In a long-awaited decision, the United States Supreme Court on Friday held that WesternGeco is entitled to lost profits resulting from the infringing export from the U.S. of components of a patented system assembled and sold outside of the United States. This 7-2 decision, WesternGeco LLC v. ION Geophysical Corp. (June 22, 2018), reversed the Federal Circuit’s finding that WesternGeco was not entitled to profits lost outside of the U.S.
WesternGeco owns four patents directed to systems for surveying the ocean floor using a lateral-steering technology that purportedly produces higher quality data than prior surveying systems. In 2007, ION Geophysical Corp. began manufacturing components for its competing surveying system in the U.S. and shipping the components to companies abroad. The foreign companies then assembled the ION components to create a surveying system that was essentially the same as WesternGeco’s patented system. After WesternGeco lost a number of survey contracts outside of the U.S. to these foreign companies, it sued ION for patent infringement under Sections 271(f)(1) and (f)(2). At trial, the jury found ION liable for infringement and awarded WesternGeco damages over $12 million in royalties and over $93 million in lost profits. ION filed an unsuccessful post-trial motion to set aside the verdict, arguing that WesternGeco could not recover damages for lost profits because Section 271(f) does not apply extraterritorially.
On appeal the first time around, the Federal Circuit reversed the award of lost profits and held that Section 271(f) should be interpreted in the same manner as the direct infringement provision (Section 271(a)), which does not allow patent owners to recover for lost foreign sales. WesternGeco petitioned for certiorari in February 2016, after the oral arguments in Halo Electronics v. Pulse Electronics had been heard. The Supreme Court remanded the matter to the Federal Circuit for further consideration in light of Halo. The Federal Circuit again held that awarding damages for lost foreign sales would be an extraterritorial application of Section 271(f).
The High Court’s Decision
Once the appeal was before the Supreme Court again, it reversed the Federal Circuit and reinstated the lost profits damages award. While the majority acknowledged that federal statutes are indeed presumed to “apply only within the territorial jurisdiction of the United States,” the Supreme Court held that, since the infringing act occurred in the U.S., it was not an extraterritorial application of U.S. patent laws to award lost profits that directly resulted from the infringing act.
Justice Thomas, writing for the majority, explained that the application of the extraterritoriality framework depends on the specific statute’s “focus” and whether the conduct relevant to that focus occurred in United States territory. The Supreme Court determined that the focus of Section 284, which provides “damages adequate to compensate for the infringement,” is “the infringement.” In this case, Section 271(f)(2) was the basis for WesternGeco’s infringement claim and the lost-profits damages. Since Section 271(f)(2) regulates the domestic act of supplying components from the United States, and ION’s infringing conduct occurred in the United States, the majority held that the awarded lost-profits damages were a permissible domestic application of Section 284.
There is no question that the Supreme Court’s decision is a significant development in the extraterritorial application of U.S. patent laws. With the scope of damages available for infringement under Section 271(f) now arguably expanded, a patent owner’s arsenal has been fortified by allowing for recovery of profits lost overseas if the infringing product/system was assembled from components of the patented invention exported from the U.S. The decision also greatly impacts U.S. suppliers of components that will be assembled abroad into infringing articles. In short, even though an infringing product/system is not sold or offered in the U.S. and there is no foreign patent protection to prevent sales or use of the product/system in countries outside of the U.S., these suppliers can be liable for the full value of sales lost outside of the U.S. if they are exporting a component ultimately used in a foreign product/system covered by a U.S. patent.
However, it is important to note that WesternGeco does not license its patented technology, but instead uses the technology itself. As such, it remains an open question as to whether the Supreme Court’s decision will broadly apply to the recovery of not only foreign lost profits but also to foreign reasonable royalties. The answer to this question will be especially relevant for companies that do not themselves practice their patented inventions but instead license them to others.
It is also unclear as to whether foreign lost profits are available under a direct infringement theory. While Federal Circuit precedent indicates that overseas lost profits are not available under Section 271(a), which makes it an act of infringement to make, use, offer to sell, or sell a patented invention within the United States, this is likely an area that will be tested in the future.
Finally, it will be interesting to see how ION’s next anticipated steps, as articulated by its president and CEO in a recent article, are received by the Federal Circuit. In particular, ION has stated that it will now revive its previously submitted alternative argument that it is not a direct competitor of WesternGeco, and thus, as instructed, the jury could not have properly awarded lost profits to WesternGeco. We will have to stay tuned to see how the next chapter in this dispute unfolds.