Nearly half a century ago, a dispute about shrimp led to the global expansion of U.S. patent rights.

In the 1960s, a series of shrimp deveining machines manufactured by the Deepsouth Packing Company were found to infringe patents owned by its competitor, Laitram Corporation. To circumvent the infringement finding and continue selling to its foreign customers, Deepsouth divided the machines into sub-assemblies, and shipped them abroad in three separate packages; the machines would then subsequently be assembled at customer sites. Because Deepsouth was manufacturing and selling the machines in pieces, the machines as a whole were, technically speaking, not “made” or “used” in the United States. And because the Patent Act at the time only prohibited such activities within U.S. borders, the Supreme Court concluded that Deepsouth's activities could not constitute patent infringement. But in doing so, the court acknowledged that Deepsouth was “artful” in exploiting a loophole in the U.S. patent laws, one which only Congress could properly close.

Thus began the expansion of the territorial reach of U.S. patents to capture activities beyond U.S. shores, despite the judiciary's repeated invoking of the “presumption against extraterritoriality” of U.S. Patents. That expansion is being revisited through another case the Supreme Court is reviewing this term—WesternGeco v. ION Geophysical—in which the court will determine whether profits lost overseas can properly be captured as damages for infringement of a U.S. patent.

'Deepsouth Packing v. Laitram'

In Deepsouth Packing, the Supreme Court relied heavily on the presumption against extraterritoriality of U.S. law to reach its conclusion that Deepsouth's activity could not constitute infringement of a U.S. patent. Deepsouth Packing Co. v. Laitram, 406 U.S. 518, 531 (1972) (“Our patent system makes no claim to extraterritorial effect, [and is] not intended to operate beyond the limits of the United States”). In light of this presumption, the court indicated it would be unwilling to expand the geographic reach of the patent laws and close the identified loophole. But the decision also came with a strongly-worded dissent from Justice Blackmun, which argued:

If this constitutional protection [of Article I, Section 8, Clause 8, which seeks to promote the 'Progress of Science and Useful Arts'] is to be fully effectuated, it must extend to an infringer who manufactures in the United States and then captures the foreign markets from the patentee. The Constitutional mandate cannot be limited to just manufacturing and selling within the United States. The infringer would then be allowed to reap the fruits of the American economy—technology, labor, materials, etc.—but would not be subject to the responsibilities of the American patent laws. We cannot permit an infringer to enjoy these benefits and then be allowed to strip away a portion of the patentee's protection.

Id. at 534. Despite the dissent, the court concluded that it could not apply U.S. patent law to extraterritorial activities without “a clear and certain signal from Congress” to that effect.

Extraterritoriality Is Born, But Has Its Limits

In 1984, Congress answered the call of the Supreme Court and enacted 35 U.S.C. §271(f). Congress, in essence, took the domestic causes of action for induced infringement, already then codified in §271(b), and contributory infringement, already codified in §271(c), and expanded their reach globally for instances in which some or all components of multi-component products are sourced from within the United States. See Legislative History of the Patent Law Amendments Act of 1984, ​130 Cong. Rec. H10522-32 (daily ed. Oct. 1, 1984). Congress specifically noted that the provision “responds to the United States Supreme Court decision in Deepsouth Packing [], concerning the need for a legislative solution to close a loophole in patent law.” Id. at H10525 (statement of Rep. Kastenmeier).

Just four years later, Congress again expanded the extraterritorial applicability of the U.S. patent laws when it enacted §271(g). That section makes it unlawful in certain circumstances to import into the United States a product that is made from a patented process or method performed abroad.

However, courts have continued to take care to limit the extraterritorial application of U.S. patents. Indeed, as the Supreme Court has cautioned, “[t]he presumption that United States law governs domestically but does not rule the world applies with particular force in patent law.” Microsoft v. AT&T, 550 U.S. 437 (2007). Courts have been reluctant to expand the reach of patent rights beyond U.S. shores, or at least to have taken a conservative approach when doing so—typically only when, and to the extent that, a statute very explicitly supports extraterritoriality.

