Supreme Court Eyes Relaxing Rule on Foreign Patent Damages

Breyer seemed perplexed that neither marine surveyor WesternGeco LLC nor its amicus the U.S. government had embraced that theory during arguments. “I thought that would be a fallback position for them,” he said at one point.

But WesternGeco counsel Paul Clement assured the court as time was winding down that it would settle for that compromise position.

“I'm, of course, happy to win this case on any of the three theories we present in our brief or on the government's theory,” he told the court. But he said he would prefer the court to state clearly that the presumption against extraterritorial application of patent laws — or any laws — does not apply to compensatory damages.

At stake in WesternGeco is $93 million in lost profits in a dispute over mapping technology for oil deposits under the ocean floor. Schlumberger subsidiary WesternGeco won its verdict under Section 271(f) of the Patent Act, a relatively narrow provision that targets infringers who ship components overseas with the intent that they be combined in a manner that infringes the U.S. patent.

WesternGeco patented methods for steering the sometimes mile-long cables that scan for oil and gas deposits beneath the sea bed. The company says it invested a decade of research and nearly $100 million to develop the process of “lateral steering,” and held 100% of the market during the early 2000s. Houston-based ION manufactures a similar system that is assembled overseas and then sold to WesternGeco's competitors. A Houston federal jury found that WesternGeco lost at least 10 contracts worth $6 million to $45 million each to ION-supplied competitors.

U.S. patent laws generally limit liability to making, using or selling a patented invention in the United States. The U.S. Court of Appeals for the Federal Circuit upheld the infringement finding and $22 million in royalties under Section 271(f). But the appellate court threw out the additional $93.4 million for lost profits, on the ground that those damages occurred beyond the United States.

On April 16, Clement quickly tried to take the case beyond the narrow confines of 271(f).

“There's no case of this court that applies the presumption [against extraterritoriality] to a damages provision,” he told the justices. “If I run over a French citizen on my way to court this morning, I can't say, well, I don't have to pay your hospital bills if they're incurred in France.”

But Breyer said patents are different, in part because U.S. courts tend to award much more than foreign jurisdictions. Suppose a European company manufactured a tiny part through a branch in North Carolina that turns out to infringe a U.S. patent. Under Clement's theory, now that “French or British or Spanish company must pay to that North Carolina firm its profits from billions of dollars of sales across the world.” Foreign countries might respond with similar rules, leading to “chaos or confusion.”

Clement argued that copyright law and general torts have no such bar on foreign damages, and they haven't caused international friction. “Unlike many of these court's cases, there are no foreign governments filing briefs here telling you, boy, would this be a problem if this happens,” he noted.

The point, he emphasized repeatedly, is “what would it take to put the [injured] party back in the position they were.”

Williams & Connolly partner Kannon Shanmugam began by pointing out the Supreme Court has said “the presumption against extraterritoriality applies with particular force to the Patent Act.”

But Justice Samuel Alito said Section 271(f) is explicitly focused on overseas infringement. “What sense does it make to say … we have to analyze the remedial provisions separately?” he said.

Shanmugam argued that Ion's act of supplying the infringing component occurred in the United States. WesternGeco is “converting a single act of supply from the United States into a springboard for what would effectively be worldwide damages,” he argued.

But that argument didn't seem to get traction with Justices Elena Kagan or Anthony Kennedy. “If there's a problem here,” Kagan said, “it's a problem about where you draw the causal line. It's not a problem about some categorical extraterritoriality rule.”

Shanmugam said that if the court were to head down that road, it should address the Federal Circuit's expansive rule of proximate cause.

“I don't know that proximate causation, at least under the existing state of the law … is going to provide much solace to companies like my client,” he said.

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Scott Graham focuses on intellectual property and the U.S. Court of Appeals for the Federal Circuit for ALM. He writes ALM's Skilled in the Art IP briefing. Contact Scott at [email protected].