An End To Systematically Undercompensating US Patentees?

Daniel McDonald - Law360
December 20, 2017

UPDATE: On January 12, 2018, the U.S. Supreme Court agreed to review this case over lost profits damages. This is another step toward the Supreme Court potentially fixing what the Solicitor General says is systematic under-compensation of patent owners.

The solicitor general recently submitted an amicus brief to the U.S. Supreme Court in WesternGeco LLC v. Ion Geophysical Corp., No. 16-1011. The brief supports the grant of certiorari on the grounds that the Federal Circuit’s holding in that case “systematically undercompensates” U.S. patent owners. Should the Supreme Court grant cert and follow the solicitor general’s recommendations, the decision could lead to a multibillion-dollar shift in damages awards for infringing U.S. patents. The question presented is whether a patentee that proved a domestic act of patent infringement may recover lost profits that it would have earned outside the United States but for the infringement. The Federal Circuit denied the patent owner $93.4 million in lost profits awarded by the jury, and instead only allowed the patentee to recover a reasonable royalty of $12.5 million. The Federal Circuit denied lost profits because it found the award to violate a presumption against territoriality. The Federal Circuit applied the presumption both to the determination of liability and to damages. The solicitor general, in recommending that this decision be overturned, found that lost profits should be available to fully compensate a patentee, and that such an award would not violate any presumption against extraterritoriality.

The WesternGeco Case

According to the patent owner’s petition, WesternGeco patented a system used in geological surveys to search for oil under the ocean floor. The patent allows surveyors to control the movement of miles-long cables filled with sensors, called streamers, yielding higher-quality data than prior art systems, which simply pulled the streamers behind a ship. WesternGeco did not sell or license the patented system, but rather used its invention to perform surveys itself for oil companies on the high seas. The defendant, Ion, shipped components of another survey system from Louisiana to surveying companies abroad, which combined them in a manner that would infringe if done in the U.S. WesternGeco lost profits on survey contracts because customers who would otherwise hire WesternGeco to perform surveys instead conducted the surveys themselves, using the components provided by Ion. The jury found that, but for Ion’s infringing exportation of components in violation of 35 U.S.C. §271(f), WesternGeco would have obtained at least 10 specific survey contracts that would have yielded $93.4 million in profits for WesternGeco. The jury also awarded $12.5 million in royalties. The district court upheld these aspects of the verdict, awarding both components of damages.

While it affirmed the royalty award, the Federal Circuit reversed the lost profits award. The Federal Circuit relied primarily on the presumption against extraterritoriality with respect to damages as stated in a prior decision, Power Integrations Inc. v. Fairchild Semiconductor. Power Integrations stated that U.S. patent law does “not thereby provide compensation for a defendant’s foreign exploitation of a patented invention, which is not infringement at all.” It also found 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.” Power Integrations Inc. v. Fairchild Semiconductor International Inc. decision, 711 F.3d 1348, 1371-72 (2014). Essentially, the court found that the presumption against extraterritoriality broke the chain of causality and thus precluded an award of lost profits arising from sales lost outside the U.S.

After WesternGeco petitioned for certiorari before the Supreme Court, the court requested the views of the solicitor general. In response, on Dec. 6, 2017, the United States, through the solicitor general, submitted the brief discussed in this article, which recommended grant of the petition and reversal of the Federal Circuit’s denial of lost profits.

The Solicitor General’s Analysis

Why the Presumption Against Extraterritorial Application of U.S. Law Does not Limit Patent Damages Once Liability Is Found

The solicitor general’s brief faults the analysis of both WesternGeco and Power Integrations for several reasons. One, and perhaps most fundamentally, it argued that the analysis violated the fundamental principle that a patent infringer, like any tortfeasor, should compensate the wronged party for all reasonably foreseeable damages proximately caused by the infringing activity. It found support for this general principle in the damages statute, 35 U.S.C. § 284, as well as the Supreme Court decision in General Motors v. Devex, 461 U.S. 648, 656-57 (1983). The solicitor general also found the Federal Circuit’s rationale inconsistent with long-standing Supreme Court precedent, which supports full compensation for domestic acts of infringement regardless of where the benefit of infringement is derived.

