WesternGeco: Patent damages know no borders

OCTOBER 2017 TERM

The federal statute that governs patent damages can be found at 35 U.S.C. Section 284. Under Section 284, patentees are entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer."

On June 22, in a 7-2 decision, the U.S. Supreme Court in WesternGeco v. ION, 2018 DJDAR 6085, overturned the U.S. Court of Appeals for the Federal Circuit's application of the presumption against extraterritoriality and cleared the way for patent owners to recover foreign lost profits under Section 284. This decision will undoubtedly create new and unique opportunities for patent owners to realize their returns on investment.

In a decision authored by Justice Clarence Thomas, the Supreme Court focused much of the opinion on analyzing the scope of Section 284. The court began its analysis at step two of the two-step framework established in Morrison and RJR Nabisco for analyzing extraterritoriality issues. Morrison v. National Australia Bank Ltd., 561 U. S. 247, 255 (2010); RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016). Justice Thomas noted that even though "it will usually be preferable" to begin with step one of the framework, the court exercised its discretion to forgo the first step because WesternGeco has "far-reaching effects in future cases" and implicates many other statutes besides the Patent Act.

Under the second step, the court found that the focus of Section 284 is "the object of its solicitude," which includes the conduct it seeks to regulate as well as the parties and interests it seeks to protect or vindicate. The court reasoned that Section 284 must be "assessed in concert with other provisions" or "it would be impossible to accurately determine whether the application of the statute" is a "domestic application."

As part of its analysis, the court noted that "infringement" and "how much ha[s] the Patent Holder ... suffered by the infringement" is the focus of Section 284 because the "overriding purpose" of Section 284 is to "affor[d] patent owners complete compensation" for infringement.

But this does not resolve the "focus" issue entirely because infringement can occur in multiple ways under Section 271.

The court then analyzed Section 284 in the context of Section 271(f)(2) and found that the conduct that Section 271(f)(2) regulates is the domestic act of exporting components from the country. Based on this finding, the court concluded that the lost profits damages that were awarded to WesternGeco were a domestic application of Section 284.

Because the focus of Section 284 turns on the conduct, parties or interests that it regulates or protects, the court rejected ION's arguments that the focus should be "self-evidently on the award of damages."

The court also rejected ION's argument that the presumption against extraterritoriality applies in this case, reasoning that the overseas events were merely "incidental to the infringement" and have no "primacy" for the purposes of the extraterritoriality analysis. The court explained that RJR Nabisco interpreted a substantive element of a cause of action, not remedial damages provision, and its holding did not make any statements about damages, which is a separate legal concept.

Finally, the court addressed the dissenting opinion by Justices Neil Gorsuch and Stephen Breyer, noting that "their position wrongly conflates legal injury with the damages arising from that injury."

The court, however, limited its analysis to Section 271(f)(2) and did not address the implication of this decision on Section 271(f)(1). The court also did not address the application of proximate cause to limit or preclude foreign lost profits.

Possible Implications of WesternGeco

The Supreme Court's decision will undoubtedly give inventors powerful incentives to procure and enforce patent rights in the U.S. The decision also affirms Congress' will and strengthens the general damages principle that a patentee is entitled to full compensation, regardless of where such damages occur.

As the United States continues to pursue greater IP protection and guard against IP theft internationally, the impact of this decision on foreign sovereignty will no doubt have some measurable impact on the nation's ongoing trade negotiations with other countries. In particular, China, which has the largest share of the manufacturing and assembly market across all industries in the world, has the biggest financial stake and will be impacted most by this decision.

The court's reversal also gives the United States one less reason to rejoin the Trans-Pacific Partnership. The TPP aims to harmonize IP rights across all member countries. All signatory countries are required to conform their domestic IP laws and policies to TPP. But the United States withdrew from TPP in 2017 because of the perceived economic disadvantages that the TPP would bring to the country's growing economy. While the TPP has stalled following the United States' withdrawal, some of the remaining eleven member countries have moved to reinvigorate the partnership by seeking to retain, as much as possible, a suite of IP provisions that are favorable to the United States in the hope that the Land of the Free will rejoin the accord in the near future. But even with this political maneuvering, the court's decision only serves to distance the United States from the TPP, unless Congress agrees to level the playing field by availing U.S. companies to foreign jurisdictions, a move that is unlikely to occur given the current political climate and under the Trump administration.

This court's decision will also impact patent prosecution strategies. Specifically, it will make foreign patent filings less appealing for prospective patent applicants. In Microsoft Corp v. AT&T Corp., 550 U.S. 437 (2007), the court noted that the remedy for preventing copying in foreign countries lies in obtaining and enforcing foreign patents, thus ensuring that patent owners can recoup foreign lost profits from sales in those countries. With the court's decision in WesternGeco, that remedy is less meaningful, and even obsolete in certain instances, for patent owners concerned with foreign infringement because foreign lost profits can now be tied to U.S. infringement, effectively heightening the financial risks to doing business worldwide.