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07 May 2018
On April 16 2018 the Supreme Court heard oral argument in WesternGeco LLC v ION Geophysical Corp 16-1011. Its decision will determine whether US patentees can recover lost profits damages arising under 35 USC Section 271(f) for certain activities occurring outside the United States.
Under 35 USC Sections 271(f)(1) and (2) patent infringement liability is imposed on a party which supplies components from the United States, the combination of which outside the United States would infringe a patent had the combination occurred within the United States:
In 2009 WesternGeco sued ION in the Southern District of Texas under Sections 271(f)(1) and (2) for infringement of patents for marine survey systems that are used to search for oil and gas under the ocean floor. The patented systems comprise an array of 'streamers' (ie, long floating cables filled with sensors) that can be steered laterally to maintain their spacing and to prevent them from tangling when being pulled behind a boat. ION created a product, DigiFIN, which helps to control the steering of streamers; it sold a number of DigiFINs to foreign entities which used them to perform surveys. After trial, a jury found that ION had infringed WesternGeco's patents under Section 271(f)(2), and awarded WesternGeco $12.5 million in reasonable royalties and $93.4 million in lost profits. The reasonable royalties were based on ION's supply of DigiFINs from the United States, while the lost profits represented the value of 10 survey contracts awarded to foreign entities that, according to the jury, would have been awarded to WesternGeco but for ION's infringement. ION appealed.
On appeal, the Federal Circuit held that the Patent Act does not permit the recovery of lost profits in view of the presumption against extraterritoriality (ie, that "patent law operates only domestically and does not extend to foreign activities" – Microsoft Corp v AT&T Corp, 550 US 437, 454-455 (2007)). The Federal Circuit reasoned that WesternGeco had already been compensated in the form of reasonable royalties for each DigiFIN supplied from the United States and that damages could not be recovered for survey contracts which were negotiated and performed by foreign entities entirely outside the United States.
WesternGeco petitioned for certiorari on the matter of its lost profits in February 17 2017. The Supreme Court granted certiorari on January 12 2018.
In its Supreme Court briefs, WesternGeco argued that:
ION countered that:
The government filed an amicus brief asserting that WesternGeco should be able to recover all lost profits proximately caused by ION's domestic infringement. On April 13 2018 the Supreme Court granted leave for the government to participate in oral argument.
At the April 16 2018 oral argument, Paul D Clement argued on behalf of WesternGeco, Zachary D Tripp argued on behalf of the government and Kannon K Shanmugam argued on behalf of ION.
Clement began by reiterating WesternGeco's positions that Section 271(f) targets domestic conduct, that the presumption against extraterritoriality should not apply to damages arising under Section 271(f) and that patentees should be permitted to recover lost profits damages for the foreseeable consequences of a domestic act of infringement.
Justice Gorsuch expressed scepticism over allowing a patentee to collect lost profits damages for activities that took place on the "high seas" and for "a third party's use over which you have no lawful monopoly". He asked Clement to identify a case in which the court had awarded patent damages for foreign sales. Clement cited Goulds Mfg Co v Cowing (105 US 253 (1881)), but Gorsuch noted that the case did not substantively address the issue.
Justice Breyer told Clement that he had an excellent case, but noted that the case law was not "in [Clement's] favor 100 percent"; he echoed ION's concerns over international comity, observing that "if we can have a law like this, so can every other country… I mean, suppose 10 countries do this. I try to think about that and I see chaos or confusion". Clement noted that US copyright law permits recovery for overseas infringement and "the world hasn't ended in the copyright context". Clement also observed that an injunctive remedy prohibiting the supply of domestic components to foreign entities – which ION conceded was available – would obviate the need for damages arising from foreign combinations. Clement further noted that no foreign government had filed amicus briefs in this case, raising similar comity concerns.
Gorsuch asked Clement to identify what text from Section 271(f) permitted a patentee to treat "use on the high seas… as if it took place in Lake Michigan". Clement asserted that, notwithstanding that the infringing combination may have taken place in a foreign jurisdiction, Section 271(f) effectively provides for "contributory constructive infringement" and states that "we're supposed to treat the domestic infringer just like they induced a domestic act of infringement".
Lastly, in response to Justice Ginsburg's questions, Clement acknowledged that, in order to recover lost profits damages under Section 271(f), a patentee must prove that such damages were proximately caused by the defendants' infringement – though Clement noted that under Section 271(f) "it's going to be very easy to show damages that are reasonably foreseeable from the foreign combination because, in order to be liable at all, you have to intend or induce that very foreign combination".
