WesternGeco LLC v. Ion Geophysical Corp., No. 16-1011. The Supreme Court’s decision in this case will determine whether United States patentees will be able to recover lost profits damages arising under 35 U.S.C. §271(f) for certain activities 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 in circumstances where a party supplies components in a manner that would “actively induce” the combination. §271(f)(2) imposes such liability in circumstances where a party supplies components 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 patents claiming marine survey systems that are 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. 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 each DigiFIN supplied from the United States, and that damages could not be recovered for survey contracts that had been negotiated and performed by foreign entities entirely outside the United States.

WesternGeco petitioned for certiorari on the matter of its lost profits in February 17, 2017. The Supreme Court granted certiorari on January 12, 2018.

In its Supreme Court briefs, WesternGeco argues that (i) the plain text of §271(f) permits recovery of lost profits that were reasonably and foreseeably caused by infringement, even where the acts giving rise to the lost profits occurred abroad; (ii) insofar as the presumption against extraterritoriality applies, it is satisfied by §271(f), which targets a form of domestic conduct (albeit one undertaken with an intent to facilitate foreign acts); and (iii) patentees would be systematically undercompensated if they could not recover damages for foreign sales caused by domestic infringement.

ION counters that (i) patent damages are governed not by §271(f), but by 35 U.S.C. §284, which is subject to the presumption against extraterritoriality; (ii) as WesternGeco concedes, §271(f) concerns only domestic conduct, and thus does not overcome the presumption against extraterritoriality; and (iii) permitting recovery of damages for foreign sales would violate international standards of comity by using a domestic act of infringement as a springboard for regulating foreign conduct, and moreover would make §271(f) defendants responsible for worldwide patent damages.

The United States government filed an amicus brief asserting that WesternGeco should be able to recover all lost profits “proximately caused” by ION’s domestic infringement. On April 13, 2018, the Supreme Court granted leave for the government to participate in oral argument.

Oral Argument

At the April 16, 2018 oral argument, Paul D. Clement argued on behalf of WesternGeco; Zachary D. Tripp argued on behalf of the government; and Kannon K. Shanmugam argued on behalf of ION.

WesternGeco’s Portion Of The Argument

Mr. Clement began by reiterating WesternGeco’s positions that §271(f) targets domestic conduct, that the presumption against extraterritoriality should not apply to damages arising under §271(f), and that patentees should be permitted to recover lost profits damages for the foreseeable consequences of a domestic act of infringement.

Justice Gorsuch expressed skepticism over allowing a patentee to collect lost profits damages for activities that took place on the “high seas,” and for “a third party’s use over which you have no lawful monopoly.” He asked Mr. Clement to identify a case in which the Court had awarded patent damages for foreign sales. Mr. Clement cited Goulds Mfg. Co. v. Cowing, 105 U.S. 253 (1881), but Justice Gorsuch noted that Goulds discussed damages for foreign sales only in passing, and did not substantively address the issue.

Justice Breyer told Mr. Clement that he had an “excellent case,” but noted that the case law was not “in your favor 100 percent,” and echoed ION’s concerns over international comity, observing that “if we can have a law like this, so can every other country….I mean, suppose 10 countries do this. I try to think about that and I see chaos or confusion.” Mr. Clement noted that United States copyright law permits recovery for overseas infringement and “the world hasn’t ended in the copyright context.” Mr. Clement also observed that an injunctive remedy prohibiting the supply of domestic components to foreign entities—which ION conceded was available—would obviate the need for damages arising from foreign combinations. Mr. Clement further noted that no foreign governments had filed amicus briefs in this case raising similar comity concerns.

Justice Gorsuch asked Mr. Clement to identify what text from §271(f) permitted a patentee to treat a “use on the high seas…as if it took place in Lake Michigan.” Mr. Clement asserted that, notwithstanding that the infringing combination may have taken place in a foreign jurisdiction, §271(f) effectively provides for “contributory constructive infringement,” and that under §271(f), “we’re supposed to treat the domestic infringer just like they induced a domestic act of infringement.”

Last, in response to Justice Ginsburg’s questions, Mr. Clement acknowledged that, to recover lost profits damages under §271(f), a patentee would need to prove that such damages were proximately caused by the defendants’ infringement—though Mr. Clement noted that, under §271(f), “it’s going to be very easy to show damages that are reasonably foreseeable from the foreign combination because, in order to be liable at all, you have to intend or induce that very foreign combination.”

