Our phones, computers, cars, even our internet-connected refrigerators—it is unlikely that any of these, or any of the other electronic devices and appliances we use, are made entirely in the United States. Nor are they made from components that are made entirely in the U.S.

Even if the product is sold by a U.S. company, it is likely that foreign subsidiaries are performing many of the functions of that U.S. company. Indeed, it is easier than ever before for multinational companies to delegate specific functions of their business to specific parts of the globe. For example, foreign subsidiaries typically purchase components used in end-products from foreign vendors. And then virtually all manufacturing of the components, as well as the assembly of the devices, happens outside the U.S., either by other subsidiaries or by contract manufacturers. But much of the design and marketing activity for these devices occurs in the U.S. As does decision-making about which vendor's component to use and what price to pay for that component, such as a computer chip. These decisions about which components to incorporate into a product are significant, since those components likely will be used for all products, regardless of where in the world these products are sold.

These modern supply-chain realities have created headaches for courts for years, particularly in patent cases. When the owner of a U.S. patent sues the manufacturer of a computer chip for patent infringement, that manufacturer will surely claim it does not make or sell any of those chips in the U.S. And, indeed, it likely can point to purchase orders and invoices between two foreign entities, with shipment and delivery occurring outside the U.S. At most, the manufacturer will argue, any damages awarded by a jury must be calculated based on only those chips eventually imported into the U.S. within an end-product. Not only is this complicated to determine, but the damages claim will be limited to only a fraction of the total sales of the infringing chips. This leaves the patent owner asking why foreign sales must be excluded, when so much of the business activity that led to those foreign sales took place in the U.S.

This dispute highlights the tension between two competing legal principles. The damages provision of the U.S. Patent Act provides that courts "shall award the claimant damages adequate to compensate for the infringement …." 35 U.S.C. §284. This broad language indicates U.S. patent owners should receive damages commensurate with the infringement of their U.S. patents.

But U.S. courts also are bound to apply a presumption against extraterritoriality, and not just in patent lawsuits. The presumption is that unless Congress intends otherwise, laws must be read to apply only to actions taken in the United States. See e.g., Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949). See also Impression Prods. v. Lexmark Int'l, 137 S. Ct. 1523, 1538 (2017) (Ginsburg, J., concurring in part and dissenting in part) ("Patent law is territorial. When an inventor receives a U.S. patent, that patent provides no protection abroad"). This, too, seems fair. U.S. companies and citizens would balk at having the laws of various other countries applied to their actions inside the United States, so restricting U.S. patent law to infringement in the United States makes sense.

Squarely between these legal principles is the gray area of infringement of U.S. patents in the U.S., but with related consequences or actions outside the U.S., and whether those consequences can form a basis for damages under U.S. patent law.

In the next few months, the Federal Circuit Court of Appeals will hear oral argument in a case anticipated to clarify the damages available in these situations. In Power Integrations v. Fairchild Semiconductor Int'l, No. 2019-1246, 2019-1247 (Fed. Cir. Dec. 2018), the court may decide the extent to which infringing products sold outside the United States can still be considered in calculating a damages award under U.S. patent law.

This case will be the Federal Circuit's first application of the U.S. Supreme Court's decision in WesternGeco v. ION Geophysical Corp., 138 S. Ct. 2129 (2018). There, in a 7-2 decision, the Supreme Court held that a patent damages award can include foreign sales when caused by domestic infringement. But the infringement in WesternGeco was under §271(f)(2) of the Patent Act, which applies to exporting components from the U.S. A footnote limits the holding to infringement under this subsection. And another footnote expressly declines to provide guidance about the broader issue of how proximate cause could be applied to damages claims involving foreign sales.

Soon after the WesternGeco decision, the District Court in Delaware heard argument about how to apply it to the now-15-year-old Power Integrations case. That case has lengthy history and a number of previous appeals. As a short recap, focusing solely on the damages issues: in 2004, Power Integrations sued Fairchild for infringing four patents through its sales of power supplies for electronic devices. The jury ultimately awarded damages of nearly $34 million. The district court then reduced this award to approximately $6 million, since the evidence at trial indicated that 82% of the components were not imported into the U.S. Eventually, the Federal Circuit issued an opinion in 2013 that affirmed the reduced damages award, applying the presumption against extraterritoriality to preclude Power Integrations from recovering damages predicated on sales outside the U.S. See Power Integrations v. Fairchild Semiconductor Int'l, 711 F.3d 1348, 1371 (Fed. Cir. 2013).

Most recently, the district court concluded that the Supreme Court's WesternGeco decision "implicitly overruled the Federal Circuit's Power Integrations opinion." Power Integrations v. Fairchild Semiconductor Int'l, No. 04-1371-LPS at *2 (D. Del. Oct. 4, 2018). The parties and the court agreed that this decision should be appealable immediately, setting up the appeal now before the Federal Circuit.

With the briefing now complete in the most recent Power Integrations appeal, the competing interpretations of WesternGeco are clear.

Power Integrations seeks a ruling that it can recover the full amount of the original jury award, since all of its lost profits—even those calculated based on Fairchild's sales outside the U.S.—resulted from Fairchild's infringement. In short, Power Integrations reads WesternGeco to mean that the presumption against extraterritoriality is no longer a basis for limiting damages under 35 U.S.C. §284 once domestic infringement has been proven.

Fairchild, however, argues that WesternGeco changed nothing, since the infringement in that case was under a different section of the Patent Act that specifically contemplated activity outside the U.S.—namely, the exporting of components to combined into an infringing product outside the U.S. Thus, the presumption against extraterritoriality should still bar recovery of damages based on foreign sales under 35 U.S.C. 271(a), which focuses on domestic infringement. Further, Fairchild contends, Power Integrations did not prove a causal link between infringement in the U.S. and any lost worldwide sales, and this is another basis for rejecting its claim. Intel Corporation filed an amicus curiae brief supporting Fairchild's argument.

For now, it is impossible to predict which way the Federal Circuit will rule. Regardless of which side prevails in this appeal, it seems inevitable that the Supreme Court will be asked to weigh in again on the extent to which damages based on foreign sales are recoverable under U.S. patent law.

In the meantime, patent owners asserting their patents against semiconductor and other component manufacturers will continue to seek damages based on global sales. And the defendants in those cases will continue to resist discovery about sales outside of the U.S. while also arguing that there is no causal link between any U.S. infringing activity and any foreign sales. But without clarification from the courts, patent owners and defendants in infringement lawsuits are left struggling to evaluate the value and risk of these lawsuits. Hopefully, the Federal Circuit's decision will provide much-needed guidance in this difficult area of patent damages law.

Aaron Davidson is a member in the Dallas office of Cole Schotz, primarily focusing his practice on commercial and intellectual property litigation, including patent, trademark, copyright and trade secret matters.