Lawrence Ashery of Caesar, Rivise, Bernstein, Cohen & Pokotilow. Lawrence Ashery of Caesar, Rivise, Bernstein, Cohen & Pokotilow.

The U.S. Supreme Court has rarely addressed the issue of patent damages, but a case currently before the court has the potential to create significant changes in this area of the law.

The issue of contention pertains to patent damages on an international scale. When a U.S. patent is infringed, it is because the act of infringement occurred … well … in the United States. Awarding damages in the United States—for a U.S. patent infringed in the United States—is obvious. But what about foreign damages that result from infringement of a U.S. patent in the United States? If the infringement occurs in the United States, then should the infringer also be responsible for the U.S. patent holder’s overseas lost profits?

The case is WesternGeco v. ION Geophysical, No. 16-1011, and the U.S. Supreme Court heard oral argument earlier this month. If the court rules that foreign damages are indeed available to U.S. patent holders with infringed U.S. patents, future recoveries may be astronomical.

The patents in suit relate to technology for searching the ocean floor for gas and oil. An amicus brief that was filed by the solicitor general provides helpful background information: “When conducting a marine seismic survey, a ship typically tows an array of sensors attached to cables, called ‘streamers,’ that detect sound waves reflected off the ocean floor … The information obtained is used to create maps of the subsurface geology … WesternGeco’s patents cover a system for controlling the movement of the streamers in a manner that produces more efficient surveys and higher-quality data. WesternGeco manufacturers the patented system domestically, and performs seismic surveys in international waters using its patented system.”

ION manufactures in the United States a device that steers streamers during the same seismic survey process performed by WesternGeco. WesternGeco sued ION for infringement of its U.S. patents and won. In addition to a royalties award, the jury awarded WesternGeco $93.4 million in profits lost outside the United States. The U.S. Court of Appeals for the Federal Circuit affirmed the royalties award, but reversed the lost profits award because the profits would have been obtained from surveys “on the high seas, outside the jurisdictional reach of U.S. patent law … .” A petition for writ of certiorari was granted to decide the issue of whether profits lost outside the United States could be awarded on the basis of infringement of a U.S. patent in the United States.

The law on foreign damages has been subject to significant changes over the past few years. In 1972, the U.S. Supreme Court held that patent infringement does not occur when parts of a patented invention were manufactured in the United States and assembled overseas (Deepsouth Packing v. Laitram, 406 U.S. 518 (1972)). Congress statutorily overruled Deepsouth by enacting 35 U.S.C. 271(f). Paragraph 1 of 271(f) defines infringement as having occurred when “in or from the United States all or a substantial portion of the components of a patented invention [are supplied] … in such manner as to actively induce the combination of such components outside of the United States.” Paragraph 2 of 271(f) states that there is infringement when “in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, … intending that such component will be combined outside of the United States.”

35 U.S.C. 271(f) does not describe foreign lost profits, per se, but in its brief to the U.S. Supreme Court, WesternGeco argued that the recovery of foreign lost profits is indeed encompassed by the statute: “In enacting Section 271(f), Congress focused its attention on transnational transactions and identified a specific form of domestic conduct that constituted infringement if it occurred with an intent to facilitate foreign combinations. When the intended combinations in fact occur, Congress wanted to supply a remedy and plainly contemplated that damages would be inflicted by foreign combinations and lost sales abroad. That inescapable conclusion is reinforced by the fact that Congress was acting to close a loophole created by this court’s decision in Deepsouth, which caused a patent holder to be undercompensated when components were exported for combination abroad. To find the presumption unsatisfied by Congress’ deliberate effort to close that loophole is to defy Congress’ will.”

ION, in its brief to the U.S. Supreme Court, argued that the damage award WesternGeco seeks is “intolerable as a matter of policy”: “Petitioner’s rule would transform any domestic act of infringement into a springboard for worldwide patent damages, and thereby expose companies with design operations in the United States to staggering awards. As this court has recognized, competing views of appropriate remedies are a major source of international tension. Given the outsized awards available in the United States for patent infringement, petitioner’s rule has grave implications for international comity. And while petitioner suggests that causation principles offer a meaningful limit, juries are not equipped to consider the comity implications of the damages they award. In short, this is the paradigmatic situation in which the presumption against extraterritoriality should be applied.”

The amicus brief filed by the solicitor general (at the court’s request) took a position strongly in favor of WesternGeco: “The general common-law rule for compensatory damages is that an “injured party is to be placed, as near as may be, in the situation he would have occupied if the wrong had not been committed,” citing Wicker v. Hoppock, 73 U.S. (6 Wall.) 94, 99 (1867). “Accordingly, damages for infringement may include lost profits that the patentee would have earned absent the defendant’s infringing conduct,” see Aro Manufacturing v. Convertible Top Replacement, 377 U.S. 476, 507 (1964).

Last week, in oral argument, attorneys for both parties received aggressive questioning of their respective positions. Justice Neil Gorsuch stated to WesternGeco’s attorney, “You don’t have a … lawful monopoly, to use this technology abroad. That doesn’t belong to you. That’s outside the patent laws.” “So why,” he asked, ”would you get lost profits … because of a third party’s use entirely abroad?” WesternGeco’s attorney responded that his client was “not collecting damages for the combination [that resulted in domestic patent infringement] itself. What we’re doing is we are collecting damages for the foreseeable consequences of the domestic act of infringement.” On the other hand, Justice Anthony Kennedy asked ION’s attorney, “Your position is that the petitioner is not entitled to full compensation for its injury? That’s your position?” ION’s attorney responded that “Yes, as a consequence of the application of the presumption against extraterritoriality [that is our position].”

If the court rules in favor of WesternGeco, the door could potentially be opened to huge damage awards for overseas lost profits. The opinion of the court is anticipated with great interest.

Lawrence E. Ashery is a partner in the Philadelphia office of Caesar Rivise. He focuses his practice on all aspects of intellectual property law. He can be reached at lashery@crbcp.com.