Lawrence Ashery.

In a 7-2 decision, the U.S. Supreme Court ruled that U.S. patent holders are eligible to recover lost profits—that were lost outside of the United States—for domestic infringement of a U.S. patent in WesternGeco v. Ion Geophysical, 585 U.S. ______ (2018).

WesternGeco owns four patents relating to ocean floor survey technology—for locating oil and gas deposits. ION manufactured the components for a competing system and sold those components to foreign companies that perform ocean floor surveys.

At trial, WesternGeco proved that ION had infringed WesternGeco's patents. More importantly, WesternGeco also showed that it had lost 10 foreign contracts as a result of ION's U.S. patent infringement.

While 35 U.S.C. 281 gives patent owners a “civil action for infringement,” Section 271(f)(2) defines one form of patent infringement as occurring when components of a patented invention are supplied from the United States, with the intent to “be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.”

The district court determined that patent infringement under 271(f)(2) had indeed occurred and awarded damages of $12.5 million in royalties. In an unusual step, however, the court also awarded WesternGeco $93.4 million in lost profits for the ten lost foreign contracts. The Court of Appeals reversed, based on a presumption against extraterritoriality of 271(f)(2). The U.S. Supreme Court reversed again, and held that the U.S. patent statutes allow a patent owner to recover for lost foreign profits if it resulted from U.S. infringing activity.

While 271(f) makes no mention of foreign lost profits, WesternGeco argued that foreign lost profits were encompassed by the statute: “In enacting Section 271(f) … Congress plainly contemplated that damages would be inflicted by … lost sales abroad. That inescapable conclusion is reinforced by the fact that Congress was acting to close a loophole created by this court's decision in Deepsouth … To find the presumption against extraterritoriality unsatisfied by Congress' deliberate effort to close that loophole is to defy Congress' will.”

The Deepsouth decision referred to by WesternGeco was the 1972 U.S. Supreme Court opinion holding that patent infringement does not occur when parts of a patented invention were manufactured in the United States and assembled overseas (Deepsouth Packing v. Laitram, 406 U.S. 518 (1972)). Congress statutorily overruled Deepsouth by enacting 35 U.S.C. 271(f).

ION argued that awarding lost foreign profits associated with U.S. patent infringement was “intolerable as a matter of policy” and “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.”

Listening to oral argument, it was difficult to predict what would be the court's decision. Justice Neil Gorsuch stated to WesternGeco's attorney, “You don't have a … lawful monopoly, to use this technology abroad. That doesn't belong to you. That's outside the patent laws.” “So why,” he asked, ”would you get lost profits … because of a third party's use entirely abroad?” On the other hand, Justice Anthony Kennedy asked ION's attorney, “Your position is that the petitioner is not entitled to full compensation for its injury? That's your position?” While WesternGeco's response was that they were “collecting damages for the foreseeable consequences of the domestic act of infringement” ION's position was that lost damages should not be awarded as a consequence of the application of the presumption against extraterritoriality.”

The analysis of the extraterritoriality issue was key to the U.S. Supreme Court awarding damages for lost foreign profits to WesternGeco.

As explained by the Supreme Court's opinion, “Courts presume that federal statutes apply only within the territorial jurisdiction of the United States” and thus prevent “unintended clashes between our laws and those of other nations, which could result in international discord” citing Equal Employment Opportunity Commission v. Arabian American Oil, 499 U.S. 244 (1991).

Therefore, U.S. statutes are presumed not to apply to acts that occur outside of the United States. There is a two-step framework for determining otherwise. Step one is to ask “whether the presumption against extraterritoriality has been rebutted” (RJR Nabisco v. European Community, 579 U.S. _____ (2016)). The presumption is rebutted, i.e., a U.S. statute applies to overseas acts if the text of the statute has a “clear indication of an extraterritorial application” (Morrison v. National Australia Bank, 561 U.S. 247 (2010). Step two is to ask “whether the case involves a domestic application of the statute,” (RJR Nabisco). A step-two determination is made by looking at the statute's focus and identifying whether actions relevant to that focus occurred within the United States.

Exercising its discretion to begin the analysis at either step, the court began at step two. The court noted that the statute in question, 271(f)(2), states that “a company 'shall be liable as an infringer' if it 'supplies' certain components of a patented invention 'in or from the United States' with the intent that they 'will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.” Thus, the focus of the statute is the act of exporting components from the United States. As ION's act of patent infringement occurred as a result of supplying components from the United States, the Supreme Court held that a lost profit damage award was proper.

Justice Gorsuch's dissent argued that a U.S. patent “provides a lawful monopoly over the manufacture, use, and sale of an invention within this country only” and WesternGeco was seeking “lost profits for uses of its invention beyond our borders.” His position was that the majority decision would “allow U.S. patent owners to use American courts to extend their monopolies to foreign markets” which in turn would “invite other countries to use their own patent laws and courts to assert control over our economy.”

The decision in this case is very important because it significantly increases the damage awards that are available to U.S. patent holders when infringement results in lost foreign profits. It will be interesting to observe how such damages are awarded in the future.

Lawrence E. Ashery is a partner in the Philadelphia office of Caesar Rivise. He focuses his practice on all aspects of intellectual property law. He can be reached at [email protected].