WesternGeco v. ION Geophysical, 271(f) & Global Lost Profit Recovery

This June the US Supreme Court decided a relatively important issue for global competitors having domestic operations. WesternGeco v. ION Geophysical, Case No.: 16-1011 (June 22, 2018). In WesternGeco, the Supreme Court decided that lost profit damages (in addition to reasonable royalties) are recoverable for knowingly exporting key components for use overseas in what would be an infringing arrangement domestically pursuant to 35 USC §271(f)(2). For WesternGeco the ruling meant securing a recovery of $93M in lost profits from ten lost contracts overseas.

WesternGeco is the owner of several patents to steering technology used for ocean floor surveys of geological deposits for fuel recovery. Specifically, the steering technology mitigates tangle between streamers of multiple surveyors operating simultaneously. ION Geophysical domestically produced a subcomponent of the patented systems – DigiFINs, drone swimmers used to guide the streamers underwater – which are especially made for use with the claimed systems. However, ION Geophysical did not sell the finally assembled systems in the US, rather the systems were assembled at sea and in international waters, where the surveying is performed.

Plain vanilla patent infringement in the United States covers unauthorized making, using, offering for sale, selling or importing any patented invention, within the United States under §271(a). Moreover, §271 lists other funky flavors of infringement, e.g., inducing another to infringe someone’s patent (§b) or filing for FDA approval of a drug claimed in a patent (§e). The Jamoca Almond Fudge of this hour is §271(f)(2) infringement which is defined as follows:

"Whoever without authority supplies or causes to be supplied 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, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer."

ION Geophysical was accused of supplying domestically made DigiFINs to a third-party manufacturer who competed with WesternGeco for surveying contracts. In an infringement trial in the SD of Texas a jury awarded WesternGeco lost profit damages for infringement under §271(f)(2) in the amount of over $93M. The district court denied a motion to set aside the damages award. A Court of Appeals panel, however, overturned the grant of lost profit damages citing the extraterritorial implications of §271(f)(2) when lost profit damages are awarded. Case Nos: 2013-1527, 2014-1121, -1526 & 1528 (July 2, 2015). The divided panel cited its own precedent in Power Integrations rejecting the argument that the patentee in that case should have recovered worldwide lost profits for foreseeable failed bids that resulted from infringement under §271(a). The majority reasoned that since §271(f)(2)’s liability is in supplying a component only, the patentee cannot recover for the would-be infringement when the component is combined abroad. Judge Wallach, in dissent at the Court of Appeals, brought up several reasonable points, some that were adopted by the Supreme Court majority and others that were not.

Justice Thomas, writing for the 7-person majority, held that §284 on compensatory damages is to be interpreted in tandem with §271(f)(2) in determining its extraterritorial effects and compliance with the doctrine that “[c]ourts presume that federal statutes ‘apply only within the territorial jurisdiction of the United States.’ ” citing Foley Bros. at 4-8. The award of lost profit damages was reviewed under a two-step framework for assessing questions of extraterritoriality: (1) “‘whether the presumption against extraterritoriality has been rebutted’” by “text [that] provides a ‘clear indication of an extraterritorial application;’” and (2) “‘whether the case involves a domestic application of the statute.’” Under the Court’s discretion it can begin the analysis at step 2, which Justice Thomas did in this instance due to §284’s implication on other statutes. at 5. The focus of §284 is to compensate (or “make whole” as J. Wallach previously indicated citing GM v. Devex) patentees for “infringement,” as spelled out in the statute, and §271(f)(2) is one of several flavors by which infringement can occur. at 6-7. Extraterritorial compliance of §271(f)(2) hinged upon the inculpating conduct focused upon by Congress properly being domestic: “the domestic act of ‘suppl[ying] in or from the United States’” key components. In other words, since the statute’s “sin” was defined by exporting components, which occurs domestically, it can be said that §271(f)(2) and full recovery options under §284 suitably compensate one for domestic malfeasance. at 6-8. The fact that the exported components were combined in final assembly overseas was incidental to the infringing behaviors defined in §(f)(2) as the statute contemplates combination outside of the US in defining infringement and such post-US combinations do not have primacy for the purposes of the extraterritorial analysis. at 8.

Justices Gorsuch and Breyer dissented preferring to limit damages to reasonable royalties based upon defining infringement solely by the terms of §271(a). at 8-9.

It is also worth noting that some ordinary principles against the excessive reach of US laws do not apply here as J. Wallach argued in dissent at the COA because overlapping recovery from patents in various countries is not possible here as plain-vanilla infringement occurs in international waters, outside of the scope of any country’s patent laws. J. Wallach’s 07-02-2015 Dissent at 14 (“The greater concern, therefore, is not the possibility of recovering too much, but the possibility that patent owners will be unable to obtain full compensation, as may well be the import of the [COA] majority’s holding today.”). The Supreme Court’s hold in WesternGeco, should bolster patent rights allowing for claimants to fully recover against component exporters seeking to subvert domestic patent laws while competing abroad.