High Court: Patent Owners May Flex Their Reach on Lost Profits Beyond U.S. Borders – WesternGeco v. ION (2018)

Ruling

The United States Supreme Court on June 22, held that patent owners can recover certain profits lost outside the U.S. If an infringing product or a component of such product is made in the U.S. and shipped overseas to be assembled into an infringing product, the infringer can be liable for damages that occur outside the U.S. Justice Clarence Thomas wrote the opinion for the majority.

In a 7-2 decision, the Court reversed the Federal Circuit. Justices Neil Gorsuch and Stephen Breyer dissented warning that such a ruling may allow U.S. patent owners to use American courts to extend their monopolies to foreign markets.

What This Ruling Means

Patent law is generally territorial. It prevents unauthorized manufacture, use, or sell or importation of patented invention in U.S., and awards “damages adequate to compensate for the infringement” in the forms of lost profits and/or reasonable royalty. 35 U.S.C. § 284. But if any component of a patented invention is supplied from the U.S. to oversees for final assembly, §271(f)(2) gives patent owner an opportunity to recover damages based on the export of that component. In this situation, a potential infringer and the foreign business partners faces considerable liability for damages even when only a component of the invention is shipped from the U.S.

In the present case, the High Court found ION Geophysical Corp. (“ION”) liable not only for a royalty on the component of the patented invention but also for WesternGeco LLC’s (“WesternGeco”) lost foreign profits. It means that WesternGeco can seek from ION the jury award of $93 million lost profits and $12.5 million royalty.

However, during the course of this court battle, the Patent Trial and Appeal Board (PTAB) found three out of the four WesternGeco patents invalid and Federal Circuit upheld those determinations. Therefore, the total damages award to WesternGeco may be reduced.

How the Ruling May Impact Your Business

This decision has a narrow, but a significant impact. While the ruling does not permit omnibus patent infringement liability for all foreign conducts, it narrowly extends the reach of U.S. Patent laws to conducts abroad for supplying invention or part therefore from the U.S. to abroad. It could raise the stakes not only for companies operating in the U.S., but also for their business partners around the globe. The ruling does not affect situations where the infringing component was manufactured abroad and supplied abroad. The Court also expressly declined to address the issue of proximate causality, required to prove damages. This carve out could also limit or preclude damages.

The Court emphasized that damages awards should put patent owners in the same position they would be absent the infringement. That reasoning could apply in other patent cases and patent owners are expected to cite this decision to argue they should be awarded foreign lost profits in other foreign infringement situations. An important idea to remember is that while the holding is narrow, the reasoning could be applied more broadly.

For example, the damages awards in many foreign jurisdiction is far less generous than those available in U.S. Therefore, U.S. patent owners with corresponding foreign patents could leverage the U.S. patent rights in U.S. courts, even though the relief may be available more expeditiously in foreign jurisdiction.

Patent owners, whose foreign patents may have expired or who do not have foreign counterparts to their U.S. patents, could nonetheless recover damages for an infringer’s conducts abroad.

Often times, U.S. and foreign rights may be held by different entities, e.g., through divestitures. In this situation, two entities could sue for damages based on the same conduct abroad, and the alleged infringer could be required to pay damages to two entities.

Because of the enhanced damages, generally accused infringers would likely capitulate and reach a settlement quicker, even when there may be a good chance to win on the merits.

This ruling may stifle innovation in U.S. because the threat of damages for conduct abroad may discourage potential inventors and innovators from conducting research activity in the U.S.

Many multinational companies that conduct collaborative research and development work around the globe, e.g., pharmaceutical, software, medical device, electronics companies, face greater liability under this ruling. Therefore, some of these companies may relocate all U.S. activities to some of their international locations taking with them U.S. jobs.

And finally, there is a possibility that other nations could pass laws and adopt reciprocal and retaliatory measures against U.S. companies.

Procedural History

WesternGeco’s patents relate to systems for scanning the ocean floor for oil and gas deposits (U.S. Patent Nos. 6,691,038; 7,080,607; 7,162,967; and 7,293,520). WesternGeco L.L.C. v. ION Geophysical Corp., 837 F.3d 1358, 1360 (Fed. Cir. 2016) rev’d sub nom. No. 16-1011, 2018 WL 3073503 (U.S. June 22, 2018). In particular, these patents relate to a lateral steering, which allows surveyors to control the lateral movements of the streaming sensors, rather than simply pulling them behind the ship. WesternGeco is a subsidiary of Schlumberger. ION is a competitor based out of Texas.

Around 2007, ION began shipping abroad components called the DigiFIN, which positions these streamer sensors and lateral controllers from its warehouse in Louisiana. The foreign companies then combined the components and developed a competing surveying system. WesternGeco sued ION for patent infringement and a Texas jury awarded $93 million lost profits and $12.5 million royalty to WesternGeco. Id.

The Federal Circuit agreed that ION was liable for infringement but was divided (2-1) on the issue of remedies. The majority reversed the lost profits award relying on the presumption against extraterritorial reach of patent law and noting that the services were to be performed in high seas, outside the jurisdictional reaches of the US patent law. WesternGeco v. ION Geophysical, 791 F.3d 1340, 1349 (Fed. Cir. 2015). The petition for rehearing en banc was denied. WesternGeco petitioned for certiorari. The Court granted, vacating the Federal Circuit ruling and remanded, following its decisions in Electronics, Inc. v. Pulse Electronics, Inc., (No. 14-1513) and Stryker Corp. v. Zimmer, (No. 14-1520). WesternGeco LLC v. ION Geophysical Corp., 136 S.Ct. 2486 (2016). On remand, Federal Circuit majority affirmed the ruling but only focused on the issue of enhanced damages. WesternGeco, 837 F.3d at 1364. WesternGeco repetitioned for certiorari.

In the present ruling, the Court sidestepped the presumption against extraterritoriality, focusing on the domestic nature of the infringement under § 271(f)(2) which pertains to the domestic act of supplying components of a patented invention from the U.S. to be combined abroad.

The Court summarized its holding as the focus of § 284, “in a case involving infringement under §271(f)(2), is on the act of exporting components from the United States.” WesternGeco, 2018 WL 3073503, at *1. The Court noted that the relevant conduct was ION’s domestic act of supplying the components that infringed WesternGeco’s patents. Id. at *5. Thus, the lost-profits damages that were awarded to WesternGeco were a domestic application of § 284.

The Court expressly declined to address the issue of proximate causality. Id. at *6, n.3. (In reaching this holding, we do not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.”).

Separately, three of the four patents at issue (U.S. Patent Nos. 7,080,607; 7,162,967; and 7,293,520) have been held invalid by PTAB and these determinations have been affirmed by the Federal Circuit. WesternGeco LLC v. ION Geophysical Corp., 889 F.3d 1308, 1313 (Fed. Cir. 2018).

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