Intellectual Property

• Publication year: 2018
• Author: By Morgan Chu and Dominik Slusarczyk

Intellectual Property

By Morgan Chu and Dominik Slusarczyk

In Search of "Overseas" Lost Profits: the Supreme Court Broadens the Availability of Damages in Patent Cases

Last term, the Supreme Court permitted a patent owner to recover damages for lost profits resulting from overseas economic activity in the WesternGeco case.¹ This decision appears to change the law that generally precluded recovery for foreign exploitation of United States patents. Although WesternGeco applies a provision of the Patent Act that is not the focus of typical patent infringement cases, its analysis may apply more broadly to just about any kind of patent infringement. The decision may expand the breadth of damages recoverable in patent cases, particularly when patents are asserted against global companies with substantial foreign operations.

A Territorial Ambiguity in the Patent Act

The Patent Act provides the framework of rights and remedies available to patent owners in the United States.² Among its many provisions, the Act specifies what counts as liability-creating "patent infringement" conduct and sets forth the remedies available for that conduct. Two of its provisions were principally at issue in WesternGeco: section 271, which on its face recites geographic limitations, and section 284, which does not.

Patent Infringement: Domestic Activity Only

First, the Patent Act defines conduct that gives rise to patent infringement liability in section 271. For example, section 271(a) states that "whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent."³ This basic provision defines the most common acts of infringement, namely, making, using, or trading in patented inventions within the territorial bounds of the United States.

But there are other kinds of patent infringement, too. For example, inducing or contributing to the infringement of another are acts of patent infringement in their own right, as set forth in sections 271(b) and (c). And section 271(f) makes it patent infringement for anyone to "without authority suppl[y] or cause[] to be supplied in or from the United States" certain "components" of a patented invention.

Section 271(f) traces its roots to a 1972 Supreme Court decision. In Deepsouth Packing, the defendant attempted to avoid infringement liability by manufacturing and shipping a competitor's patented invention in "less than fully assembled form"—that is, in parts—for final assembly abroad.⁴ Having never handled the "patented invention . . . within the United States" as required for patent infringement in section 271(a), the defendant argued that it could not be liable for infringement. The Court agreed, finding that, with respect to the patented invention at issue, the statute "protect[ed] only against the operable assembly of the whole and not the manufacture of its parts."⁵ Congress promptly enacted section 271(f) to patch the loophole, making it patent infringement to export certain sufficiently important components of a patented invention.⁶

Monetary Damages: No Express Geographic Limit

Section 284 authorizes monetary damages for infringement. It broadly provides that "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, together with interest and costs as fixed by the court."⁷ One common measure of "adequate" compensation, developed by the courts, is "lost profits"—i.e., the amount of profits lost by a patent owner due to a competitor's use of infringing technology.⁸

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Section 284 is not limited by any express geographic bounds. On the one hand, it authorizes only damages for "the infringement," which has domestic limits as set forth in section 271(a). On the other hand, the ripple effects of domestic infringement may sometimes cross political boundaries.

For example, because section 271(f) is directed to the export of components, it often precedes an extraterritorial exploitation of the fully assembled patented invention (such as making, using, selling, or offering to sell it). That exploitation can usually be traced to the export by causation: The invention would not have been assembled and exploited abroad but for the exported components. But the exploitation itself does not infringe under section 271(a)—because it does not take place in the United States—and patent owners thus sometimes invoke the geographically unbounded language of section 284 in an attempt to recover for foreign exploitation that can be causally linked to other domestic infringement.

The Power Integrations Rule

Prior to the Supreme Court's decision in WesternGeco, the United States Court of Appeals for the Federal Circuit limited the availability of damages arising from non-infringing foreign exploitation of a patented invention, even if a causal link to domestic infringement could be shown. These limits were necessary, the Federal Circuit reasoned, because of the "axiomatic" principle that "U.S. patent law does not operate extraterritorially to prohibit infringement abroad."⁹ That court's decisions enforced this principle under a "presumption against extraterritoriality" by denying causation between domestic infringement and foreign exploitation of inventions patented in the United States. The latter, the Federal Circuit held, "is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement."¹⁰ Losses resulting from such foreign exploitation thus could not be the basis of a damages award for domestic patent infringement.

For example, in the Power Integrations case, both the patent owner and the defendant "competed for [sales] contracts which necessarily involved supplying [computer] chips both in the United States and abroad."¹¹ The patent owner lost domestic sales as a result of its competitor's infringement, and argued that section 284's principle of "damages adequate to compensate for the infringement" further entitled it to recovery for the additional sales lost abroad.¹² Given the global structure of the sales contracts, it argued that the competitor won the foreign sales as a direct result of its domestic infringement. But the Federal Circuit held that the sales were an extraterritorial exploitation of the patented invention—an "intervening act" that categorically cut off the casual link between the domestic...