Foreign Lost Profits Recoverable for Patent Damages

Judge Wallach dissented, arguing that the majority improperly focused on whether foreign activity created liability; instead, the question should be whether the foreign activity could be considered when calculating damages “given a finding of liability.” WesternGeco I, 791 F.3d at 1361 (Wallach, J., dissenting). The case went to the Supreme Court, and came right back to the Federal Circuit for consideration in light of the recent Halo Electronics decision on willfulness. See, Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923, 579 US __ (2016). On remand, the Federal Circuit reinstated the portion of its previous opinion regarding damages, and Judge Wallach again dissented. WesternGeco, LLC v. Ion Geophysical Corp., 837 F.3d 1358, 1361 (Fed. Cir. 2016) (WesternGeco II); id. at 1364–69 (Wallach, J., dissenting). She again focused on liability versus damages, explaining that “[i]t is of course uncontroversial that patentees are not entitled to lost profits resulting from foreign uses of a patented invention,” but that as they are entitled to “lost profits resulting from infringement under the law of the United States,” the court needed to address when activity abroad “may be considered in calculating damages flowing from” such infringement. Id.at 1365–66 (Wallach, J., dissenting).

The Supreme Court Announces Foreign Lost Profits May Be Available

The Supreme Court granted certiorari a second time to address the issue of damages and extraterritoriality. In a 7–2 decision, it held that damages under §284 “can include lost foreign profits when the patent owner proves infringement under §271(f)(2).” WesternGeco, 138 S. Ct. at 2139.

The majority acknowledged the general presumption that a federal statute apply only within the territorial jurisdiction of the United States. The Court has a two-step framework for determining whether this presumption against extraterritoriality applies: 1) asking if the presumption is rebutted by a “clear indication of an extraterritorial application” in the text of the relevant statute; and 2) asking whether the case involves a permissible domestic application of the statute by examining the statute's “focus” and the location of the relevant conduct. Id. at 2136. Because it determined that resolving the first step would implicate numerous statutes not at issue in the case, and could have far-reaching unintended consequences, the Court opted to skip step one.

The general patent damages statute, 35 U.S.C. §284, provides a remedy for “the infringement”. Under the second step of its extraterritoriality framework, the Court found that the focus of that statute is “the infringement.” Here, §284 is concerned with the conduct giving rise to ION's infringement under §271(f)(2) — that is, the act of exporting certain components with the intent that they be combined extraterritorially “in a manner that would infringe the patent if such combination occurred within the United States.” That act, the Court explained, is a domestic act: “suppl[ying] in or from the United States.” Because the conduct giving rise to liability under §271(f)(2) occurred in the United States, it found that the award of lost foreign profits for that conduct was a permissible domestic application of §284.

Predictions of Monopolistic Consequences

Judge Gorsuch authored a dissent, joined by Justice Breyer, envisioning a dramatic expansion of United States patent law stemming from the majority's holding. The dissent warned that allowing §271(f)(2) to “protect” against foreign uses would make a party who supplied a single infringing product from the United States “responsible for any foreseeable harm its customers cause by using the product to compete against [the patentee] worldwide.” Id. at 2142. The dissent was concerned that allowing recovery of lost profits for uses abroad would “effectively giv[e] the patent owner a monopoly over foreign markets through its U.S. patent.” Id. Reaching further, the dissent described a scenario where foreign courts awarded damages for U.S. companies' production and sale of products within the United States based on infringement of foreign patents in a foreign country, creating foreign monopoly and control over U.S. markets.

In response, the majority stated that the dissent “wrongly conflate[d] legal injury with the damages arising from that injury.” Id. at 1238. Although the majority explained that patent owners are allowed, under §284, to recover lost foreign profits as part of compensation adequate to place the patent owner “in as good a position as he would have been in” had the patent not been infringed, it chose not to address the degree of connection required between the foreign profits and the infringing acts. It noted that “other doctrines, such as proximate cause, could limit or preclude damages in particular cases.” Id. at 2139 n.3.

Practice Note

As the Federal Circuit found infringement under §271(f)(2), but did not address §271(f)(1), the Supreme Court limited its opinion to infringement under that particular clause. However, the reasoning used by the Court is readily applicable to other provisions of §271. As with §271(f)(2), the conduct giving rise to liability under §271(f)(1) is “suppl[ying] in or from the United States,” which the Court found to be a domestic act. Many of the acts that may give rise to liability under §§271(a)–(c) are explicitly domestic: making, using, offering to sell, or selling within the United States. District courts are likely to face a variety of arguments as patentees explore entitlement to lost profits or other damages from foreign sales and uses where any part of the infringing activity can be tied to the United States. Although arguments based on foreseeability and proximate cause may limit damages awarded, defendants will no longer be able to rely on a blanket prohibition against foreign damages to avoid producing data on sales outside of the United States during discovery.

While the Supreme Court's decision will be eagerly embraced by patent owners, for companies with innovation centers or development activities in the United States and overseas distribution, it could give rise to a massively increased damages risk assessment. As the boundaries of foreign damages are explored by the lower courts, such companies may be incentivized to move all manufacturing, and possibly all development activities, out of the United States.

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Elizabeth B. Hagan, Ph.D. is an associate at Fenwick & West LLP's Seattle office. She focuses her practice on patent litigation matters for clients in the life sciences and technology industries. She can be reached at [email protected].