The tendency to conservatively apply extraterritorial patent statutes has been borne out in a number of cases, including Microsoft v. AT&T, 550 U.S. 437, 449 (2007) (finding that software not stored on a tangible medium is uncombinable, and therefore “does not match §271(f)'s categorization: 'components' amenable to 'combination.'”); Cardiac Pacemakers v. St. Jude Medical, Inc. , 576 F.3d 1348 (Fed. Cir. 2009) (finding that §271(f) cannot apply for method or process patents, because a step of a method does not qualify as a “component” that can be “supplied” from the U.S.); Life Techs. v. Promega, 137 S. Ct. 734, 741 (2017) (holding that a single component of a multi-component invention cannot as a matter of law satisfy the “substantial portion” requirement of §271(f)(1)—even for a system having only two components); and Bayer AG v. Housey Pharms., 340 F.3d 1367, 1376-77 (Fed. Cir. 2003) (finding that “information” cannot be an infringing component, because §271(g) is limited to physical products that are “manufactured”).

'WesternGeco v. ION Geophysical'

The Supreme Court is now again poised to consider the geographic reach of U.S. patents—this time with respect to the issue of damages—after its grant of certiorari in WesternGeco v. ION Geophysical, cert. granted, 138 S. Ct. 734 (Jan. 12, 2018) (No. 16-1011).

WesternGeco filed suit against ION Geophysical for infringement of patents directed to equipment for conducting seismic surveys on the high seas, which map the ocean floor to assist in identifying oil and gas drilling locations. After a trial in the Southern District of Texas, a jury found infringement and awarded WesternGeco damages in the form of $93.4 million in lost profits and $12.5 million in reasonable royalties.

The parties appealed and cross-appealed on a number of issues, including ION's challenge of the jury's award of lost profits as improper, because it was directed to lost contracts for services to be performed abroad. ION argued that WesternGeco could not receive lost profits resulting from the failure to win these contracts, because these were contracts for services to be performed on the high seas, outside the reach of U.S. patent laws.

The Federal Circuit agreed with ION and reversed the jury's award of lost profits. The court began by acknowledging that “[t]he presumption against extraterritoriality is well-established and undisputed.” WesternGeco v. ION Geophysical, 791 F.3d 1340, 1349 (Fed. Cir. 2015), cert. granted, judgment vacated sub nom. WesternGeco v. ION Geophysical, 136 S. Ct. 2486 (2016). The court also relied on its prior decision in Power Integrations v. Fairchild Semiconductor Int'l, 711 F.3d 1348 (Fed. Cir. 2013), in which the Federal Circuit had previously rejected a patent holder's claim for damages based on lost sales in foreign markets.

Judge Wallach in a lengthy dissent argued that the provisions of §§271(f) and (g) are statutory exceptions to the general presumption against extraterritoriality, and pointed to the policy in our patent laws supporting full compensation to a damaged patent holder. Moreover, the dissent distinguished the Power Integrations decision as being driven by a stated concern that the damages claimed in that case were too tenuously connected to the infringement. The dissent also noted that the patent holder in Power Integrations could have resorted to foreign patents to seek damages for foreign use of the invention, whereas in WesternGeco no such option would be available because the conduct at issue occurred on international waters.

WesternGeco appealed the Federal Circuit's reversal, seeking to restore the award of lost profits damages. In its brief, WesternGeco argues inter alia that the plain text of the patent damages statute, 35 USC §284, provides for full compensation for patent infringement, and that the Federal Circuit's decision reversing the award of lost profits “systematically undercompensates patent holders and flouts Congress' will by reopening the precise loophole Congress sought to close.” Brief for Petitioner at 2, (No. 16-1011), 2018 WL 1083739. The Solicitor General of the United States filed a brief in support of WesternGeco's positions. See Brief for United States, (No. 16-1011), 2018 WL 1168813.

The Supreme Court is set to hear oral argument on April 16, 2018.

Ultimately, the Supreme Court's decision in WesternGeco could have a significant impact on the international reach of U.S. patents, and could raise the stakes not only for companies operating in the United States, but also for their business partners around the globe.

Robert Maier is a patent lawyer and intellectual property partner in the New York office of Baker Botts.