Supreme Court Awards Patent Damages for Overseas Losses (2)

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By Peter Leung

U.S. patent owners can get damages from overseas sales lost through infringement, the Supreme Court has ruled.

The high court said WesternGeco LLC, an oil and energy services company, may be awarded damages based on lost overseas contracts, in a decision that may affect damages calculations in cases involving international supply chains.

A jury had awarded WesternGeco $93.4 million in lost profits, but the U.S. Court of Appeals for the Federal Circuit threw out part of the award because it stemmed from lost overseas contracts. That portion improperly applied U.S. patent laws to activities outside the country, the Federal Circuit reasoned.

But the Federal Circuit was wrong, because ION Geophysical Corp. infringed WesternGeco’s patent by exporting components from the U.S., which is a domestic action, the high court said June 22 in a 7-2 opinion by Justice Clarence Thomas.

“The overseas events were merely incidental to the infringement,” Thomas said.

Critics say the high court is improperly imposing U.S. patent law on other countries, which may lead other countries to take similar action.

“Given that our international patent system is setup to allow each country to issue and enforce its own patents, this decision creates many problems,” Bernard Chao, professor at the University of Denver Sturm School of Law, told Bloomberg Law.

What’s the Focus?

WesternGeco’s patents relate to systems for scanning the ocean floor for oil and gas deposits.

Two provisions in federal law lie at the heart of the dispute. The trial court found ION infringed the patents under 35 U.S.C. §271(f)(2), which makes supplying components of a patented invention from the U.S. for assembly abroad an infringing act in some instances. WesternGeco received damages under 35 U.S.C. § 284, which entitles patent owners to “damages adequate to compensate for the infringement.”

Courts presume that U.S. law doesn’t apply to actions in other countries, unless there’s a reason to believe otherwise, a doctrine known as the presumption against extraterritoriality. When analyzing whether the presumption applies, there are two questions. The court first looks at whether the presumption has been rebutted, and if not, the court looks to see if the law in question focuses on a domestic activity, Thomas said.

Awarding WesternGeco for its lost foreign sales isn’t an application of U.S. law abroad, the majority said. Section 271(f)(2) of the U.S. Code focuses on domestic activity, specifically the infringer’s supplying of components of a patented invention from the U.S., Thomas wrote.

ION argued that Section 284 focuses on providing damages to wronged patent owners. Using the provision to give WesternGeco damages for lost overseas profits improperly applies U.S. law abroad, it said.

The Supreme Court rejected that argument, saying that while Section 284 allows for damages, it focuses on infringement. Damages are merely the means to remedy patent infringement, Thomas wrote.

The focus of a statute is “the object of its solicitude,” not just what it authorizes, Thomas wrote.

The decision is straightforward and “fits an ongoing theme at the Supreme Court, that it will apply standard legal doctrines to patent law,” Russ Emerson, a partner with Haynes and Boone LLP in Dallas, told Bloomberg Law.

The ruling doesn’t address how other concepts, such as the doctrine of proximate cause, could limit damages from foreign activity, Thomas said. The doctrine says liability exists when an injury is sufficiently related to an act.

Thomas’ reference to proximate cause could be the court’s hint that damages related to overseas acts may not be so easy to get, because other rules must be considered, Yar Chaikovsky, a partner with Paul Hastings LLP in Palo Alto, told Bloomberg Law.

Dissent

Justice Neil Gorsuch dissented, with Justice Stephen G. Breyer joining.

Gorsuch said Section 271(f)(2) expands the definition of what it means to make an infringing item in the U.S., by including the act of exporting the components to be assembled abroad. But the majority decision allows the patent owner to collect lost profits for use of the patent abroad, which isn’t an infringing act at all, he said.

The majority’s ruling will allow patent owners to collect damages that go far beyond the harm caused by the infringing act, Gorsuch wrote. For example, a company that designs and builds a prototype of a microchip in the U.S., but manufactures abroad, could be liable for its worldwide sales, if the prototype infringes a U.S. patent, he said.

Chao, of the University of Denver, raised a similar issue, saying the ruling could lead companies to move work out of the U.S.

What’s Next?

Practitioners now must look to the lower courts to apply the ruling and iron out the details.

There are questions about how lower courts will apply the decision alongside the Supreme Court’s 2007 ruling in Microsoft v. AT&T, Fabio Marino, a partner with Polsinelli LLP in San Francisco, told Bloomberg Law. In that decision, a software program digitally transmitted abroad for installation on computers wasn’t considered an exported “component” under Section 271(f), but the issue could arise again if a case comes up with slightly different facts.

Plaintiffs may try to apply the high court’s analysis to other forms of patent infringement, Emerson, of Haynes and Boone, said. If they’re successful, plaintiffs could seek foreign-based damages for more straightforward forms of infringement, he said.

Thomas wrote the decision in his typically straightforward fashion, and made efforts to keep it narrow, Kevin Noonan, a partner with McDonnell Boehnen Hulbert & Berghoff LLP in Chicago, told Bloomberg Law. Noonan said he doesn’t expect significant changes following the ruling but expects some plaintiffs will try to use the decision to expand damages in other types of patent infringement cases.

“Lawyers are clever people, after all,” he said.

Kirkland & Ellis LLP represented WesternGeco. Williams & Connolly LLP represented ION.

The case is WesternGeco LLC v. Ion Geophysical Corp., 2018 BL 222217, U.S., No. 16-1011, 6/22/18.

— With assistance from Susan Decker (Bloomberg)

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