Source: https://iclg.com/practice-areas/patents-laws-and-regulations/3-u-s-supreme-court-finds-room-for-compensation-of-foreign-lost-profits
Timestamp: 2019-04-22 11:02:13+00:00

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The decision likely opens the door to broader recovery of foreign lost profits as a result of U.S. patent infringement. Although the decision analysed only a specific type of patent infringement under the Patent Act – namely, exporting components that are specially adapted for an invention under 35 U.S.C. § 271(f)(2) – the reasoning underlying the decision could potentially apply to other types of infringement defined by the statute.
This article describes the background of the WesternGeco case, examines the history of the U.S. patent damages statute, and then returns to the Supreme Court’s opinion in view of this context.
The case arose out of a dispute between WesternGeco LLC (“WesternGeco”) and competitor ION Geophysical Corp. (“ION”). WesternGeco sued ION in the U.S. District Court for the Southern District of Texas, alleging infringement of patents concerning technology used to survey the ocean floor to search for oil deposits. At trial, a jury found infringement of four patents and awarded damages as follows: $12,500,000 in reasonable royalties, plus $93,400,000 in lost profits, which represented expected profits from service contracts that WesternGeco would have been awarded but for ION’s infringement of the patents. These contracts involved deep ocean surveying on the high seas for oil companies.
In a first appeal to the U.S. Court of Appeals for the Federal Circuit, the appellate panel held that lost profits could not be awarded for damages resulting from these contracts because the work was to be performed on the high seas, outside the jurisdictional reach of U.S. patent law. Relying on an earlier decision in Power Integrations, Inc. v. Fairchild Semiconductor Int’l, which held that foreign lost profits are not available as damages under the general infringement provision, 35 U.S.C. § 271(a), the two-judge majority reasoned, “the entirely extraterritorial production, use, or sale of an invention patented in the United States is an independent intervening act that under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement”. The majority also relied heavily on the “well established and undisputed” presumption against the extraterritorial application of U.S. laws.
Judge Wallach dissented in part, noting that a patentee is generally “entitled to full compensatory damages” and “the relevance of foreign activities is not limited to the underlying issue of liability for infringement, but also relates to the associated issue of damages”.
On remand, the Federal Circuit reinstated its earlier opinion in all respects except for the discussion of enhanced damages. Judge Wallach again dissented in part, writing, “patentees are entitled […] to lost profits resulting from infringement under the laws of the United States, which is what the jury found below, and what was affirmed by this court on appeal”.
WesternGeco filed a petition for a writ of certiorari with the U.S. Supreme Court, which granted the petition on January 12, 2018.
To frame the discussion underlying the case, it is useful to recount some of the history behind damages in U.S. patent law.
Section 4 of the Patent Act of 1790, the first U.S. patent statute, provided that an infringer would “forfeit and pay [...] such damages as shall be assessed by a jury”, and moreover would “forfeit to the person aggrieved” the infringing articles. The damages generally reflected the opportunity for compensatory recovery afforded by the law courts in England. In addition, the forfeiture of the infringing articles reflected the injunctive relief and restitutionary remedies afforded in equity.
By 1793, the statute had been revised such that an infringer would “forfeit and pay to the patentee, a sum, that shall be at least equal to three times the price, for which the patentee has usually sold or licensed to other person, the use of said invention”. Thus appeared the first statutory provision for trebled damages.
The next substantial amendment came in 1836. Whereas the 1793 amendment had set trebling as a floor on damages, the 1836 version of the statute was revised to set a trebling as the ceiling on damages. The section now provided that the infringer would pay “any sum above the amount found by such verdict as the actual damages sustained by the plaintiff, not exceeding three times the amount thereof, according to the circumstances of the case, with costs”.
In the mid-1800s came the merger of courts of law and equity in the United States. In 1870, this merger was reflected in the statutory language. Section 59 of the Act continued to require payment by the infringer for “any sum above the amount found by the verdict as the actual damages sustained, according to the circumstances of the case, not exceeding three times the amount of such verdict, together with the costs”. However, the statute also was amended to add Section 55, which expressly provided that patent actions would “be originally cognizable, as well in equity as at law”. The claimant would “be entitled to recover, in addition to the profits accounted for by the defendant, the damages the complainant has sustained thereby [...] and the court shall have the powers to increase the same in its discretion”.
Birdsall v. Coolidge, 93 U.S. 64, 68-69 (1876).
Thus, damages historically were measured in two possible ways: by the infringer’s gain (if sufficient to compensate for the infringement), or by the patentee’s loss. In 1886, the U.S. Supreme Court recognised in Yale Lock Mfg. Co. v. Sargent that the patentee’s loss can include lost profits the patentee would have earned but for the infringement. The infringer’s gain, meanwhile, included profits the infringer would not have made but for the infringement. And the patentee had the ability to make an election as to which measure it would pursue.
