On April 16, 2018, the U.S. Supreme Court heard arguments in WesternGeco v. ION Geophysical, a case raising important issues about the extraterritorial reach of U.S. patent law—namely, whether a patentee can recover lost profits stemming from the non-infringing use, outside the United States, of a system found to infringe domestically under §271(f) of the Patent Act. 138 S. Ct. 734, petition for cert. granted, No. 16-1011 (Jan. 12, 2018).

Claims for patent infringement are most commonly pursued under 35 U.S.C. §271(a), which provides that, “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” 35 U.S.C. §271(a) (emphasis added). This obviously limits liability to domestic acts; foreign use of a patented invention—i.e., use occurring outside the United States, does not constitute infringement under §271(a), and thus patentees cannot recover damages for such use. See id.

Section 271(f) creates a separate category of liability for patent infringement arising from the domestic supply of components of a patented invention with the intent that such components be combined abroad. See 35 U.S.C. §271(f). It has two sub-parts: one relating to inducement ((f)(1)), and the other relating to contributory infringement ((f)(2)). See id. Congress enacted §271(f) specifically to overturn the Supreme Court's 1972 decision in Deepsouth Packing Co. v. Laitram, 406 U.S. 518 (1972). See WesternGeco v. ION Geophysical, 791 F.3d 1340, 1350 (Fed. Cir. 2015) (WesternGeco I). There, the court held that a domestic entity that manufactured components of an infringing product and then exported those components abroad without first combining them was not an infringer under §271(a). See Deepsouth, 406 U.S. at 532.

This case addresses how far damages under that section extend: whether, once a system (uncombined) has been found to infringe under §271(f), a patentee can recover lost profits resulting from non-infringing foreign uses of that system (as combined abroad).

WesternGeco asserted four patents directed to systems that search for oil and gas beneath the ocean floor using sensors attached to long streamers towed behind ships. See id. at 1342-43. WesternGeco manufactured a commercial embodiment of the patented system and also performed ocean surveys using its system on behalf of oil companies. See id. at 1349. The defendant, ION, manufactured and sold an accused system but did not perform surveys; rather, it sold its system to customers who in turn performed surveys on behalf of oil companies outside the United States, on the “high seas.” Id.

WesternGeco sued ION for infringement in the U.S. District Court for the Southern District of Texas. See WesternGeco v. ION Geophysical, 953 F. Supp. 2d 731 (S.D. Tex. 2013). At trial, WesternGeco identified 10 surveys, each conducted outside the United States by ION's customers and valued at over $90,000,000, that WesternGeco contended it would have been hired to perform but for ION's provision of the accused system to ION's customers. See WesternGeco I, 791 F.3d at 1349. The jury found ION liable for infringement under §271(f)(1) and (2) on all asserted claims, and awarded WesternGeco $93.4 million in lost profits and a reasonable royalty of $12.5 million. See id. at 1344. Following trial, WesternGeco moved to enhance damages for willful infringement, which the district court denied under the since-overturned Seagate framework. See WesternGeco v. ION Geophysical, 837 F.3d 1358, 1360-61 (Fed. Cir. 2016) (WesternGeco II). ION appealed that WesternGeco was not entitled to lost profits, while WesternGeco cross-appealed the district court's refusal to enhance damages. See id.

The Federal Circuit reversed the lost profits award, holding that WesternGeco was not entitled to lost profits resulting from foreign uses of the infringing system—an issue on which Judge Wallach dissented. See id. The majority reasoned that, “[j]ust as the United States seller or exporter of a final product cannot be liable for use abroad, so too the United States exporter of the component parts cannot be liable for use of the infringing article abroad.” WesternGeco I, 791 F.3d at 1351. The Federal Circuit also unanimously affirmed the district court's denial of enhanced damages, again applying Seagate. See WesternGeco II, 837 F.3d at 1360-61. WesternGeco petitioned for certiorari, but requested that the Supreme Court hold its petition in light of the then-pending Halo case, which challenged Seagate. See id. After the Supreme Court decided Halo and, in so doing, overturned Seagate, the Court granted certiorari and remanded this case back to the Federal Circuit “for further consideration in light of Halo.” Id.