The Government’s Portion Of The Argument

Mr. Tripp began by asserting that the Patent Act provides for damages “that are adequate to compensate for the infringement, not damages that leave the victim worse off than it would have been if the infringement had never occurred,” and that “[t]he rule that we’re advocating of full compensation is already the rule that applies basically everywhere else in U.S. law, in tort, in contract, in copyright, that this Court previously assumed applied in patent law as well, and it hasn’t given rise to any significant foreign relations problems in—in any of those areas.”

Justice Breyer again raised the concern that foreign countries could establish reciprocal laws that would subject United States actors who make only a “small part” of a patent combination to significant damages abroad. Mr. Tripp noted that §271(f) imposes liability only upon those who supply a “substantial portion” of the combination and do so with intent, and that the doctrines of causation-in-fact and proximate cause would provide additional checks against excessive damages awards in such scenarios. In connection with those causation doctrines, Mr. Tripp asked the Supreme Court to reject “the ham-handed rule that basically, as soon as you get across the international border, the causal chain is automatically severed, no matter what, no matter how clear the causal link is.”

Justice Kagan asked Mr. Tripp to explain why the government did not adopt WesternGeco’s arguments focusing on §271(f). Mr. Tripp explained that the government was seeking the adoption of a “full compensation” rule throughout the Patent Act, “not just in rare cases that come up under 271(f).”

Justice Alito noted that “what makes this case difficult” is the gap between the legal injury, which is “ephemeral,” and the “practical injury, which occurs completely abroad.” Mr. Tripp responded by noting that “it’s quite common to hold a tortfeasor responsible for the harm that it causes when it sets into motion a series of events by which the victim [] will be hurt, even if they’re not hurt at the time.”

ION’s Portion Of The Argument

Mr. Shanmugam began his portion of the argument by asserting that that the presumption against extraterritoriality “applies with particular force to the Patent Act,” and that §284, the damages provision of the Patent Act, has no extraterritorial reach.

Justice Kennedy asked Mr. Shanmugam whether WesternGeco would be able to recover lost profits if, instead of conducting marine survey operations itself, it simply sold devices to foreign entities in competition with ION. Mr. Shanmugam answered that, in that hypothetical, WesternGeco would be entitled to recover lost profits “because the situs of the injury in that circumstance would be the United States.” Mr. Shanmugam asserted that, by contrast, the survey contracts at issue were not entered into in the United States, and that the infringing sales which took place in the United States were adequately compensated by reasonable royalty damages.

Justice Sotomayor pushed back on that assertion, asking, “[S]ince this company didn’t sell its products, it only used them, why should it only get the value of royalty, since that’s not its business? Its business was to sell [] its services, your point, abroad or anywhere in the world where it could.” Mr. Shanmugam attempted to argue that the reasonable royalty calculation would have included the “commercial value of the component that’s being supplied from the United States,” including its “expected foreign use.”

Justice Alito asked Mr. Shanmugam rhetorically whether, “if you have a liability provision that says there is liability for acts that are committed abroad, what sense does it make to say, well, although Congress thinks there should be liability for these acts committed abroad, we have to analyze [] the remedial provisions separately to see whether they wanted any remedy for these acts that are committed abroad….Why does that make any sense whatsoever?”

Justice Breyer again raised concerns over the effects a ruling in WesternGeco’s favor would have on international comity. Mr. Shanmugam agreed with Justice Breyer about those concerns, and in particular with the consequence of “converting a single act of supply from the United States into a springboard for what would effectively be worldwide damages.”

Justice Kennedy asked Mr. Shanmugam, “[Y]our whole position is that this Petitioner is not entitled to full compensation for his injury, yes or no?” Mr. Shanmugam responded that WesternGeco was not entitled to full compensation, because “everything relevant after the initial act of infringement took place abroad.” Justice Ginsburg asked, “Isn’t that exactly how the copyright law is applied under the so-called predicate act doctrine?” Mr. Shanmugam countered by explaining the predicate act doctrine permits recovery of an infringer’s profits, but that neither copyright law nor patent law permitted “the sort of lost profits that are at issue here.”

Justice Kagan observed that “if there’s a problem here, it’s a problem about where you draw the causal line. It’s not a problem about some categorical extraterritoriality rule.” When Mr. Shanmugam tried to assert that causation wasn’t necessarily the solution to the problem, Justice Breyer countered that “the damages here are pretty closely related, I think.”

Conclusion

While predicting the decisions of the Supreme Court based upon oral argument is never an easy task, it appears that the Justices who asked questions tended to favor the positions of WesternGeco and the United States government over those of ION. Several of the Justices appeared sympathetic to the argument that reasonable royalties were not sufficient to compensate WesternGeco fully for ION’s infringement, and most of the Justices also seemed to accept the argument that the application of proximate cause would be sufficient to limit the risk of excessive damages awards and to mitigate any potential harms to international comity.