IP Law Daily Justices struggle with questions of extraterritoriality in patent damage awards
Tuesday, April 17, 2018

Justices struggle with questions of extraterritoriality in patent damage awards

By Cheryl Beise, J.D.

The U.S. Supreme Court heard oral arguments on April 16 in WesternGeco LLC v. ION Geophysical Corporation, which concerns a patent owner’s ability to recover damages resulting from infringement occurring abroad. In a broad sense, the case pits the presumption against extraterritorial application of U.S. patent law against a patent owner’s right under 38 U.S.C. § 284 to recover "damages adequate to compensate for the infringement." A potentially narrowing factor is that liability in this case was predicated not on the general patent infringement liability provision, but on 35 U.S.C. §271(f), which expressly prohibits the knowing domestic supply of infringing components of a patented invention for combination abroad.

WesternGeco sued ION Geophysical for infringement of four patents claiming "seismic streamer control and positioning" technologies for facilitating the search for oil and gas deposits below the ocean floor. A Texas jury found that ION willfully infringed all the asserted claims under 35 U.S.C. §271(f). The jury awarded $12 million in reasonable royalty damages and $93.4 million in lost profit damages, based on ten ocean survey contracts WesternGeco lost to foreign competitors that used ION’s infringing system. The Federal Circuit affirmed the royalty award, but reversed the lost profits award, on the ground that the Patent Act does not permit the recovery of lost profits for third parties’ extraterritorial uses of a system patented in the United States.

The Justices first heard from Paul D. Clemont (Kirkland & Ellis LLP), on behalf of the petitioner, Schlumberger subsidiary WesternGeco LLC. Next, Zachary D. Tripp, Assistant to the Solicitor General, U.S. Department of Justice, presented the views of the United States as amicus curaie in support of the petitioner. Kannon K. Shanmugan (Williams & Connolly LLP) appeared on behalf of the respondent, ION Geophysical Corporation. Counsel faced fewer than usual questioning from most Justices, which allowed them to present fuller arguments on behalf of their clients.

WesternGeco argument. Clement began his argument by focusing on the narrow question WesternGeco presented in its petition, i.e., whether "lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases in which patent infringement is proven under 35 U.S.C. §271(f )." However, the questions quickly turned to the broader issue the Solicitor General raised in the government’s amicus curiae brief, whether a patent owner "may recover lost profits it would have earned outside the United States if [an act of] domestic infringement had not occurred."

Responding to a question by Justice Ruth Bader Ginsburg hinting at contributory liability for downstream customer infringement, Clement suggested that if the whole case happened on Lake Michigan instead of on the high seas, WesternGeco could recover all damages to be made whole. Clement also noted that in adopting Section 271(f), Congress did not require any foreign infringement.

Justice Neil Gorsuch expressed concern that a company, which cannot enforce a monopoly over its patented technology abroad, could recover lost profits because of a third party's use entirely abroad. In response, Clement pointed out that WesternGeco was not collecting damages from the combination abroad, but rather "for the foreseeable consequences of the domestic act of infringement."

Clement analogized his client to a foreign citizen who is injured in a car accident in the United States, but able to recover costs for hospital bills later incurred in France. "Because of ION's domestic act of infringement, my client has $90 million less in its wallet in Houston than it otherwise would have if they had obeyed the law," Clement said.

Justice Stephen Breyer expressed concern about applying American law abroad and the chaos that could ensue if other countries did the same to reach foreign conduct that is otherwise lawful. Clement noted that this has worked in the common law and copyright contexts for years without international incident.

When Justice Gorsuch asked for Clement’s "best textual argument" to show that use on the high seas is to be treated as if it took place in Lake Michigan, Clement returned to Section 271(f) to argue that inducing infringing combinations abroad violates the patent law of the United States just as if the conduct had occurred in the United States.

Unites States argument. Representing the United States,Tripp said that he was advocating for "full compensation" for patent holders in in all cases, the same rule that "basically everywhere in American law," in tort, in contract, in copyright, and previously in patent law.

Justice Breyer again raised his concern about a hypothetical infringer, Joe Smith, who goes to France and makes a tiny particle, which it turns out violates somebody else's French patent. Smith ships it back to the United States, where it forms a very small part of a very large and valuable gizmo and ends up paying the entire profit of the entire gizmo industry to some French company that had a small patent on a small part. Tripp replied that doctrines of causation in fact and proximate cause that are tailor-made to answer these kinds of questions. Tripp pointed to an amicus brief elaborating on those principals. He also noted that Section 271(f) was narrow and required intent.

Justice Samuel Alito observed that what makes the case difficult in his mind is the "gap between the legal injury, which is ... ephemeral, and the practical injury, which occurs completely abroad."

ION Geophysical argument. Shanmugan began by restating ION’s position that the Patent Act’s remedial provision, Section 284, has no extraterritorial application. "The presumption against extraterritoriality applies with particular force to the Patent Act. And as the government recognized at least in its brief, the presumption applies independently to remedial provisions as well as substantive ones because remedial provisions can create a similar risk of conflict with foreign law," Shanmugan said.

In response to question from Justice Sonia Sotomayor, Shanmugan explained that in calculating a hypothetical reasonable royalty, you "take into account the expected foreign use as a way of determining the commercial value of the component." Shanmugan argued that Congress enacted Section 271(f) narrowly to regulate only the act of supply from the United States, not the foreign combination itself. According to Shanmugan, even if an underlying substantive provision has extraterritorial reach, you still must conduct an independent analysis of the remedial provision.

Justice Anthony Kennedy pressed Shanmugan to admit that ION’s position would prevent WesternGeco from being fully compensated for its injury. Justice Breyer raised proximate cause as a potential check on damages, suggesting that comity could be taken into account when applying proximate cause.

Shanmugan emphasized that an overlooked remedy is that the patent holder is able to obtain the right to enforce its patent in foreign jurisdictions. Even on the high seas, a company could go to the countries where the ships are flagged and prosecute its patents, Shanmugan said.

WesternGeco rebuttal. In rebuttal argument, Clement said he was "happy to win this case on any of the three theories we present in our brief or on the government's theory," adding that, in his view, the better way to resolve the case "is to say cleanly once and for all: The presumption does not apply to damages provisions."

The exchange between counsel and the Justices did not provide a clear indication for how the Court will decide this case. It seemed that Justices Breyer and Gorsuch were particularly concerned about the principal of international comity and the implications of possible territorial overreach. Other Justices, including Justices Kennedy and Kagan, appeared to be more concerned about ensuring that patent owners receive full compensation for injuries that can be proximately tied to infringing conduct.

The case is No. 16-1011.

Attorneys: Paul D. Clemont (Kirkland & Ellis LLP) for WesternGeco. Kannon K. Shanmugan (Williams & Connolly LLP) for ION Geophysical Corporation. Zachary D. Tripp, Assistant to the Solicitor General, U.S. Department of Justice, for the United States as amicus curaie.

Companies: WesternGeco LLC; ION Geophysical Corporation

MainStory: TopStory Patent

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