Patent Damages and Extraterritoriality

In January the U.S. Supreme Court granted cert in WesternGeco LLC v. ION Geophysical Corp., No. 16-1011.  As I've previously noted on this blog: 

The question presented is "Whether the U.S. Court of Appeals for the Federal Circuit erred in holding that lost profits arising from prohibited combinations occurring outside of the United States are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. § 271(f)."  Readers may be familiar with the underlying case, which I have blogged about before (see here, here, and here).  For background, section 271(f) of the Patent Act reads as follows: 

(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer. 

(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

The defendant in this case was found liable under section 271(f), based on evidence that it supplied components of the invention from the U.S. to foreign customers, who then assembled them and performed marine seismic surveys for customers on the high seas.  The patent owner argues that, but for the infringement, it would have carried out those surveys and earned the resulting profit.  The Federal Circuit concluded, however, that the patent owner may not recover damages for lost profits arising from services it would have been performed outside the U.S., even if the evidence indicates that, but for the unlawful conduct that occurred within the U.S. (the supplying of the components), it would have performed those services.  Judge Wallach dissented.  (For more details, read my earlier posts.)

The petitioner's brief and several of the amicus briefs can now be accessed on Scotus Blog (here).  The respondent's brief was filed on March 26 and is available on Westlaw (and presumably will be up on Scotus Blog, along with some other briefs, before too long).  There's also a good summary of the briefs filed as of March 5 on Patenty-O, here, and another one today summarizing the respondent's brief and two amicus briefs filed on the respondent's behalf.

The specific issue presented in WesternGeco is somewhat narrow (section 271(f) doesn't come up all that often), but the case raises broader questions that are becoming more and more common, both in the U.S. (see, e.g., Power Integrations and Carnegie-Mellon v. Marvell) and elsewhere (e.g., Canada, see here).  For the most part, patents (and other IP rights) throughout the world are territorial in nature:  a U.S. patent, for example, can be asserted against conduct that occurs in the U.S.; but the manufacture, use, or sale of products falling within the scope of the patent’s claims would be actionable in, say, Canada, only if the inventor has a corresponding Canadian patent (and vice versa).  But what if the infringing conduct occurring within the U.S. caused the patent owner to suffer some harm (for example, additional lost sales or lost royalties) outside the U.S.?  Is it permissible to recover damages for extraterritorial losses that were caused-in-fact and proximately caused by the U.S. infringement? Or would such a recovery undermine the principle that U.S. patent law does not apply extraterritorially, or interfere with other countries’ regulation of or public policies regarding the conduct at issue, or potentially result in duplicative recoveries?  Does this sort of situation raise a conflict of laws issue, or a comity issue, or something else?

After giving the matter a great deal of thought over the past few years, I think I've finally come around to the view that courts should award any damages that are caused-in-fact and proximately caused by the infringement, regardless of whether the loss suffered occurred domestically or abroad; and that concerns over potential interferences with foreign law or policy are misplaced (though courts should be careful to avoid duplicative judgments).  My position on this question finally gelled after reading Professor Yelderman's amicus brief, which makes the straightforward point that if my wrongful act causes your factory in the U.S. to shut down, which in turn causes you to suffer a foreseeable loss of profits on sales you would have made in the U.S. and abroad, general principles of tort law (cause in fact, proximate cause) would allow you to recover full compensation for those lost profits, including the lost profits attributable to the lost foreign sales.  That seems uncontroversial to me.  That said, what's different about patents and other IP rights is that sometimes the losses resulting from an act of domestic infringement would also, potentially, be remediable in another country.  Suppose, for example, that my domestic act of patent infringement foreseeably causes you to lose x number of sales in Asia (as was alleged in Carnegie-Mellon).  It's conceivable that the sales my competitor made in Asia could themselves infringe my counterpart Asian patents.  So then we have a risk of duplicative recoveries, or recoveries that exceed the parameters of what would be available in, say, Japan (punitive damages), etc.  On the other hand, I may not have any corresponding Asian patents, either because I didn't seek any or because I didn't succeed in obtaining them.

Anyway, it seems to me that duplicative recoveries are a bad idea, but that that risk can be managed.  Suppose again that an act in country A causes a loss in country B. If the loss in country B has already been the subject of a lawsuit in country B, resulting in a judgment for the plaintiff, any damages recovered in country A should be reduced by the amount of damages recovered in country B.  I don't see why damages in country A should be zero, though, if for some reason country A awards more generous recoveries than country B (punitive damages, disgorgement).  Alternatively, if the lawsuit in country B resulted in a judgment for the defendant--or was never and will never be filed in country B, because the owner doesn't have or can't get a corresponding IP right there--that just means that the act didn't infringe in country B, but the sales themselves could still be foreseeable losses resulting from the infringement in country A.  This seems analogous to me to a "false conflict" in conflict of laws terminology.  On the other hand, what if the loss in country B is potentially remediable there but the first lawsuit is in country A?  Again, I'd say let country A award full damages, but I would hope that B wouldn't impose duplicative damages in some future lawsuit involving the same conduct in B. 

To put it another way, it seems to me that (within reason) country A should be able to decide for itself what sort of activity occurring within its own borders violates A's laws, and what the consequences should be.  If the conduct occurring in A causes the patentee to lose sales that would have been made in B, and A thinks those losses should be compensated in accordance with whatever rules A normally applies to remedy acts of infringement occurring within A, I don't see how that interferes with B's sovereignty.  What makes it seem like a potential interference is that the sales that occurred in B (displacing sales the patentee otherwise would have made) might infringe patent rights in B.  But that is fortuitous.  The only way A would be interfering with B would be if A penalized the infringement occurring in B as such, that is, if it were purporting to penalize conduct, in B, infringing a B-issued patent.  At least the traditional policies in favor of territoriality would counsel against A doing that.  But to the extent A is simply providing a remedy for misconduct occurring in A, I don't see a problem--unless B awards a remedy for the infringement of the patent in B that duplicates the remedy provided in A (e.g., they both award lost profits for the same lost sales in B; or A awards a lost royalty on the lost sales in B, while B awards disgorgement without reducing the award by the amount of the lost royalty). 

At bottom, awarding the full measure of damages implies no disrespect of other countries' laws.  Each country can decide as it sees fit how to remedy wrongful acts occurring within its borders. The only limitation would be to ensure that the same act doesn't get penalized twice.  So if country A awards the disgorgement of profits earned in country B, country B shouldn't award lost profits or disgorgement on top of that for the same acts.  But the interference with sovereignty issue as a red herring.  

I'd also note that proving the domestic act of infringement proximately caused the loss suffered in a foreign country is hardly a walk in the park--those consequences may well be too remote and unforeseeable in a given case.  Thus, I tend to view some of the concerns expressed  in, for example, the respondent's brief, as overblown.  (See, e.g., pp. 49-50, arguing that "Creating a prototype of any product in the United States would give rise to uncontrollable liability for downstream activities by unrelated foreign actors that occur entirely abroad."  I don't think that necessarily follows.)  Moreover, as the Yelderman brief suggests, in some cases moving production to a country where there are no corresponding IP rights could have been the domestic infringer's next-best available noninfringing alternative, thus potentially reducing the damages it owes to zero. 

Of course, I could still be wrong, and I'd welcome comments.