First published in LES Insights
The U.S. Court of Appeals for the Federal Circuit recently held that a patent owner cannot recover lost profits resulting from its failure to win foreign-service contracts due to the use abroad of the accused device. Both the patent owner and the accused infringer manufacture devices in the United States that are used abroad to search for oil and gas beneath the ocean floor. The jury awarded the patent owner over $93 million in lost profits stemming from the patent owner's loss of foreign contracts it alleged it would have won but for the accused infringer's supply of accused devices to foreign customers. The Federal Circuit reversed the lost-profits award, finding that U.S. patent law does not permit recovery of foreign profits from the use abroad of a patented item.
In the early 1970s, the United States Supreme Court determined that a U.S. manufacturer, who made components of a patented invention and then exported them to be assembled abroad was not liable for infringement. In response, Congress enacted 35 U.S.C. § 271(f), which imposes liability on U.S. entities who export components of patented systems, with the intent that the components will be assembled abroad in a manner that would be infringing if done in the United States.
In a recent case, WesternGeco LLC v. ION Geophysical Corp.,1 the U.S. Court of Appeals for the Federal Circuit held that the patent owner could not recover lost-profits it allegedly sustained from losing foreign-service contracts because the accused infringer supplied accused products to the patent owner's competitors abroad.
WesternGeco LLC owns four patents that cover system claims relating to technologies used to survey the ocean floor for subsurface oil and gas. Both WesternGeco and ION Geophysical Corporation manufacture in the United States devices used to search for oil and gas. WesternGeco uses its devices abroad to perform the surveys for oil companies, whereas ION ships its devices overseas to customers, who perform the surveys.
WesternGeco sued ION, alleging patent infringement under 35 U.S.C. § 271 (f). WesternGeco sought lost-profits damages on the theory that but for ION's supply of its accused device to ION's customers, WesternGeco would have been awarded ten additional contracts to perform surveys abroad, equating to over $90,000,000 in profit. ION countered that no lost profits were available for the contracts because they were not entered into in the United States and were to be performed on the high seas, taking them outside of the jurisdictional reach of U.S. patent law. The district court accepted WesternGeco's lost-profits theory and declined to disturb the jury's award of $93,400,000 in lost profits and $12,500,000 in reasonable royalties. ION appealed the award of lost profits.
Reiterating that there is a presumption against U.S. laws having extraterritorial effect, the court acknowledged that in enacting § 271(f), Congress expanded the territorial scope of the patent laws to treat intentional exportation of components of a patented system the same as exportation of finished patented systems. The court explained, however, that nothing indicates Congress intended to expand U.S. patent law to cover uses abroad of the exported patented system. Thus, in a previous case, Power Integrations, Inc. v. Fairchild Semiconductor International, Inc., the court held that the extraterritorial production, use, or sale of an invention patented in the United States is an “independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement." Against this backdrop, the court ruled that WesternGeco cannot recover lost profits that resulted from foreign-service contracts it allegedly lost due to ION's supply of infringing devices to WesternGeco's competitors abroad.
The court rejected WesternGeco's argument that the analysis from Power Integrations did not apply to infringement under § 271(f). Observing that § 271(f) does not eliminate the presumption against extraterritoriality, the court explained that liability under a § 271(f) infringement theory arises from the act of exporting the components from the United States and does not extend to permit recovery of foreign profits. The court reasoned that just as a U.S. seller or exporter of a final product is not liable for use of the product abroad, a U.S. exporter of component parts is not liable for use of the assembled product abroad.
Finally, the court noted that although WesternGeco cannot recover lost profits from the foreign use of its invention, it may still be entitled to a reasonable royalty. Because the issue was not presented, however, the court expressly declined to discuss to what extent the royalty may be affected by lost profits sustained abroad.
Strategy and Conclusion
This decision illustrates that a patent owner likely cannot recover damages in the form of lost profits on the basis that it lost foreign-service contracts from the use abroad of an item covered by a U.S. patent.