Supreme Court Holds Patent Owners May Recover Lost Profits for Infringement Abroad

Photo taken by Renee C. Quinn, May 2018.

WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, 2018  (June 22, 2018) (Thomas, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Ginsburg, Alito, Sotomayor, and Kagan, JJ., joined. Gorsuch, J., filed a dissenting opinion, in which Breyer, J., joined.)

WesternGeco owns four patents relating to a system that it developed for surveying the ocean floor. In 2007, ION began selling a competing system. It manufactured the components in the United States and then shipped them to companies abroad. The companies then combined the components to create a surveying system indistinguishable from WesternGeco’s and used the system to compete with WesternGeco.

WesternGeco sued ION for patent infringement under 35 U.S.C. §§271(f)(1) and (f)(2). The jury found ION liable and awarded WesternGeco damages of $12.5 million in royalties and $93.4 million in lost profits. ION filed a post-trial motion to set aside the verdict, arguing that WesternGeco could not recover damages for lost profits because §271(f) does not apply extraterritorially. The district court denied the motion. On appeal, the Federal Circuit reversed the award of lost-profits damages, relying on its previous holding that §271(a), the general infringement provision, does not allow patent owners to recover for lost foreign sales. WesternGeco petitioned for review in the Supreme Court, which vacated the Federal Circuit’s judgment, and remanded for further consideration in light of its decision in Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. (2016). On remand, the Federal Circuit reinstated the portion of its decision that §271(f) has no extraterritorial reach. The Supreme Court granted certiorari again.

Courts generally presume that federal statutes “apply only within the territorial jurisdiction of the United States.” Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949). The Supreme Court has established a two-step framework for deciding whether extraterritoriality should nonetheless apply. The first step asks whether the presumption against extraterritoriality has been rebutted. It can only be rebutted if the statutory text provides a clear indication of an extraterritorial application. If the presumption has not been rebutted, the second step asks whether the case involves a domestic application of the statute. Courts determine this by identifying the statute’s “focus” and asking whether the conduct relevant to that focus occurred in a United States territory.

Although it is usually preferable to begin with step one, courts have the discretion to begin at step two in appropriate cases. One reason to exercise this discretion is because addressing step one requires resolving difficult questions that do not change the outcome of the case but could have far-reaching effects in future cases. WesternGeco argued that the presumption against extraterritoriality should never apply to statutes, such as §284, that merely provide a general damages remedy for conduct that Congress has declared unlawful. Because resolving that question could implicate many other statutes besides the Patent Act, the Court exercised its discretion to forgo the first step of its extraterritoriality framework.

Under step two, the focus of a statute is the object of its solicitude, which can include the conduct it seeks to regulate, as well as the parties and interests it seeks to protect or vindicate. “If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application” of the statute, “even if other conduct occurred abroad.” RJR Nabisco, Inc. v. European Community, 579 U.S. (2016) (slip op., at 9). But if the conduct occurred in another country, “then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.” Id. Further, if the statutory provision at issue works in tandem with other provisions of the statute, it must be assessed together with those other provisions.

The Court previously explained that the “overriding purpose” of §284 is to “affor[d] patent owners complete compensation” for infringements. General Motors Corp. v. Devex Corp., 461 U.S. 648, 655 (1983). Therefore, the focus of §284 is infringement. The Court then turned to §271(f)(2), which was the basis for WesternGeco’s infringement claim and the lost-profits damages that it received. The conduct that §271(f)(2) regulates is the domestic act of “supply[ing] in or from the United States.” Section 271(f)(2) invokes domestic interests because it “reach[es] components that are manufactured in the United States but assembled overseas.” Life Technologies Corp. v. Promega Corp., 580 U.S. (2017) (slip op., at 11). The infringing conduct that is relevant occurred in the United States because it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents. Therefore, the lost-profits damages that were awarded to WesternGeco were a domestic application of §284.

The Court rejected ION’s arguments to the contrary. First, ION contended that the statutory focus is “self-evidently on the award of damages.” However, the damages themselves are simply how the statute achieves its goal of remedying infringements. Second, ION argued that this case involves an extraterritorial application of §284 because “lost-profits damages occurred extraterritorially, and foreign conduct subsequent to [ION’s] infringement was necessary to give rise to the injury.” But those overseas events were incidental to ION’s infringement. Finally, ION extrapolated a general rule from RJR Nabisco that damages awards for foreign injuries are always an extraterritorial application of a damages provision. However, “[t]hat portion of RJR Nabisco interpreted a substantive element of a cause of action, not a remedial damages provision.” It did not make any statements about damages.

Consequently, the Court held that WesternGeco’s damages award for lost profits was a permissible domestic application of §284. The judgment of the Federal Circuit was reversed, and the case was remanded for further proceedings consistent with the Court’s opinion.

Justices Gorsuch and Breyer dissented, arguing that because an infringement must occur within the United States, “that means a plaintiff can recover damages for the making, using, or selling of its invention within the United States, but not for the making, using or selling of its invention elsewhere.” The dissent contended that permitting damages of this sort would effectively allow United States patent owners to use American courts to extend their monopolies to foreign markets. In turn, this would invite other countries to use their own patent laws and courts to assert control over the United States economy.

Take Away

Patent owners may recover lost foreign profits under §271(f)(2) when the infringing party exports parts from the United States for assembly in foreign countries, so long as the relevant infringing conduct occurred in the United States.