A case the U.S. Supreme Court is set to hear next week has the potential to shake up the law on patent damages by significantly expanding the amount of money patent owners could be able to recover to include profits lost in other countries due to infringement in the U.S.
At arguments on April 16, the justices will consider whether the Federal Circuit was correct to discard $93 million in lost profits that Schlumberger Ltd. unit WesternGeco LLC won from Ion Geophysical Corp. in a patent suit over devices used to search for oil and gas under the ocean.
The Federal Circuit held that the presumption that U.S. patent law does not extend outside the country means WesternGeco cannot recover profits it would have earned overseas absent Ion's infringement. WesternGeco maintains that the presumption against extraterritoriality applies only to liability, not to damages, so it should have been awarded lost profits.
If the justices agree and take an expansive view of that argument, "it has the potential to be a game-changer across the board," said Brian Ferrall of Keker Van Nest & Peters LLP. Patent owners would have opportunities to pursue much more sizable damages awards than are now available.
"We're in a worldwide market for most all technology," he said. "That would open up the damages analysis to worldwide sales. That could be very significant."
The impact of the case will depend on how broadly the justices approach the issue. The court could decide to expand damages to include foreign lost profits only in specific situations akin to the facts of the WesternGeco case, which would have limited impact. Or it could apply the holding to most types of patent infringement cases, marking a significant shift in damages law.
The case puts a spotlight on the interaction between the patent damages statute, which calls for patent owners to be awarded "damages adequate to compensate for the infringement," and the Supreme Court's long-standing precedent that American law doesn't extend beyond the country's borders.
"There's a tension between making the patentee whole for all foreseeable damages from the infringement and the presumption against extraterritoriality," said Jacob Schroeder of Finnegan Henderson Farabow Garrett & Dunner LLP.
If the court were to find that WesternGeco were entitled to lost profits in this case, it could still be difficult for patent owners in the future to tie lost sales suffered in other countries to infringement in the U.S., said Russ Emerson of Haynes and Boone LLP. But even if the floodgates don't open to broader damages in most cases, such a ruling would be significant.
"It would make clear that, to the extent patentees could prove it up, lost profits damages in other countries could result from domestic conduct. That's a fairly big deal," he said.
The dispute between WesternGeco and Ion involves Section 271(f) of the Patent Act, which holds that it is infringement to supply the components of a patented invention from the U.S. so as to actively induce the combination of the components outside of the United States. Ion was found to infringe under the section, and WesternGeco sought to recover profits from contracts it lost outside the U.S. due to Ion's infringement.
The lower court awarded those lost profits, but the Federal Circuit threw out the award, though it let stand $12.5 million in royalties the company won.
Infringement under Section 271(f) arises in relatively few patent cases, and WesternGeco's argument on appeal is focused largely on that specific section of the law. However, U.S. Solicitor General Noel Francisco urged the justices to take a broader view and hold that foreign lost profits damages should be available in other types of patent cases as well.
Federal Circuit precedent limiting the availability of such damages "systematically undercompensates U.S. patent owners for infringement when the patent owner derives profits from cross-border commerce," Francisco told the justices in an amicus brief last month.
Attorneys said they will be watching at arguments to see which approach to the case the justices appear to be leaning toward. If they agree that WesternGeco is entitled to lost profits, but only because it involves the narrow context of infringement under 271(f), the impact of the decision would be relatively muted.
"That would be interesting, but 271(f) really is an aberration and rare bird itself that doesn't arise that often," Ferrall said.
It's possible the court would decide foreign lost profits should be available in those cases because the statute is the only patent infringement provision that expressly extends outside the U.S. The law was passed to close a loophole left by a 1972 Supreme Court decision that shipping components to other countries to be combined there was not patent infringement.
In its opening brief in February, WesternGeco argued that given the purpose of the law, it "beggars belief and defies Congress' unmistakable intent" to restrict the damages available in those cases.
If the justices endorse the broader view taken by the solicitor general that patent owners should be able to get damages they would have earned in foreign countries due to any kind of infringement of U.S. patents, the door would be open for patent owners to make all sorts of creative arguments about how their overseas businesses were undermined by patent infringement.
For instance, companies could argue that the worldwide market is so fluid that the existence of infringing products in the U.S. could hurt their ability to sell elsewhere by eroding prices or spurring copycats.
"There could be a more indirect argument about lost profits in one form or another that don't tie to a discrete lost sale," Ferrall said.
That sort of broad ruling "would be a strengthening of patent rights to allow patentees to rely more heavily on their U.S. intellectual property," Schroeder said.
If the justices appear to suggest that patent owners are losing out under current law and need to be made whole for all injuries they've suffered, it could augur a more sweeping decision. But attorneys said they don't expect the justices to go as far as the solicitor general is urging.
"I think there's a chance that the court gets nervous about what it's potentially bitten off and shies away from a decision" that goes so far as to make foreign lost profits available in all patent cases, Ferrall said.
Ion and its amici, which include a coalition of major technology companies, have warned the justices against making a wide-ranging decision in stark terms, saying it would effectively make U.S. patents into worldwide patents and overcompensate patentees.
Such a ruling "would transform any domestic act of infringement into a springboard for worldwide patent damages, and thereby expose companies with design operations in the United States to staggering awards," Ion said in its brief, calling that outcome "intolerable as a matter of policy."
However the high court rules, anything the justices have to say about how patent owners should be compensated will get attention, since damages is a rare area of patent law where the court's views are quite opaque.
The court has heard numerous patent cases in recent years, but none of them have addressed damages. If any justices feel that patent owners are getting short shrift in damages, or that they're able to win too much money, the case is potentially a chance for them to make their views known.
"The Supreme Court has barely touched the issue of patent damages since the 1952 Patent Act," Schroeder said. "That's why a lot of people who focus on patent damages are watching this case. It's one of the areas the Supreme Court hasn't weighed in on much lately."
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