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What To Expect From High Court Patent Damages Ruling

Law360

The U.S. Supreme Court held oral argument in WesternGeco LLC v. Ion Geophysical Corp. on April 16, 2018. The petition for certiorari was granted on the question of “[w]hether the court of appeals erred in holding that lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. § 271(f).” While the damage theory in this § 271(f) case is somewhat unusual, the court’s decision could have broader implications for patent damages.

For context, WesternGeco sued Ion for infringement under 35 U.S.C. § 271(f). Ion sold components in this country to third parties who then used an assembled system outside of the United States to perform oil and gas surveys below the high seas. WesternGeco competed against Ion’s customers for the high-seas survey contracts. The jury awarded WesternGeco $12.5 million in reasonable royalties, based on the sale of the components in the United States, and $93 million in lost profits, based on high-seas survey contracts WesternGeco had lost to Ion customers. In a 2-1 decision, the Federal Circuit reversed the award of lost profits, reasoning that United States patent law did not allow the recovery of foreign profits due to the presumption against extraterritoriality. In so doing, the panel majority disagreed with WesternGeco that enactment of §271(f) was a clear expression of congressional intent to allow recovery of all foreseeable damages, without regard to geographical constraints. The government filed an amicus brief in support of WesternGeco’s recovery of its lost profits, but relied on §284 instead of § 271(f).

The discussion below begins with the arguments regarding statutory construction and the applicability of common law tort concepts of proximate cause and foreseeability. This article then interjects the presumption against extraterritoriality, most recently considered by the court in 2016 in a case involving the Racketeer Influenced and Corrupt Organizations Act, and considers likely outcomes.

The Landscape of U.S. Patent Law and Analogous IP Law

Section 271(a) of the Patent Act expressly states infringement is “within the United States.” In Deepsouth Packing Co. v. Laitram Corp. in 1972,[1] the Supreme Court held that a party who exported components of a patented machine which could be easily assembled abroad did not infringe claims to an assembled machine under §271(a). Congress then enacted §271(f) to fill the perceived loophole in §271(a). WesternGeco argued that because §271(f) requires consideration of foreign activity, the statute reflects clear congressional intention to rebut the presumption of extraterritoriality. In WesternGeco’s view, §271(f) allows recovery against the U.S. infringer of the high-seas survey profits WesternGeco lost to third parties because those profits were foreseeable foreign consequences of domestic acts of infringement.

In response to a question from Justice Stephen Breyer concerning comity and potential international disruption, WesternGeco argued that allowing recovery under U.S. Patent law for damages suffered abroad had been the law for 100 years, without any such problems. An 1881 case, Goulds' Manufacturing Co. v. Cowing,[2] involved oil pumps made in the United States and sold both in this country and in Canada. Damages were awarded for sales in both countries. Justice Neil Gorsuch questioned Goulds' as not having addressed the territorial issue. WesternGeco responded that in Dowagiac Manufacturing Co. v. Minnesota Moline Plow Co. in 1915,[3] the court distinguished Goulds' on its facts in reversing a damages award, implying that at least Dowagiac had considered the territorial issue. Ion argued that the court could leave open the type of damages awarded in Goulds' while the government relied on Goulds' and Dowiagiac in emphasizing the incongruity created if the court were to decide the case in favor of WesternGeco based on § 271(f) instead of on § 284.

Section 284, of course, provides for “damages adequate to compensate” for infringement. That statute has no territorial limitation. As mentioned above, the government argued that damages should put the patent owner in the same position it would have been in if the infringement under U.S. law had never occurred. Reliance on §284 instead of §271(f) avoided the possibility that greater damages could be recovered against an infringer who only partially manufactured a system in this country than against one infringing under §271(a). The government emphasized that causation in fact and proximate cause provided a filter against attenuated damages awards, but that a rule automatically severing the causal chain by crossing an international border “doesn’t make any sense.” Justice Ruth Bader Ginsburg raised the analogy of so-called predicate act doctrine in copyright law.

