own surveys. WesternGeco was awarded damages in the form of reasonable royalties as well as lost profits amounting to $90 million based on 10 lucrative service contracts that it proved had been lost to ION's customers.

The U.S. Court of Appeals for the Federal Circuit reversed the award for profits that WesternGeco lost due to use of its patented systems abroad by ION's customers. Applying the Supreme Court's long-established presumption against the extraterritorial application of United States patent laws, the Federal Circuit held that WesternGeco cannot recover lost profits from its failure to win foreign service contracts. Writing for a divided panel, Judge Timothy B. Dyk applied a bright-line rule and determined that damages for patent infringement cannot be based on activity that occurred outside the United States. He noted that the Federal Circuit previously has rejected compensation for a defendant's foreign exploitation of a patented invention because such foreign use is not infringement at all. In Power Integrations v. Fairchild Semiconductor, the Federal Circuit held that a chip supplier that had lost millions of dollars of foreign chip sales as a result of a smaller amount of infringing U.S. sales could not seek lost profits based on the lost foreign sales. These foreign sales may have been made possible by other infringing sales in the United States, but they could not form the basis of a damages award. Applying the rationale of Power Integrations, the Federal Circuit held that WesternGeco similarly could not seek damages based on the extraterritorial use of its patented system because such use does not constitute patent infringement.

In its petition for review, WesternGeco argued that the extraterritoriality concerns at issue in Power Integrations were irrelevant to ION's infringement. Power Integrations involved infringement under 35 U.S.C. Section 271(a), which expressly prohibits only making, using or selling the patented invention "within the United States." ION, on the other hand, was found liable for infringing under Section 271(f). Congress wrote Section 271(f) with the express intention that it have extraterritorial application so as to close a loophole in the patent laws that allowed companies to export patented products in unassembled form to avoid liability for infringement. The statute expressly overruled the Supreme Court's decision in Deepsouth Packing Co. v. Laitram Corp., which held that a company was not liable for patent infringement because it only exported the components of a shrimp cleaning machine in unassembled form, never having assembled them into a machine here in the United States. Section 271(f) closes this loophole by prohibiting the practice of exporting "components of a patented invention ... in such manner as to actively induce the combination of such components outside of the United States." Having found ION liable for infringing a statute meant to have extraterritorial effect, WesternGeco argued, the jury was permitted to award damages under Section 284 of the Patent Act. That statute permits awarding damages that are "adequate to compensate for the infringement." The Federal Circuit's limiting of damages, WesternGeco argued, effectively eliminated the risk of lost-profit damages for companies that decide to infringe by exporting components of a patented system, leaving only the potential for "royalties" based on the cost of transferring components. Such a pathway could make infringement palatable and even profitable from the infringer's perspective.

WesternGeco's petition found support in a vigorous dissent by U.S. Circuit Judge Evan J. Wallach. Wallach explained that although it is "uncontroversial that patentees are not entitled to lost profits resulting from foreign uses of a patented invention," it is well established that they are entitled to lost profits resulting from infringement under the laws of the United States. Here, after the jury found ION liable for infringement under Section 271(f) by exporting components of a patented system for assembly abroad, awarding damages that included profits from lost foreign sales was appropriate and necessary to compensate for the infringement. Wallach also decried the majority's categorical rule that extraterritorial sale or use of an invention "cuts of the chain of causation initiated by an act of domestic infringement." The Supreme Court has criticized the Federal Circuit in recent years for adopting bright-line rules that are not supported by the Patent Act.

WesternGeco's petition was also supported by an amicus brief filed by U.S. Solicitor General Noel Francisco. The solicitor argued that the Federal Circuit's approach systematically undercompensates prevailing patentees whose transnational business suffers by infringement that takes place in the United States. He argued that once a determination is made that liability exists based on conduct occurring in the United States, damages should not be limited based on concerns about extraterritoriality. Rather, he argued, damages should be determined based on the common law tort principle that a plaintiff must be made whole for the infringement.

WesternGeco represents the third time since 2006 that the Supreme Court will be reviewing the arcane issues of infringement under 35 U.S.C. Section 271(f). In Microsoft v. AT&T, the court held that Microsoft did not infringe an AT&T speech recognition patent by sending its Windows operating system to companies that copied the software themselves overseas onto CD-ROMs that they then used to build computers. Last year in Life Technologies v. Promega Corp., the court held that the supply of a single component of a multicomponent invention for manufacture abroad does not give rise to Section 271(f) liability.

Unlike these two cases, however, WesternGeco does not involve whether there is Section 271(f) liability but the extent to which damages for such liability must be limited by concerns against extraterritorial application of U.S. laws. The Supreme Court already has held in the context of copyright law that if the "predicate act" causing copyright infringement occurred in the United States, damages may be awarded based on exploitation abroad of the domestic acts of infringement. Because Congress specifically enacted Section 271(f) to reach activities that would otherwise be beyond the reach of United States patent laws, the Supreme Court is likely to hold that patent owners may seek their lost profits based on use of systems that were assembled abroad from components that were exported from the United States.