Section 284 of the Patent Act provides that, upon finding infringement, “the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” Historically, recovery has been limited to damages within the United States. More recently, however, the scope of exposure for damages is testing traditional concepts and allowing patent owners to recover damages on worldwide sales that infringe U.S. patents.
Courts presume that federal statutes apply only within the territorial jurisdiction of the United States. This principle, commonly called the presumption against extraterritoriality, “rests on the commonsense notion that Congress generally legislates with domestic concerns in mind.” WesternGeco v. ION Geophysical, 138 S. Ct. 2129, 2136 (2018) (citations omitted). Doing so prevents “unintended clashes between our laws and those of other nations which could result in international discord.” Id. The Federal Circuit has adhered to this understanding, recently confirming that a plaintiff is not “entitled to compensatory damages for injury caused by infringing activity that occurred outside the territory of the United States.” Power Integrations v. Fairchild Semiconductor Int’l, 711 F.3d 1348, 1371 (Fed. Cir. 2013).
The established norm of territorial limitation is now in question in view of litigation making its way again through the courts. In a case now stretching 15 years, Power Integrations (Power) sued Fairchild Semiconductor (Fairchild) in 2004 for infringement of four Power patents. At trial, the jury was instructed on direct and induced infringement and returned a general verdict finding infringement, awarding Power approximately $34 million in worldwide damages. Power Integrations v. Fairchild Semiconductor Int’l, No. 04-1371-LPS (D. Del. Oct. 10, 2006). Post-trial, the court granted Fairchild’s motion for remittitur and reduced the jury’s award by approximately 82 percent, to around $6 million, the amount of damages Power incurred in the United States. Power Integrations v. Fairchild Semiconductor Int’l, No. 04-1371-LPS (D. Del. Dec. 12, 2008). On appeal, the Federal Circuit agreed with the reduction. Despite “having established one or more acts of direct infringement in the United States,” Power could not “recover damages for Fairchild’s worldwide sales of the patented invention,” even if “those foreign sales were the direct, foreseeable result of Fairchild’s domestic infringement.” Power Integrations, 711 F.3d at 1371. The Federal Circuit relied on established concepts that “the entirely extraterritorial production, use, or sale of an invention patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement.” Id. at 1371-72. The Federal Circuit nonetheless remanded for a new trial on damages for direct infringement alone because Power “adduced insufficient evidence of induced infringement to sustain the district court’s award of damages under that theory.” Id. at 1376.
Five years later, in an unrelated case, the Supreme Court in WesternGeco v. ION Geophysical held that §284 of the Patent Act permits the recovery of worldwide lost profits for infringement under §271(f)(2). 138 S. Ct. at 2133. Section 271(f)(2) addresses the act of exporting “any component of a patented invention that is especially made or especially adapted for use in the invention.” WesternGeco sued ION Geophysical for infringement under §§271(f)(1) and (f)(2). WesternGeco, 138 S. Ct. at 2135. WesternGeco claimed it was entitled to lost profits after “it lost lucrative foreign surveying contracts because ION’s customers used its invention overseas to steal that business.” Id. at 2139. At trial, ION was found liable, and the jury awarded damages of $12.5 million in royalties and $93.4 million in lost profits. Id. On appeal, the Federal Circuit, relying on its Power Integrations decision, reversed the lost-profits award, holding that §271(f) does not allow patent owners to recover for lost foreign sales. Id. at 2135. In a 7-2 decision written by Justice Thomas, the Supreme Court reversed the Federal Circuit, opening the door to a new source of damages recovery.
In reaching its decision on extraterritoriality, the Court applied a two-step framework. The first step asks “whether the presumption against extraterritoriality has been rebutted.” WesternGeco, 138 S. Ct. at 2136. The presumption can be rebutted only if the text provides a “clear indication of an extraterritorial application.” Id. If the presumption against extraterritoriality has not been rebutted, the second step asks “whether the case involves a domestic application of the statute.” Id. Courts make this determination by identifying the statute’s focus and asking “whether the conduct relevant to that focus occurred in United States territory.” Id. If the relevant conduct occurred in the United States, then the case involves a permissible domestic application of the statute. Id.
