« For they have sown the wind, and they shall reap the whirlwind. »

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Old Testament, Hosea 8, 7.

foreign lost profits
Photo by Claire Anderson on Unsplash

On 22 June 2018 an interesting decision was issued by the US Supreme Court (USSC) relating to an award of damages in WESTERNGECO LLC v. ION GEOPHYSICAL CORP.  Reversing the decision of the Federal District Court, the USSC decided to award damages for loss of profits which occurred outside the US. This was a reversal of the previous position held by US Courts where lost foreign sales were generally considered not recoverable through enforcement of a US patent.  In order not to over, or under, interpret this decision and its consequences, the facts of the case are important.  Here is the Supreme Court’s own summary:

Petitioner WesternGeco LLC owns four patents relating to a system that it developed for surveying the ocean floor. The system uses lateral-steering technology to produce higher quality data than previous survey systems. WesternGeco does not sell its technology or license it to competitors. Instead, it uses the technology itself, performing surveys for oil and gas companies. For several years, WesternGeco was the only surveyor that used such lateral-steering technology.

In late 2007 respondent ION Geophysical Corporation began selling a competing system. It manufactured the components for its competing system in the United States and then shipped them to companies abroad. Those com­panies combined the components to create a surveying system indistinguishable from WesternGeco’s and used the system to compete with WesternGeco.

WesternGeco sued for patent infringement under §§271(f)(1) and (f)(2). At trial, WesternGeco proved that it had lost 10 specific survey contracts due to ION’s in­fringement. The jury found ION liable and awarded WesternGeco damages of $12.5 million in royalties and $93.4 million in lost profits.” (Emphasis added).

§ 271(f)(1) of the U.S. Title 35 (Patents) addresses the act of exporting a substantial portion of an invention’s components from the US to a foreign destination. §271(f)(2) addresses the act of exporting components that are specially adapted for an invention, once again, from the US to a foreign destination.

ION filed an appeal and the Federal circuit reversed the decision regarding the lost profits award on the basis that lost foreign profits are not recoverable, in principle. Based on the 22 June 2018 decision of the USSC, this principle does not hold anymore: foreign lost profits ARE now recoverable, at least under specific conditions.

In a nutshell, the USSC decided that once domestic infringement is established, the overriding principle of award is to provide a remedy which is commensurate with the harm caused by the infringement. The fact that the lost profits arose from the loss of foreign contracts was not relevant to assess damages.

At first, anyone can see the fairness principle underlying this decision. The action of the infringer enabled the purchaser to dispense with the surveying services of the patentee.  The loss caused could have threatened the very existence of the company.

However, among the five Supreme Court judges, two dissented with this approach. One of the dissenting judges, Judge Gorsuch J, raised the issue that the infringer becomes suddenly liable for acts beyond its control and that it has no power to stop. Hence, once the supply of the components necessary to manufacture the surveying devices is carried out, the infringer cannot retract it.  It becomes thus potentially liable for all future “lost contracts” that can be established as being the direct consequence of the supply forbidden by §271(f)(1) and §271 (f)(2) (cf. supra).  Although such a proof is usually difficult to establish, this was one of the cases where it was successfully argued, because there were no other competing players in this specialised market than the litigants themselves.

If the acts of using the invention had been carried out in the US, the purchaser in this case would have become an infringer and could have been stopped. This is not the case if the purchaser is in fact using the invention outside of the US.  The liability of the US supplier/infringer mushrooms suddenly without clear limits.

However the USSC balanced this potential unknown liability with the principle that the patentee has to be commensurately compensated, and decided in favour of the latter.

This decision now stands as a strengthening of patent rights.  This will be pleasing to the owners of US patents and increase the value of their US portfolio.  However to be applicable the patentee had not only to establish a domestic infringing act of exporting abroad but also a clear and direct consequential link between the act and the loss of profits. In this case this was possible due to the combination of :

  • a particular business model where the patentee kept its patented technology for itself and offered only its services; and
  • a market where only one competitor existed, said competitor being the infringer.

This particular combination of facts is not likely to be very frequent. Nonetheless, there is no doubt that U.S. exporters as well as U.S. patentees will be keeping this decision very much in mind as a biblical warning against unforeseen consequences of unlawful conduct.

 

Article written by Sophie McDade from LLRLLR logo