The Presumption Against Extraterritoriality

Courts presume that federal laws apply domestically unless Congress expressly intends an extraterritorial application. According to the Supreme Court's 2007 decision in Microsoft Corp. v. AT&T, “[t]he presumption that United States law governs domestically but does not rule the world applies with particular force in patent law.”[4] In RJR Nabisco Inc. v. European Community in 2016,[5] all seven justices hearing the case agreed to a two-step analytical framework, although the court divided 4-3 on the application of that test to RICO. The first step is to ascertain whether the presumption is rebutted by a “clear, affirmative indication that it applies extraterritorially.”[6] Importantly, the court emphasized this question must be asked “regardless of whether the statute in question regulates conduct, affords relief, or merely confers jurisdiction.”[7] If the presumption has not been rebutted, then the analysis turns to step two, which involves analyzing the statue’s focus to determine if domestic application of the statute is at issue. “If the conduct relevant to the statute's focus occurred in the United States,” then the court instructed that “the case involves a permissible domestic application even if other conduct occurred abroad.”[8] “[I]f the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.”[9]

The justices agreed that the presumption of extraterritoriality was overcome with respect to some, but not all, aspects of RICO’s substantive prohibitions in § 1962. However, with respect to RICO’s private right of action in § 1964(c), Justices Samuel Alito, John Roberts, Anthony Kennedy and Clarence Thomas separately applied the presumption against RICO’s cause of action, even though the court had concluded the presumption had been overcome to some extent for §1962. They concluded that “[n]othing in §1964(c) provides a clear indication that Congress intended to create a private right of action for injuries suffered outside of the United States,” observing that congress had “cabin[ed] RICO’s private cause of action to particular kinds of injury”.[10] This difference in scope between the statutes led to their conclusion that the presumption was not rebutted for §1964(c).

Implications of RJR on the Likely Outcome

The government and WesternGeco argued that proximate cause and foreseeability should determine the limits of recoverable damages, based on congressional intent and statutory language. Nevertheless, RJR sets forth the analytic framework the court likely will apply to determine whether Congress intended to overcome the presumption against extraterritoriality for the lost-profit damages at issue here. While Ion’s argument emphasized RJR, Justice Alito asked Ion to put RJR aside and explain why it made sense for congress to enact §271(f), creating liability for acts directed abroad, while having to analyze the remedial provisions separately to see whether congress wanted any remedy for acts done abroad. Ion’s response was that Deepsouth did not involve recovery of profits earned by third parties, reiterating counsel’s theme that congress merely intended 271(f) to level the liability playing field between exported components and exported completed machines. Justice Gorsuch asked WesternGeco for its best textual argument in § 271(f) for treating use on the high seas the same as use on Lake Michigan.

WesternGeco’s best chance to prevail is if the court applies RJR’s two-step analysis only to §271(f). However, while Congress clearly intended to overturn Deepsouth, there does not appear to be clear affirmative indication that Congress meant to extend §271(f) to damages occurring abroad. On the other hand, if the court separately analyzes liability and damage statutes, analogous to the two statutes assessed in RJR, § 284 most likely fails step one. The question then devolves to whether the focus of § 284 “involves a permissible domestic application even if other conduct occurred abroad [or] if the conduct relevant to the focus occurred in a foreign country [which] involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.”[11] Section 284 differs from §1964(c) in that the former is not cabined because §284 allows the patentee to recover damages for any patent infringement. Thus, §284 might avoid similar treatment by court. Such a holding would clarify that damage recovery under § 271(a) can include lost profits earned by overseas third parties for conduct done solely abroad.

That result, however, seems unlikely in view of the concerns articulated by the justices. A holding that RJR does not allow recovery under the Patent Act for third-party profits earned overseas would not entirely deprive WesternGeco of any recovery, although its recovery would be constrained by considerations of extraterritoriality under existing statutes. Such a holding would shift the situs of claims for damages suffered by foreign conduct to overseas patent litigation. While it is unclear whether there could be a claim for patent infringement on the high seas based on the nationality of the vessel in question, the specific facts of this case are not likely to result in a broad general rule for situations similar to Ion’s conduct or WesternGeco injury, although the court could remand for further consideration of this narrow question in the context of extraterritoriality.