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June 26, 2018

Foreign Lost Profits Are Not Lost After All

By Lora A. Brzezynski, Francis DiGiovanni and Thatcher A. Rahmeier

The United States Supreme Court ruled last week in WesternGeco LLC v. ION Geophysical Corp. that—in certain circumstances—a patent owner can recover “lost foreign profits” under 35 U.S.C. § 284. In doing so, the Court reversed the Federal Circuit’s decision that relied on the presumption against extraterritoriality to preclude such an award of damages.

The plaintiff (and petitioner) in the case, patent owner WesternGeco, owns patents relating to a system for surveying the ocean floor. WesternGeco practices its patents by performing surveys for oil and gas companies and does not sell or license its technology to others. Accused infringer ION sold a competing system, the components of which it manufactured in the United States and then shipped to customers abroad. Those customers then combined the components to create a system “indistinguishable from WesternGeco’s and used the system to compete with WesternGeco.” The trial court found ION liable for patent infringement under 35 U.S.C. § 271(f)(2), which provides that a company can be liable for patent infringement if it ships components of a patented invention overseas to be assembled there. The trial court awarded WesternGeco damages of $12.5 million in royalties and a further $93.4 million in “lost foreign profits”—profits that WesternGeco would have earned had ION not used WesternGeco’s invention overseas to win lucrative surveying contracts. On appeal, the Federal Circuit upheld the award of royalty damages but reversed the award of lost profits.

The issue presented to the Supreme Court was whether a company liable for patent infringement under 35 U.S.C. § 271(f)(2) may be accountable for damages that include a patent owner’s “lost foreign profits.” In its 7-2 decision, the Supreme Court held, with the majority opinion written by Justice Thomas, that “WesternGeco’s damages award for lost profits was a permissible domestic application of § 284.”

The Court addressed the presumption against extraterritoriality that was central to the Federal Circuit’s decision reversing the trial court’s lost profits damages award. The Court began its analysis with 35 U.S.C. § 284, which provides that “the court shall award the claimant damages adequate to compensate for the infringement,” and concluded that “the infringement” is the focus of this statute. The Court next turned to § 271(f)(2), which was the basis for WesternGeco’s infringement claim and the lost-profits damages that it was awarded. The Court explained that § 271(f)(2) “focuses on domestic conduct”—the act of exporting components from the United States. As such, the Court concluded that “the lost-profits damages that were awarded to WesternGeco were a domestic application of § 284.” Taken together, § 271(f)(2) and § 284 “allow the patent owner to recover lost foreign profits” because such damages “plac[e] [the patent owner] in as good a position as he would have been in” if the patent had not been infringed. Such damages are therefore adequate to provide complete compensation for “the infringement” under the statute.

Justice Gorsuch, joined by Justice Breyer, issued a dissenting opinion. The dissent agreed that “WesternGeco’s lost profits claim does not offend the judicially created presumption against the extraterritorial application of statutes,” but argued that the Federal Circuit “reached the right result in concluding that the Patent Act forecloses WesternGeco’s claim for lost profits.” In short, the dissent reasoned that “damages adequate to compensate for the infringement” should not include “damages for harm from noninfringing uses.” The dissent reasoned that recovery of “lost foreign profits” would effectively compensate patent owners for activities that do not infringe under the statute, such as sales or uses made entirely outside the United States.

Implications – An Expansion of Damages Liability in Competitor Cases

WesternGeco has broad implications, and could expand potential recovery of lost profit damages for infringement claims under every subsection of 35 U.S.C. § 271(a)-(g). In any case where infringement is proven under one of these provisions, worldwide lost profits may be implicated in the compensation analysis. Of course, the other legal requirements for a lost profits claim would still have to be met, including “but-for” causation and the factors enumerated in Panduit Corp. v. Stahlin Brothers Fiber Works, Inc., 575 F.2d 1152 (6th Cir 1978). A patent owner will have to prove that a sale abroad was actually lost due to the infringement, i.e., that the patent owner would have actually made the sale and suffered lost profits.

An illustrative application of WesternGeco includes when infringing products made in the United States are exported. The making of those products would also be domestic conduct (e.g., infringement under 35 U.S.C. § 271(a)), and complete compensation (including worldwide lost profits) from that conduct should be allowed under § 284, without regard to whether the lost profits are based on sales that were lost outside the United States.

Litigation over the applicability of WesternGeco will likely be a major battleground for accused infringers when a patent owner asserts that it lost foreign sales due to domestic patent infringement. In competitor cases with global reach, it appears that the Court has opened the door for expanded lost profit liability. Global companies should be aware of this additional potential exposure and recovery potential.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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