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High Court Says Patent Owners Can Recover Foreign Damages

June 22, 2018

On June 22, 2018, the Supreme Court announced its decision in WesternGeco LLC v. ION Geophysical Corp., No. 16-1011, __ S. Ct. __, Slip Op. at 2-3, holding that patent owners who prove infringement under 35 U.S.C. § 271(f)(2) are entitled to recover foreign lost profits under 35 U.S.C. § 284.  The WesternGeco holding applies to infringement under 35 U.S.C. § 271(f)(2), which “expands the definition of infringement to include supplying from the United States a patented invention’s components.”  Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 444-445 (2007). 

Background of Decision

WesternGeco owns patents related to a system developed for surveying the ocean floor via lateral-steering technology to produce higher-quality seismic data than previous systems.  WesternGeco, Slip Op. at 2-3.  In 2007, ION Geophysical Corporation began manufacturing the components of a competing system and selling those components to customers overseas, where they were assembled into a system that would have infringed WesternGeco’s patents had the components been assembled in the United States.  WesternGeco, Slip Op. at 3.  WesternGeco sued ION in the Southern District of Texas under 35 U.S.C. §§ 271(f)(1) and (2).  Id.  Subsection (f)(1) states that it shall be an act of infringement to supply from the United States components of a patented invention “in such a manner as to actively induce” the combination of the components abroad.  Subsection (f)(2) states that it constitutes infringement for someone to supply components “especially made for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use,” where the components are uncombined, “knowing that such component is so made or adapted and intending that such component will be combined outside the United States” in an infringing manner.

The jury found that WesternGeco lost 10 survey contracts due to ION’s infringement under § 271(f)(2) and awarded damages of $12.5 million in royalties and $93.4 million in lost profits.  WesternGeco, Slip Op. at 3.  The trial court then denied ION’s post-trial motion to set aside the verdict, which argued that 271(f) does not apply extraterritorially.  Id.  On appeal, the Federal Circuit reversed the trial court and held that, because § 271(a) does not allow recovery of lost profits based on foreign sales, § 271(f) should be interpreted the same way.  Id. at 3-4.

The Supreme Court’s Holding

Acknowledging that it is presumed that federal statutes only apply within the United States, the Supreme Court analyzed the question of extraterritoriality using a two-pronged inquiry of: (1) asking whether the presumption against extraterritoriality has been rebutted by the statute text providing a “clear indication of extraterritorial application”; and (2) if not, then asking “whether the case involves a domestic application of the statute” by determining the statute’s focus and whether the conduct relevant to that focus occurred in the United States.  RJR Nabisco, Inc. v. European Community, 579 U.S. __, __ (2016) (slip op., at 9).  Id. at 4-5.  The Supreme Court exercised its discretion to focus only on the second prong, because a determination that the general damages statute, § 284, applies extraterritorially, would implicate all manner of infringement.  Id. at 5.

The WesternGeco court held that the conduct relevant to the statutory focus in this case was domestic.  Beginning with § 284, the general damages statute, the Supreme Court held that the relevant portion of § 284 stated that “the court shall award the claimant damages adequate to compensate for the infringement” and that because “the infringement” is the focus of the statute, then “the question” posed is “how much ha[s] the Patent Holder . . . suffered by the infringement.”  Id. at 6-7.  The Supreme Court then turned to § 271(f)(2), which was the basis for the jury’s award, and held that that statute focuses on the domestic act of “suppl[ying] in or from the United States” and therefore vindicates domestic rights.  Id. at 7-8.  Because the relevant conduct in this case was ION’s domestic act of supplying components that infringed WesternGeco’s patents, the lost profits damages awarded “were a domestic application of § 284.”  Id. at 8.

Likely Impact

The Supreme Court appears to have intentionally limited the impact of the WesternGeco decision to only cases brought for infringement under § 271(f) (and arguably, more specifically, only cases brought under § 271(f)(2)), which is rarely invoked.  The Supreme Court was careful to avoid holding that extraterritorial damages are always recoverable under § 284 as a result of any type of infringement.  The ultimate impact of the holding is, however, unclear, as the Supreme Court reasoning in this case might also be applicable to “traditional” infringement under § 271(a).  Plaintiffs, for example, will likely argue as a logical extension of WesternGeco that if an infringing “offer for sale” occurred under § 271(a) and resulted in lost profits overseas, those lost profits should be recoverable because, in that instance, the “conduct relevant to the focus” of the statute occurred in the United States.

It is further unclear to what extent WesternGeco is precedential for cases brought under § 271(f)(2) and for which only reasonable royalty (and not lost profits) damages are sought.  The fact pattern and holding specifically involved WesternGeco’s lost profits damages based on overseas contracts.  It is conceivable, however, that because the WesternGeco holding applies to § 284 generally, one could argue that infringing conduct under 271(f) (i.e., selling components to be combined in an infringing manner abroad) should also allow recovery of royalties on sales of those combined systems. 

Care should therefore be taken in early-stage evaluation of any infringement claims, even those not brought under § 271(f), as to whether patentees might argue under WesternGeco that conduct occurring in the United States should lead to recovery of damages incurred overseas.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ryan Yagura, an O'Melveny partner licensed to practice law in California and Texas, John Kappos, an O'Melveny partner licensed to practice law in California, Nicholas Whilt, an O'Melveny partner licensed to practice law in California, and Tony Beasley, an O'Melveny counsel licensed to practice law in California, Minnesota, Texas, and Wisconsin, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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