Supreme Court Holds That Patent Owners Can Recover Under 35 U.S.C. § 271(f)(2) Lost Profits Damages Based On Foreign Acts

On June 22, 2018, the United States Supreme Court issued a 7-2 decision in WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, holding that patent owners can recover lost profits damages under 35 U.S.C. § 271(f)(2) based on acts occurring outside the United States.

Background

35 U.S.C. § 271(f)(1) and (2) impose patent infringement liability upon a party who supplies from the United States components, the combination of which outside the United States would infringe a patent had the combination occurred within the United States. § 271(f)(1) imposes such liability where a party supplies components in a manner that would “actively induce” the combination. § 271(f)(2) imposes such liability where a party supplies components from the United States that are not “suitable for substantial noninfringing use” and the party intends the components to be combined abroad in a manner that would infringe, had the combination occurred within the United States.

In 2009, WesternGeco sued ION in the Southern District of Texas under § 271(f)(1) and (2) for infringement of four patents claiming marine survey systems used to search for oil and gas under the ocean floor. The patented systems comprise an array of “streamers” (long floating cables filled with sensors) that can be steered laterally to maintain their spacing and to prevent them from tangling when pulled behind a boat. ION made a product, DigiFIN, that helps control the steering of streamers, and sold a number of DigiFINs to foreign entities who subsequently performed surveys using DigiFINs.

After trial, a jury found that ION had infringed WesternGeco’s patents under § 271(f)(2), and awarded WesternGeco $12.5 million in reasonable royalties and $93.4 million in lost profits pursuant to 35 U.S.C. § 284, the patent damages statute. The reasonable royalties were based upon ION’s supply of DigiFINs from the United States; the lost profits represented the value of ten survey contracts awarded to foreign entities that, according to the jury, would have been awarded to WesternGeco but for ION’s infringement. ION appealed.

On appeal, the Federal Circuit held that the Patent Act did not permit the recovery of lost profits in view of the presumption against extraterritoriality, i.e., the presumption that “patent law operates only domestically and does not extend to foreign activities.” Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 454-455 (2007). The Federal Circuit reasoned that WesternGeco already had been compensated in the form of reasonable royalties as to DigiFINs supplied from the United States, and that damages could not be recovered for survey contracts that had been negotiated and performed by foreign entities outside the United States.

WesternGeco petitioned for certiorari on the matter of its lost profits on February 17, 2017. The Supreme Court granted certiorari on January 12, 2018 and heard oral argument on April 16, 2018.

The Supreme Court Decision

Justice Thomas authored the majority decision holding that WesternGeco was entitled to recover lost foreign profits under 37 U.S.C. § 271(f)(2).

The majority began by noting that “[t]his Court has established a two-step framework for deciding questions of extraterritoriality. The first step asks ‘whether the presumption against extraterritoriality has been rebutted.’ It can be rebutted only if the text provides a ‘clear indication of an extraterritorial application.’ If the presumption against extraterritoriality has not been rebutted, the second step of our framework asks ‘whether the case involves a domestic application of the statute. Courts make this determination by identifying ‘the statute’s “focus” and asking whether the conduct relevant to that focus occurred in United States territory.’” (internal citations omitted).

The majority exercised its discretion not to answer the first question, because doing so “could have far-reaching effects in future cases,” and “could implicate many other statutes besides the Patent Act.”

Turning to the second question, the majority concluded that “the conduct relevant to the statutory focus in this case is domestic.” The majority reasoned that the purpose of § 284, the patent damages statute, is to afford patent owners “complete compensation” for patent infringements, that § 271 in turn identifies “several ways that a patent can be infringed,” and that § 271(f)(2) “focuses on domestic conduct.”

The majority further explained that:

The conduct that § 271(f)(2) regulates—i.e., its focus—is the domestic act of “suppl[ying] in or from the United States.” As this Court has acknowledged, § 271(f) vindicates domestic interests: It “was a direct response to a gap in our patent law,” Microsoft Corp., 550 U. S., at 457, and “reach[es] components that are manufactured in the United States but assembled overseas,” Life Technologies [Corp. v. Promega Corp.], 580 U.S., at ___ [(2017)] (slip op., at 11)….

The conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents. Thus, the lost-profits damages that were awarded to WesternGeco were a domestic application of § 284.

The majority rejected ION’s efforts to highlight the extraterritorial nature of the acts giving rise to WesternGeco’s lost profits damages, asserting that “[t]hose overseas events were merely incidental to the infringement.”

The majority concluded that a patent owner is entitled under § 271(f)(2) and § 284 to recover damages adequate to place the patent owner in “as good a position as he would have been” absent the infringement, and that such recovery “can include lost foreign profits when the patent owner proves infringement under § 271(f)(2).”  The majority decision qualified that conclusion, however, by noting in a footnote that “we do not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.”

Justice Gorsuch dissented, joined by Justice Breyer.  According to the dissent:

In measuring its damages, WesternGeco assumes it could have charged monopoly rents abroad premised on a U.S. patent that has no legal force there. Permitting damages of this sort would effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets. That, in turn, would invite other countries to use their own patent laws and courts to assert control over our economy. Nothing in the terms of the Patent Act supports that result and much militates against it.

The dissent also warned that “[a]ny suggestion that § 271(f)(2) provides protection against foreign uses would also invite anomalous results. It would allow greater recovery when a defendant exports a component of an invention in violation of § 271(f)(2) than when a defendant exports the entire invention in violation of § 271(a). And it would threaten to ‘conver[t] a single act of supply from the United States into a springboard for liability.’”(internal citations omitted; emphases in original).