In many cases, however, accounting for the infringer’s profits proved difficult. In 1912, in Westinghouse Electric & Mfg. Co. v. Wagner Electric & Mfg. Co., the U.S. Supreme Court held that it was the claimant’s initial burden to apportion the defendant’s profits to a complex device or product, but if the claimant was unable to so apportion, the burden shifted to the defendant to do the apportioning. And, if the defendant was unable to do the apportionment, then it could be subject to an award of all profits to the entire complex device.
Westinghouse Electric & Mfg. Co. v. Wagner Electric & Mfg. Co., 225 U.S. 604, 620 (1912).
Also in the early 1900s, the “reasonable royalty” began to achieve popularity as a means of computing damages without having to rely on an accounting of profits. By 1915, in Dowogiac Mfg. Co v. Minnesota Moline Plow Co., the U.S. Supreme Court had approved the reasonable royalty approach. And by 1922, the reasonable royalty concept had been incorporated into the statute, allowing a court to “decree the payment by the defendant to the complainant of a reasonable sum as profits or general damages for the infringement”.
That brings us to 1946. That year saw a proposed rewrite of the statute, which as we shall see looked quite similar to the modern version of the statute, codified at 35 U.S.C. § 284. The proposed amendment read, in relevant part, “the complainant shall be entitled to recover general damages which shall be due compensation for making, using, or selling the invention, not less than a reasonable royalty therefor, together with such costs, and interest, as may be fixed by the court”.
Thus, a reasonable royalty sets a floor on damages, but the statute contemplated that damages would be fully compensatory in nature. Restitutionary recovery of the defendant’s profits was eliminated from the statute as a measure of recovery.
Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 505 (1964).
General Motors Corp. v. Devex Corp., 461 U.S. 648 (1983).
Today, the majority of patent cases in the U.S. involve only a reasonable royalty as damages – that is, the minimum recovery authorised by the statute. The patentee’s lost profits are also still recoverable – just not the infringer’s profits. It is worth noting that claimants in UK patent cases and in many other jurisdictions can still choose between their own damages and the infringer’s profits. And the same is true in U.S. copyright and trademark cases – the defendant’s profits from the use of the work or mark are available as a measure of damages. Only in the area of patents has the claimant’s ability to disgorge the infringer’s profits been extinguished.
With our historical detour complete, we shall now turn back to the Supreme Court’s opinion in WesternGeco.
The Supreme Court heard oral argument on April 16, 2018, and issued its decision on June 22, 2018. In a 7-2 majority opinion authored by Justice Thomas, the court reversed the decision of the Federal Circuit, holding that WesternGeco’s damages award for lost profits was a permissible domestic application of § 284. Justices Gorsuch and Breyer dissented.
WesternGeco LLC v. ION Geophysical Corp., 138 S.Ct. 2129, 2138 (2018).
WesternGeco, 138 S.Ct. at 2139 (Gorsuch, J., dissenting).
According to the dissent, both the statutory text and the binding precedents of the U.S. Supreme Court confirm that no recovery is permitted on foreign uses of a patented invention. After all, such uses are not covered by – and cannot be protected by – a U.S. patent. In addition, allowing such a recovery would also “invite anomalous results”, such as providing for a greater recovery “when a defendant exports a component of an invention in violation of § 271(f)(2) than when a defendant exports the entire invention in violation of 271(a)”.
WesternGeco, 138 S.Ct. at 2143-44.
The Supreme Court’s decision raises several issues in the near-term. First, are foreign lost profits available for other types of infringement under the Patent Act – as an example, infringement under § 271(a)? The majority opinion ostensibly limited its analysis to § 271(f)(2), but § 271(a) would potentially be subject to a similar extraterritoriality analysis, because it specifically regulates conduct “within the United States” and would likewise constitute a domestic application of the statute.
Second, the majority dropped a somewhat mysterious footnote stating, “in reaching this holding, we do not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases”. In this case, WesternGeco was able to convince the jury that but for the infringement, the 10 survey contracts would have been awarded to WesternGeco. One can imagine, however, circumstances in which the foreign harm was less foreseeable or more attenuated. Where does the chain of causality for foreign acts begin to break down?
Finally, will the future reveal this decision to be part of a trend in which the Supreme Court begins to take more interest in patent damages and potentially relax some of the damages-tightening that the Federal Circuit has done in recent years? For that answer, perhaps only time will tell. Stay tuned.
1. 138 S.Ct. 2129 (2018).
2. For more information on that case, please see my article in The ICLG to: Patents 2017.

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