Reasonable Royalties Based on Extraterritorial Sales

Last April I blogged about the $1.5 billion verdict in Carnegie Mellon University v. Marvell Technology Group, Ltd.  The court permitted the jury to award a reasonable royalty based upon the infringing use of its patent in the United States, which use led to sales and uses occurring abroad. The matter is now up on appeal, and some U.S. law professors are weighing in against the verdict.

First, Professor Brian Love filed an amicus brief on Monday in support of Marvell.  You can download the entire brief here or on ssrn here.  Here is the introduction and summary of argument:

Of the issues presented by this appeal, the measure of damages is the most broadly significant. The district court ruled below that infringing a patent during the course of research and development can subject a U.S. technology company to damages reflecting the value of all its sales worldwide. This ruling effectively transforms every U.S. patent into a worldwide patent. As explained below, that result cannot be justified as a matter of doctrine or policy. To the contrary, affirmance of the district court’s damages analysis will create material disincentives for domestic innovation and likely hasten the overseas migration of technology research facilities that are now in the U.S.

The vast majority of the damages awarded in this case—at least three quarters of the roughly $1.17 billion pre-enhancement total—is a reasonable royalty for the use of chips that were neither manufactured in nor imported into the U.S. Rather, these chips were fabricated in Taiwan, installed overseas in hard drives manufactured by third-party foreign-based companies, and eventually sold to foreign end-users who used their hard drives exclusively outside the U.S.  Under long-standing precedent, supported by the explicit territorial limitations in the Patent Act, extraterritorial actions like these fall outside the scope of conduct that constitutes patent infringement under U.S. law.  Nonetheless, the district court permitted Carnegie Mellon University (CMU) to recover damages incorporating the value of chips in hard drives that were manufactured, bought, and used outside the U.S. because Marvell Semiconductor, Inc.’s chip design and marketing activities took place in the U.S. In short, the district court ruled below that Marvell’s own use within the U.S. of a relatively small number of prototype chips during the process of negotiating with potential customers rendered Marvell liable in U.S. courts for all similar chips, including those not made in the U.S., in hard drives sold worldwide.

Affirming the damages award on that theory will effectively eliminate the long-standing prohibition on recovering damages under the U.S. Patent Act for extraterritorial patent infringement. Virtually all technology companies designing a new product produce a small number of prototypes, demonstrate those prototypes to potential customers, and tweak their designs based on customer feedback—often over the course of months or years in a lengthy iterative process indistinguishable from Marvell’s so-called “sales cycle.” A holding from this Court that such conduct is sufficient to draw worldwide sales into the ambit of U.S. patent litigation will effectively render the extraterritoriality rule a dead letter.

Moreover, limiting damages in this case to only those chips made, used, or sold in the U.S. will not create a disincentive to invention. A patentholder in CMU’s shoes could have sought and enforced foreign patent rights to protect its invention from foreign actions like Marvell’s without the need for a new, disruptive theory of U.S. patent damages.

To the contrary, affirming the district court’s view of the scope of infringement damages will often over-reward inventors and thereby reduce overall incentives to innovate. By transforming every U.S. patent into a de facto worldwide patent right, the damages principles approved below undermine the territorial sovereignty of patent law and will routinely lead to overcompensation. Those principles permit U.S. patentees to evade more restrictive patent regimes enacted in foreign nations: inventors who never obtained foreign patent rights could nonetheless seek damages in U.S. courts for products made, used, and sold abroad. Moreover, if left in place, the damages ruling below may allow inventors who do obtain both U.S. and foreign patent rights to recover damages twice for the very same conduct: once by asserting U.S. patent rights against domestic uses to recover a royalty reflecting the value of all uses worldwide, and again by asserting foreign patent rights in foreign nations where the patented technology was principally used. Drastically increasing the amounts at stake in U.S. patent suits—which at present levels are already the source of considerable criticism—threatens to upset the patent system’s delicate balance of adequately rewarding innovators of the past without handcuffing the innovators of today.

The damages theory adopted below also threatens to discourage domestic innovation in another way. If affirmed, such a rule will disadvantage technology companies that locate key R&D activities in the U.S. relative to companies that offshore those activities. Accordingly, it is likely that this rule will induce U.S.-based technology firms to move U.S. operations to overseas locations that are marginally less conducive to innovation.

Second, in a similar vein Professor Bernard Chao has posted a paper titled Patent Imperialism on ssrn.  Here is the abstract:

With a few narrow exceptions, U.S. patent law concerns itself with activity that either occurs within this country’s borders or crosses its borders. The result is that patent owners have only been able to recover money damages for activity that takes place in this country. In the typical case, that means that a patentee can recover lost profits or reasonable royalties for the domestic sales of infringing products. However, patentees have begun to advance a new and creative “worldwide causation” theory that would allow them to calculate damage based on sales everywhere. So long as some domestic infringement can be said to cause sales overseas, these patentees argue that there should be no territorial limitation on their recovery.

This Essay argues that the courts should reject this new theory on both doctrinal and policy grounds. As a purely statutory matter, permitting patentees to recover damages for sales that take place overseas would circumvent the explicit territorial limitations that are well established in U.S. patent law. This argument is reinforced by the presumption against the extraterritorial application of any U.S. law.

The worldwide causation theory of damages also makes bad international and domestic policy. Under the current international regime, each nation has its own patent system. This means that inventors must satisfy a country’s specific patent laws to obtain a patent, and navigate through its courts to obtain any remedy that the country sees fit to grant. The proposed worldwide causation theory would subvert this regime and allow United States patent law to trump laws in other countries. Of course other countries could also follow suit and exercise their own forms of “patent imperialism” thereby wreaking havoc with notions of territorial sovereignty in patent law. In addition to causing problems abroad, the worldwide causation theory provides troubling disincentives for U.S companies. Companies that locate key activities in the U.S. will be worse off than companies that offshore those activities. In sum, there are ample reasons to reject patent imperialism.

When I blogged on this case back in April, I wrote:

I'm still trying to decide for myself whether this theory makes sense, though I'm inclined to think it does.  On the one hand, but for the infringement, Marvell would have sought a license for its use in the U.S. of the patented methods, and arguably the amount of that license would have reflected Marvell's expected post-sales cycle benefits (even if those benefits themselves were attributable in part to foreign sales).  On the other hand, this might seem like a way to avoid the general rule that you can't recover damages for the infringement of a U.S. patent based on conduct that occurs abroad.  Perhaps the case demonstrates the artificiality of the rule against extraterritorial damages, but I'm not sure what we can do about that. 

Although I'm still somewhat on the fence, I'm now more inclined to think the amici and Professor Chao are right.  Perhaps the question a court should pose in a case like this one is not, what would a willing licensor and licensee have agreed to for the defendant's use of the patent, full stop,  but rather what would they have agreed to for uses that would result in sales or uses in the United States only?  Otherwise there may, as noted above, be a conflict with the nonextraterritoriality principle or an incentive to outsource activities that could result in liability for inadvertent infringement.  And perhaps there is no persuasive way to distinguish the case from the Federal Circuit's opinion in Power Integrations v. Fairchild Semiconductor Int'l Inc., as both the brief and the article argue.  Anyway, it will be interesting to see how the Federal Circuit rules in this one.