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IP Alert: Lost Profits Cannot Be Recovered for Use of an Infringing Article Abroad

July 6, 2015

United States patent law contains a presumption against “extraterritoriality,” which means that patents generally do not cover activity that occurs outside of the U.S. Congress has provided some exceptions. For example, 35 U.S.C. § 271(f) creates infringement liability for the exportation of components that are a part of a patented system for assembly abroad. On July 2, 2015, in WesternGeco L.L.C., v. ION Geophysical Corp., the Court of Appeals for the Federal Circuit considered the scope of section 271(f) as applied to U.S. contracts for activities that occur outside of the U.S. In a split decision, the court ruled that a patentee cannot recover lost profits for contracts lost as a result of infringement under section 271(f), where those contracts are for services performed entirely abroad. 

Plaintiff WesternGeco asserted that defendant ION infringed numerous method and apparatus claims contained in patents held by WesternGeco for marine seismic streamer steering devices used to search for oil and gas beneath the ocean floor. WesternGeco itself manufactures survey products and uses those products to perform surveys outside of the U.S. ION manufactures a competing product, the DigiFIN lateral streamer control system, but does not perform surveys itself. Instead, ION sells the DigiFIN to customers that compete with WesternGeco for survey contracts with oil companies. 

WesternGeco alleged that ION infringed several patents under 35 U.S.C. § 271(f)(1) and (2) by exporting from the U.S. components of a patented invention and actively inducing the combination of those components outside the U.S. in a manner that would infringe the WesternGeco patents. WesternGeco alleged that it lost 10 lucrative survey contracts to ION’s customers that WesternGeco otherwise would have won, resulting in lost profits of over $90 million. 

At trial, the district court found that ION infringed WesternGeco’s valid patent claims under section 271(f)(1) and (2) by supplying components from the U.S. and actively inducing the combination of those components abroad in a manner that would have infringed the patents within the U.S. The jury awarded WesternGeco $93.4 million in lost profits and $12.5 million in reasonable royalties.

Among other issues disputed on appeal, defendant ION argued that that WesternGeco should not receive lost profits that result from WesternGeco’s failure to win the survey contracts because those contracts were performed on the high seas, entirely outside of the jurisdictional reach of U.S. patent law. 

Relying heavily on the presumption against extraterritoriality, the Federal Circuit agreed and reversed the jury award of lost profits. According to the court, Congress enacted section 271(f) to impose liability on domestic entities that export components with the intent that they be assembled in a manner that would infringe a U.S. patent, but Congress did not intend to extend U.S. patent laws further such that the law covers uses of articles created from the infringing exported components. The court concluded that entering into contracts for services performed entirely outside the U.S. (here, on the high seas) constitutes such a further use not covered under section 271(f).

The court expressed that the presumption against extraterritoriality is embedded in the U.S. Patent Act itself, which provides that a patent confers exclusive rights that are directed only to domestic activity. Congress enacted section 271(f) to expand the territorial scope of the patent laws to prevent would-be infringers from avoiding liability simply by combining infringing components after exportation. But section 271(f) is only a limited exception to the presumption against extraterritoriality. Significantly, the statute still addresses activities that are performed within the U.S., namely, acts of exportation. But allowing WesternGeco to recover its lost profits would expand section 271(f) to cover acts—specifically the use of the infringing products—that are not performed within the U.S. The court reasoned that such an interpretation would make section 271(f), which covers only components, broader than section 271(a), which covers final products. Because a U.S. seller or exporter of a finished infringing product is not liable for that product’s use abroad under section 271(a), the exporter of component parts cannot be liable for use of an infringing article made from the combination of those component parts.

The court made a comparison to the 2013 Federal Circuit case of Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., where the court refused to apply section 271(a) to the extraterritorial use of an exported infringing product. In Power Integrations, the patentee chip supplier lost out on a contract to a customer that required the supply of chips in both the U.S. and abroad. The patentee in Power Integrations argued that if the accused infringer had not infringed within the U.S., then the accused infringer would not have been able to compete for the world-wide contracts. The Power Integrations court rejected that argument, holding that an extraterritorial production, use, or sale of an invention is an intervening act that cuts the chain of causation initiated by an act of domestic infringement. The court found Power Integrations to be a compelling precedent.

Judge Wallach dissented in part, disagreeing with the majority’s reversal of the award of WesternGeco’s lost profits. He argued that majority had improperly framed the issue, and that the proper question to ask is not whether the export of a finished product can create liability for extraterritorial use of that product, but instead is “what is the proper measure of damages given a finding of liability.” He further contended that a patentee should be entitled to full compensatory damages that result from a proven act of infringement. In certain circumstances, foreign activities are relevant to determine issues of infringement, such as infringement under section 271(g), which imposes liability based on an underlying foreign use of a patented process if the product made by that process is imported into the United States. Because foreign actions can be relevant to the issue of infringement, the dissent argued that foreign actions should also be relevant to the issue of damages that result from infringement. 

The WesternGeco decision provides important guidance to those concerned with patent infringement for products that are used abroad and to patent owners considering how to develop an international patent portfolio.

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