The Supreme Court will soon decide, in WesternGeco, LLC v. Ion Geophysical Corp., whether a patent owner can recover damages for a defendant’s activities outside the United States. A ruling that reverses the court of appeals and allows such “extraterritorial” damages could vastly increase the value of a U.S. patent and, according to opponents of such damages, “effectively transform every U.S. patent into a worldwide patent.” Amicus Brief of Electronic Frontier Foundation and R Street Institute, p. 2.
In WesternGeco, a jury found that Ion infringed a patent owned by WesternGeco that covers a product used in “marine seismic surveys.” Brief of Respondent, p. 2. Ion was found liable for infringement under 35 U.S.C. sec. 271(f)(2), which defines infringement as supplying, from the United States, a component, not itself covered by a patent, but especially made or adapted to be used in a product that is covered by a patent, with the knowledge that the “component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.” WesternGeco was awarded $105.9 million in damages. Most of the verdict, over $93 million, was for lost profits on contracts awarded to Defendant Ion to perform marine surveys outside the United States, using the infringing product. WesternGeco LLC v. Ion Geophysical Corp., 791 F.3d 1340, 1344 (Fed. Cir. 2015).
The Court of Appeals for the Federal Circuit affirmed the verdict on liability, but overturned the award of lost profits on the contracts for surveys conducted outside the United States. It ruled that such damages are not recoverable because the presumption against extraterritorial reach of a statute, which principle “is well-established and undisputed,” applied, and the principle was not overcome by evidence of contrary Congressional intent. Id. at 1349. The Supreme Court granted certiorari on the question of whether “lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. Section 271(f).”
WesternGeco’s argument to the Supreme Court focused on the history of section 271(f), which was enacted in 1984 to close what Congress called a “loophole in patent law.” The section supplements the general statutory definition of infringement in section 271(a) — making, using, selling, or offering to sell a complete, patented product in the United States without permission — by defining infringement as also including shipping (non-infringing) product components overseas for assembly into an infringing product. WesternGeco argued first that the presumption against extraterritorial reach of a statute shouldn’t even be an issue under section 271(f), because the statute for liability purposes reaches only domestic conduct — the act of shipping domestically-manufactured components. Alternatively, WesternGeco argued that, if the presumption applies, then it is clearly overcome by Congress’ goal in 271(f) to prevent certain conduct occurring overseas. Lastly, WesternGeco argued that the presumption does not apply independently to damages awards, arguing that, when Congress clearly intends to create liability for certain conduct, it also intends that any damages that are proximately caused by that conduct, including profits from lost foreign sales, are recoverable.
The United States filed an amicus brief in support of WesternGeco, which, in contrast to WesternGeco’s brief, did not limit its argument to the special circumstance of infringement under section 271(f), but also argued that damages for foreign conduct are recoverable under the general infringement statute (sec. 271(a)). The United States’ brief emphasized the text of the patent damages statute, 35 U.S.C. section 284, which defines damages as those “adequate to compensate for the infringement,” and which has been interpreted to require the patent owner to be “placed in as good a position as he would have been” but for infringement. General Motors Corp. v. Devex Corp., 461 U.S. 648, 655 (1983). Limiting damages to domestic sales would undercompensate WesternGeco for its losses, and thus, according to the United States, conflict with Congress’ intent in section 284.
Defendant Ion responded that WesternGeco’s concession that shipping components from the United States is domestic activity means that one cannot infer from Congress’ prohibition of that conduct any intent to reach foreign activities, or foreign damages. Also, according to Ion, even if section 271(f) has extraterritorial scope for purposes of liability, the question of extraterritorial recovery of damages must be looked at separately, under RJR Nabisco v. European Community, 136 S.Ct. 2090 (2016). In RJR, the Court held that, despite the extraterritorial reach of liability for some “predicate acts” under a liability provision of the RICO Act (18 U.S.C. sec. 1962(c)), the remedial section of RICO permitting private right of action and damages (18 U.S.C. sec. 1964) had to be addressed separately, and held that the presumption against extraterritoriality was not overcome as to damages for foreign conduct.
As to the United States’ amicus brief, Ion pointed out effectively that the brief’s argument begs the question of the presumption against extraterritoriality, by relying on section 284’s general grant of a right of compensatory damages, even though the statute does not specifically address foreign damages.
Ion also argued “comity” – that, if WesternGeco prevails, a defendant could be liable for damages for sales in a foreign jurisdiction in which the plaintiff could not otherwise get patent protection, due to the differing standards under foreign law for the grant of a patent. To downplay the comity problem, the United States’ brief emphasized that the infringement in this case had occurred not in a foreign country but in international waters (or, as the brief puts in more colorfully, “on the high seas”), but at oral argument the Justices did not seem interested in exploring that distinction, and Justice Breyer in his questioning seemed especially concerned with the comity issue.
Ion’s position, however, has a major flaw, which arises from the fact that, under the statutory scheme for patents, the act of infringement itself necessarily causes some injury to the patent owner’s property right. Patent law sets a floor for damages, in the form of a “reasonable royalty.” In instances in which a patent owner cannot prove that infringement caused it to lose profits, the patent owner is still entitled to “in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. sec. 284.
Ion conceded that it is proper to award reasonable royalty damages for products whose components were manufactured in the United States in violation of section 271(f)). Brief, pp. 28-29. Ion even conceded that it would be proper to “consider the expected foreign use of an object in determining the reasonable royalty rate.” Brief, p. 29 n.10. Ion was essentially forced to make those concessions because, under patent law, at the moment that the infringing domestic conduct occurs, i.e., manufacture of the components, the patent owner suffers an injury compensable by a reasonable royalty, and that injury occurs in the United States, not overseas.
Those concessions leave Ion attempting to distinguish the following two scenarios in order to exclude lost profits on foreign sales:
Scenario A — Components are manufactured in the U.S. and assembled abroad, in violation of section 271(f), and the finished product is shipped into the U.S. and sold. It is not disputed that in this scenario the patent owner can recover damages for sales of the finished product in the form of an award of lost profits, if proven, or, at a minimum, a reasonable royalty.
Scenario B — The same situation, except the finished product is sold in a foreign market, rather than shipped back to the United States. Ion argues that, here, the patent owner is categorically barred by the presumption against extraterritoriality from recovering lost profits. Nevertheless, Ion concedes, the patent owner can still recover damages in the form of a reasonable royalty. (In WesternGeco, the jury awarded $12.5 million in the form of a reasonable royalty, which Ion did not challenge as extraterritorial.)
Query, then, what rationale there is for a supposed policy against extraterritoriality whose practical effect is not to preclude damages for foreign activity altogether, but merely to limit the form and amount of damages.
Oral argument in April of this year did not indicate how the Court will decide. It is unclear not only which way the Court will go on recovery of extraterritorial damages, but also whether the Court will go beyond the question on which certiorari was granted, which referenced the specific circumstances delineated to section 271(f), and speak more broadly on foreign damages. The latter approach could affect the question of patent damages in any case where there are foreign sales of a product manufactured in the United States.