On June 22, 2018, the Supreme Court decided WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, and held that a patent owner can recover damages for the profits that it lost on sales outside of the United States resulting from an act of infringement occurring inside the United States. This holding significantly expands the potential award of damages by including foreign sales. In particular, companies that manufacture infringing products or components in the United States for export to foreign countries may now be liable for worldwide damages.
The WesternGeco case arose from a dispute over underwater surveying technology exported from the United States. In particular, WesternGeco developed and patented technology to allow “lateral steering” of an array of sensors towed behind a boat for finding oil and gas fields. In 2009, WesternGeco sued ION Geophysical for infringement under § 271(f), alleging that ION had exported components of the patented invention from the United States. WesternGeco alleged that ION’s foreign customers then combined the components and used the infringing systems to compete with WesternGeco in performing underwater surveys in international waters. A jury found ION liable for infringement and awarded WesternGeco $12.5 million in reasonable royalties and $93.4 million in lost profits related to sales outside of the United States.
ION appealed and the Federal Circuit reversed the award of lost profits. In a 2-1 panel decision, the court upheld the finding of infringement under § 271(f)(2) but held that the presumption against the extraterritorial application of U.S. laws prevented WesternGeco from recovering lost profits on foreign sales.
In a 7-2 opinion authored by Justice Thomas, the Supreme Court reversed, holding that the award of lost foreign profits was a permissible domestic application of § 284 of the Patent Act. Whether a U.S. statute should apply extraterritorially is determined by the two-step framework set forth in RJR Nabisco, Inc. v. European Community, 579 U.S. ___ (2016). First, courts ask “‘whether the presumption against extraterritoriality has been rebutted.” WesternGeco LLC v. ION Geophysical Corp., 585 U.S. ___ (2018) (slip op. at 5) (quoting RJR Nabisco, 579 U.S. at ___ (slip op. at 9)). “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.’” Id. (quoting RJR Nabisco, 579 U.S. at __ (slip op. at 9)). A permissible “domestic application” of a federal statute occurs when the conduct relevant to the “focus” of the statute occurred in United States territory. Id.
Here, the Court opted not to consider the first step of the RJR Nabisco framework, thereby side-stepping the question of whether the presumption against extraterritoriality should apply to a general damages statute such as § 284. Id. Instead, the Court started at the second step of the analysis, holding that the application of § 284 in this case was “domestic” in nature. The Court explained that the “focus” of § 284 is on “the infringement” that gives rise to the damages in each case, not the damages themselves as ION argued. Id. (slip op. at 6, 8). Justice Thomas found, in turn, that infringement under § 271(f)(2) concerns “the domestic act of ‘suppl[ying] in or from the United States’” components of a patented invention. Id. (slip op. at 7). Since the infringing conduct under § 271(f)(2) occurs in the United States, the award of lost profits attributable to that infringement was a permissible domestic application of U.S. law.
Justice Gorsuch, joined by Justice Breyer, asserted in dissent that § 271(f)(2) only makes the exportation of key components of a patented invention for assembly abroad an act of infringement, not the foreign sale or use of the completed invention. WesternGeco LLC v. ION Geophysical Corp., 585 U.S. __ (2018) (Gorsuch, J., dissenting) (slip op. at 5-6). Thus, the dissent argues, lost profits based on the foreign sale or use of the completed invention - themselves non-infringing acts - should not be a permissible measure of damages. Id. (slip op. at 6, 8).
Although the opinion is limited on its face to damages arising from infringement under § 271(f)(2), the Court’s logic in this decision opens the door to foreign-based damages for all provisions of § 271, including § 271(a). So long as the infringing act occurs in the United States, lost foreign profits arising from the infringing act may be recoverable as a means of putting the patentee “‘in as good a position as he would have been in’ if the patent had not been infringed.” WesternGeco LLC v. ION Geophysical Corp., 585 U.S. ___ (2018) (slip op. at 9) (quoting Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 507 (1964)). It remains to be seen what connection, if any, between the domestic infringing activity and the lost foreign profits will be required (e.g., to satisfy principles of proximate cause) before courts will award the latter as damages for infringement.
The Court’s decision in WesternGeco will increase the damages exposure of U.S. exporters accused of infringement in the United States. The opinion may also expose companies operating in the U.S. to larger patent damages awards in foreign countries. See WesternGeco LLC v. ION Geophysical Corp., 585 U.S. __ (2018) (Gorsuch, J., dissenting) (slip op. at 2) (Court’s holding “invite[s] other countries to use their own patent laws and courts to assert control over our [U.S.] economy”). That is, U.S. sales of products manufactured in other countries could become the basis for damages awards in foreign courts if those courts opt to follow the Supreme Court’s approach to worldwide damages. For example, many U.S. companies manufacture components at facilities in China before importing the components into the United States for final assembly. If those components infringe a Chinese patent, the Chinese patent holder may be entitled to lost profits for sales in the United States even if there is no corresponding patent protection in the United States.