The solicitor general further found fault in the Federal Circuit’s reliance on the presumption against extraterritoriality to deny lost profits. The brief notes that courts apply the presumption of extraterritoriality to determine liability, but not to limit the type of damages available to a plaintiff once
liability is established. The brief further noted that foreign activities that are considered in many contexts under U.S. patent law without violating the presumption against extraterritoriality. For example, foreign patents and publications may be prior art under 35 U.S.C. § 102(a). Also, the court’s decision in Impression Products Inc. v. Lexmark International Inc., 137 S. Ct. 1523 (2017), held that even the foreign sale of a patented article by a patentee exhausts the patentee’s U.S. patent rights in that article. The brief notes that such cases do not conflict with the presumption against extraterritoriality because they all pertain to domestic acts of patent infringement, as does WesternGeco.

Although the Federal Circuit has sole appellate jurisdiction over patent cases, the solicitor general also noted a conflict between the holding in WesternGeco and holdings of other courts of appeals in analogous situations involving infringement under the Copyright Act. Several courts of appeals have adopted the Predicate Act Doctrine, which holds that the recovery of damages arising from foreign infringing uses of a copyright may be recovered under U.S. law if copyright infringement that occurred within the United States enabled the infringing reproduction abroad. See, e.g., LA News Service v. Reuters TV International Ltd., 149 F. 3d 987, 992 (9th Cir. 1998).

In LA News, like other appellate decisions citing the Predicate Act Doctrine, the circuit court cited Sheldon v. Metro-Goldwin Pictures Corp, 106 F.2d 45, 52 (2d Cir. 1939), aff’d, 309 U.S. 390 (1940). There, Judge Learned Hand held that a plaintiff could recover profits from exhibiting a motion picture
abroad because the infringing copy was made in the U.S. Judge Hand found that the plaintiff acquired an equitable interest in the infringing works as soon as they were made in the U.S., which gave the plaintiff a constructive trust in any money derived from their exploitation either in the U.S. or abroad.

Although copyright law and patent law are distinct doctrines, they are analogous in many ways, and in particular, their damages statutes similarly indicate that the owner of the rights should be fully compensated for any infringement.


The Broad Implications of the Solicitor General’s Analysis for Patent Damages Awards

The solicitor general’s brief makes clear that more is at stake than the specific damages award in WesternGeco. Whereas WesternGeco involved only infringing exportation under 271(f), the question presented is important and recurring because, as argued in the solicitor general’s brief, “the Federal
Circuit has made the same analytical error in addressing damages for direct patent infringement under Section 271(a).” On its face, WesternGeco is narrowly directed to a specific type of infringement under Section 271(f) involving exporting components of a patented invention in a manner intended to induce their combination abroad in a way that would infringe if done in the U.S. The solicitor general’s challenge to the underlying rationale of the Federal Circuit, however, could have much broader implications, as § 271(a) applies to anyone who “makes, uses, offers to sell, or sells any patented
invention” in the U.S. That type of infringement is most typical in run-of-the-mill patent cases.

The solicitor general attacked Power Integrations, which involved infringement under § 271(a), for “establishing a categorical bar to the recovery of damages that are proximately caused by domestic infringement but arise abroad.” Should the Supreme Court agree, patent owners would be able to
receive compensation under U.S. law potentially in the billions of dollars for losses that are not currently subject to compensation. For example, if a patentee can prove lost sales arising from an infringing U.S. sale that caused a customer to purchase additional of the infringer’s products abroad (for example, because the customer wants or needs consistent worldwide standards), lost profit damages may be recoverable for those lost foreign sales. Thus, the case has wide-ranging and significant implications. Under current Federal Circuit law, patent owners have been unable to recover all reasonably foreseeable damages that are the direct and proximate result of infringement of U.S. patents. The solicitor general’s brief makes a persuasive case that the Federal Circuit’s analysis is flawed and undercompensates patent owners. Should the Supreme Court heed the solicitor general’s advice, grant the petition, and reverse the Federal Circuit, patent owners will have good reason to hope that this undercompensating will end.


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