Tripp began by asserting that the Patent Act provides for damages "that are adequate to compensate for the infringement, not damages that leave the victim worse off than it would have been if the infringement had never occurred" and that:
"[t]he rule that we're advocating of full compensation is already the rule that applies basically everywhere else in U.S. law, in tort, in contract, in copyright, that this Court previously assumed applied in patent law as well, and it hasn't given rise to any significant foreign relations problems in—in any of those areas."
Breyer again raised the concern that foreign countries could establish reciprocal laws that would subject US actors who contribute only a small part of a patent combination to significant damages abroad. Tripp noted that Section 271(f) imposes liability only on those who supply a substantial portion of the combination and do so with intent, and that the doctrines of causation-in-fact and proximate cause would provide additional checks against excessive damages awards in such scenarios. In connection with those causation doctrines, Tripp asked the Supreme Court to reject "the ham-handed rule that basically, as soon as you get across the international border, the causal chain is automatically severed, no matter what, no matter how clear the causal link is".
Justice Kagan asked Tripp to explain why the government did not adopt WesternGeco's arguments focusing on Section 271(f). Tripp explained that the government was seeking a full compensation rule throughout the Patent Act, "not just in rare cases that come up under 271(f)".
Justice Alito noted that "what makes this case difficult" is the "ephemeral" gap between the legal injury and the "practical injury, which occurs completely abroad". Tripp responded by noting that "it's quite common to hold a tortfeasor responsible for the harm that it causes when it sets into motion a series of events by which the victim… will be hurt, even if they're not hurt at the time".
Shanmugam began by asserting that that the presumption against extraterritoriality "applies with particular force to the Patent Act" and that Section 284, the damages provision of the Patent Act, has no extraterritorial reach.
Justice Kennedy asked Shanmugam whether WesternGeco could recover lost profits if, instead of conducting marine survey operations itself, it simply sold devices to foreign entities in competition with ION. Shanmugam answered that, in that hypothetical situation, WesternGeco would be entitled to recover lost profits "because the situs of the injury in that circumstance would be the United States". Shanmugam asserted that, in contrast, the survey contracts at issue were not entered into in the United States and that the infringing sales which took place in the United States were adequately compensated by reasonable royalty damages.
Justice Sotomayor pushed back, asking:
"[s]ince this company didn't sell its products, it only used them, why should it only get the value of royalty, since that's not its business? Its business was to sell… its services, your point, abroad or anywhere in the world where it could."
Shanmugam attempted to argue that the reasonable royalty calculation would have included the "commercial value of the component that's being supplied from the United States", including its "expected foreign use".
Alito asked Shanmugam rhetorically whether:
"if you have a liability provision that says there is liability for acts that are committed abroad, what sense does it make to say, well, although Congress thinks there should be liability for these acts committed abroad, we have to analyze… the remedial provisions separately to see whether they wanted any remedy for these acts that are committed abroad… Why does that make any sense whatsoever?"
Breyer again raised concerns over the effects that a ruling in WesternGeco's favour would have on international comity. Shanmugam agreed, in particular regarding the consequence of "converting a single act of supply from the United States into a springboard for what would effectively be worldwide damages".
Kennedy asked Shanmugam, "[y]our whole position is that this Petitioner is not entitled to full compensation for his injury, yes or no?" Shanmugam responded that WesternGeco was not entitled to full compensation, because "everything relevant after the initial act of infringement took place abroad". Ginsburg asked, "[i]sn't that exactly how the copyright law is applied under the so-called predicate act doctrine?" Shanmugam countered by explaining that the predicate act doctrine permits recovery of an infringer's profits, but that neither copyright law nor patent law permits "the sort of lost profits that are at issue here".
Kagan observed that "if there's a problem here, it's a problem about where you draw the causal line. It's not a problem about some categorical extraterritoriality rule". When Shanmugam tried to assert that causation was not necessarily the solution to the problem, Breyer countered that "the damages here are pretty closely related, I think".
While predicting the decisions of the Supreme Court based on oral argument is never easy, it appears that the justices who asked questions tended to favour the positions of WesternGeco and the government over those of ION. Several of the justices appeared sympathetic to the argument that reasonable royalties were not sufficient to compensate WesternGeco fully for ION's infringement and that the application of proximate cause would be sufficient to limit the risk of excessive damages awards and mitigate any potential harm to international comity.
For further information on this topic please contact Christopher Loh at Fitzpatrick, Cella, Harper & Scinto by telephone (+1 212 218 2100) or email (firstname.lastname@example.org). The Fitzpatrick, Cella, Harper & Scinto website can be accessed at www.fitzpatrickcella.com.
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