The Supreme Court decided extraterritoriality at step two. In doing so, the Court noted that the “overriding purpose of §284 is to afford patent owners complete compensation for infringements.” WesternGeco, 138 S. Ct. at 2137 (citations omitted). And because infringement was alleged under §271(f)(2), “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, 138 S. Ct. at 2138. Under this framework, the Court held that ION’s conduct “clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents.” Id. Thus, “the lost-profits damages that were awarded to WesternGeco were a domestic application of §284.” Id. In so holding, the Court noted that its analysis is limited to §271(f)(2); Id. at 2137 n.2; and further noted that its analysis did “not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.” Id. at 2139 n.3. In dissent, Justice Gorsuch aptly warned, especially given today’s tense international trading climate, that “[p]ermitting damages of this sort would effectively allow U. S. patent owners to use American courts to extend their monopolies to foreign markets. That, in turn, would invite other countries to use their own patent laws and courts to assert control over our economy.” WesternGeco, 138 S. Ct. at 2139.
The WesternGeco decision and its potential implications were immediately placed into action. The district court in the above mentioned Power Integration litigation, pending on remand, held that the Supreme Court’s decision “implicitly overruled the Federal Circuit’s Power Integrations opinion.” Power Integrations v. Fairchild Semiconductor Int’l, No. 04-1371-LPS at *2 (D. Del. Oct. 4, 2018). In doing so, Chief Judge Stark reasoned that “[t]he Supreme Court’s analysis of the patent damages statute, §284, has equal applicability to the direct infringement allegations pending here, as governed by §271(a), as it did to the supplying a component infringement claims at issue in [WesternGeco], which were governed by §271(f)(2).” Id. at 2-3. According to Judge Stark, “Section 271(a) vindicates domestic interests no less than Section 271(f).” Id. at 2. The court thus held that the trial on remand “will permit Power to seek recovery of worldwide damages.” Id. at 4. On motion, Judge Stark certified the issue for interlocutory appeal to the Federal Circuit. Id. The Federal Circuit recently agreed to hear the appeal on “whether WesternGeco v. ION Geophysical, 138 S. Ct. 2129 (2018), implicitly overruled [Power Integrations v. Fairchild Semiconductor Int’l, 711 F.3d 1348 (Fed. Cir. 2013).]” Power Integrations v. Fairchild Semiconductor Int’l, No. 2019-102 at *3 (Fed. Cir. Dec. 3, 2018).
The highly anticipated Federal Circuit decision may have broad ramifications. If the district court decision is affirmed, patent litigation and the damages landscape could be fundamentally altered. Indeed, the costs of patent litigation could explode. For example, rather than the customary U.S. discovery rules, multinational litigants would be faced with navigating and litigating discovery rules in foreign countries that are often much less permissive than those in the United States. The need and use of patent damages experts would likely increase, further raising costs. From a practical perspective, determining a reasonable royalty rate could be much more complicated, as there could be economic and other factors that would impact hypothetical negotiations not present in traditional U.S.-based negotiations. On the other hand, by including foreign sales as a basis for damages in a pre-suit cease and desist letter or when pleading worldwide damages, accused infringers might be more inclined to resolve disputes early to avoid litigation and opening their worldwide structure to litigation in the U.S. court system. As shown by Power Integration, including worldwide profits significantly increased the damages award by approximately 82 percent and $28 million.
The full implications of the Supreme Court’s WesternGeco decision are still unclear. Nevertheless, as expected, multinational defendants are advocating for a narrow reading of the case, whereas patentee plaintiffs are advocating for an expansive reading. The Federal Circuit will surely help shape the debate, and, given the importance of this issue, especially in the wake of WesternGeco, it is plausible that the Supreme Court would again be asked to consider the scope of patent damages in a future term.
Tryn T. Stimart is a director and Jean E. Dassie is an associate in the Gibbons P.C. intellectual property department in New York.