On remand, the Federal Circuit reinstated all but the enhanced damages portion of its earlier opinion, including the reversal of WesternGeco's lost-profits award. See id. at 1361. Judge Wallach took the opportunity to reiterate his disagreement with the panel majority's decision, asserting that “[a]n unduly rigid rule barring the district court from considering foreign lost profits even when those lost profits bear a sufficient relationship to domestic infringement improperly … threatens to deprive plaintiffs of deserved compensation in appropriate cases.” Id. at 1369 (Wallach, J., dissenting).

WesternGeco again petitioned for certiorari to the Supreme Court, this time on the lost-profits issue alone. The Supreme Court granted its petition. See WesternGeco, 138 S. Ct. 734 (Jan. 12, 2018).

In its merits brief to the Supreme Court, WesternGeco highlighted the plain language of the patent damages provision, 35 U.S.C. §284, which states that a patent holder who proves an act of infringement is entitled to “damages adequate to compensate for the infringement,” and which reflects “a policy of full compensation for the patent holder for losses caused by infringement.” Brief of Petitioner at 21-22 (quoting 35 U.S.C. §284). According to WesternGeco, “given the conduct specifically prohibited by §271(f), the fact that damages flow from foreign combinations and lost sales abroad is all but inevitable and certainly no basis for denying Petitioner a make-whole recovery under §284.” Id. at 22 (emphasis in original).

WesternGeco further argued that the Federal Circuit misapplied the so-called “presumption against extraterritoriality,” an “interpretive canon” under which “courts generally presume that federal statutes do not apply extraterritorially unless traditional tools of statutory interpretation reveal 'a clear, affirmative indication' to the contrary.” Id. at 28 (quoting RJR Nabisco v. European Cmty., 136 S. Ct. 2090, 2100 (2016)). According to WesternGeco, the presumption is simply not implicated because its claims “are not based on unlawful foreign conduct; they are based on unlawful domestic conduct.” Id. at 33 (emphasis in original).

But, WesternGeco argued, even if the presumption against extraterritoriality did apply, it would be satisfied in this case by §271(f), which Congress enacted to close the “loophole” left by Deepsouth:

To treat the fact that the combination occurred abroad as a reason to lessen responsibility for the infringer or reduce compensation for the victim is to ignore the nature of the loophole Congress was closing [by enacting §271(f)]. The fact that the combination occurred abroad is not some unintended overreach but the whole point of the statute.

Id. at 38 (emphasis in original). Notably, the U.S. government filed an amicus brief in support of WesternGeco. See Brief for the United States as Amicus Curiae Supporting Petitioner.

In its opposition brief, ION argued that the proper focus is on §284, not §271(f). Because §284 lacks language indicating that Congress meant for it to apply outside the United States, ION reasoned that §284 is subject to the presumption against extraterritoriality, and the award of lost profits “meant to compensate for [WesternGeco's] foreign injury as a result of the foreign conduct of [ION's] foreign purchasers, constituted an impermissible extraterritorial application of Section 284.” Brief of the Respondent at 22, 24 (emphasis added). ION stressed that patentees are adequately compensated by reasonable royalties and domestic lost profits, and concluded that “[WesternGeco's] rule would transform any domestic act of infringement into a springboard for worldwide patent damages, and thereby expose companies with design operations in the United States to staggering awards.” Id. 14, 28, 48.

At oral argument, Justice Breyer expressed concern about the ramifications if multiple countries were to adopt the rule proposed by WesternGeco and thus allow foreign patentholders to collect lost profits for sales made in the United States, where those sales did not violate American law. And several Justices, including Justices Breyer, Kagan, and Ginsburg, discussed whether the doctrine of proximate cause was sufficient to cut off recovery of foreign lost profits that were too far removed causally from the domestic act of infringement.

We will continue to monitor the case for important developments.

Gene W. Lee and Joseph P. Reid are partners, and Caroline A. Teichner is an associate, in Perkins Coie's patent litigation practice.