WesternGeco v. ION: Analysis

Again, here is a link to the opinion (majority opinion by Justice Thomas; dissent filed by Justice Gorsuch, joined by Justice Breyer).  From the opinion:

Under the Patent Act, a company can be liable for patent infringement if it ships components of a patented invention overseas to be assembled there. See 35 U.S.C. § 271(f)(2). A patent owner who proves infringement under this provision is entitled to recover damages. § 284.The question in this case is whether these statutes allow the patent owner to recover for lost foreign profits. We hold that they do (p.1).

The majority opinion centers on the Supreme Court's extraterritoriality analysis, although it does also reiterate, as past decisions have done, that § 284 is intended to provide "full compensation" for the infringement.  (The Court expressly decides not to "address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases" (p.9 n.3).  I expected the Court would address that issue, and I think it should have.)  Basically, the Court concludes that the conduct that § 271(f)(2) addresses is domestic, and thus that § 284 should be read as providing full compensation for that act of domestic infringement.  Here are some of the key excerpts from what is a fairly short opinion:

This Court has established a two-step framework for deciding questions of extraterritoriality. The first step asks “whether the presumption against extraterritoriality has been rebutted.” RJR Nabisco, Inc. v. European Community, 579 U. S. ___, ___ (2016) (slip op., at 9). It can be rebutted only if the text provides a “clear indication of an extraterritorial application.” Morrison v. National Australia Bank Ltd., 561 U.S. 247, 255 (2010). If the presumption against extraterritoriality has not been rebutted, the second step of our framework asks “whether the case involves a domestic application of the statute.” RJR Nabisco, 579 U.S., at ___ (slip op., at 9). Courts make this determination by identifying “the statute’s ‘focus’” and asking whether the conduct relevant to that focus occurred in United States territory. Ibid. If it did, then the case involves a permissible domestic application of the statute. See ibid.

We resolve this case at step two. While “it will usually be preferable” to begin with step one, courts have the discretion to begin at step two “in appropriate cases.” See id., at ___, n.5 (slip op., at 10, n.5) (citing Pearson v. Callahan, 555 U.S. 223, 236–243 (2009)). . . .

Under the second step of our framework, we must identify “the statute’s ‘focus.’” RJR Nabisco, supra, at ___ (slip op., at 9). The focus of a statute is “the objec[t] of [its] solicitude,” which can include the conduct it “seeks to ‘regulate,’” as well as the parties and interests it “seeks to ‘protec[t]’” or vindicate. Morrison, supra, at 267 (quoting Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 10 (1971)). “If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application” of the statute, “even if other conduct occurred abroad.” RJR Nabisco, 579 U.S., at ___ (slip op., at 9). But if the relevant conduct occurred in another country, “then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S.territory.” Ibid. . . .

Applying these principles here, we conclude that the conduct relevant to the statutory focus in this case is domestic. We begin with § 284. It provides a general damages remedy for the various types of patent infringement identified in the Patent Act. The portion of § 284 at issue here states that “the court shall award the claimant damages adequate to compensate for the infringement.” We conclude that “the infringement” is the focus of this statute. As this Court has explained, the “overriding purpose” of § 284 is to “affor[d] patent owners complete compensation” for infringements. General Motors Corp. v. Devex Corp., 461 U.S. 648, 655 (1983). “The question” posed by the statute is “‘how much ha[s] the Patent Holder. . . suffered by the infringement.’” Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 507 (1964). Accordingly, the infringement is plainly the focus of § 284.

But that observation does not fully resolve this case, as the Patent Act identifies several ways that a patent can be infringed. See § 271. To determine the focus of § 284 in a given case, we must look to the type of infringement that occurred. We thus turn to § 271(f)(2), which was the basis for WesternGeco’s infringement claim and the lost-profits damages that it received. . . .

Section 271(f)(2) focuses on domestic conduct. It provides that a company “shall be liable as an infringer” if it“supplies” certain components of a patented invention “in or from the United States” with the intent that they “will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.” The conduct that § 271(f)(2) regulates—i.e., its focus—is the domestic act of “suppl[ying] in or from the United States.” . . .

In sum, the focus of § 284, in a case involving infringement under § 271(f)(2), is on the act of exporting components from the United States. In other words, the domestic infringement is “the objec[t] of the statute’s solicitude” in this context. Morrison, 561 U. S., at 267. The conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents. Thus, the lost-profits damages that were awarded to WesternGeco were a domestic application of § 284 (pp. 5-8).

So, suppose we have a replay of Power Integrations or Carnegie-Mellon.  The infringing conduct at issue is a manufacture, use, or sale that occurs in the United States, in violation of § 271(a), but which triggers a chain of events resulting in (1) the U.S. patent owner losing a sale to the defendant in another country, or (2) the defendant obtaining higher profits on the sales it makes in another country.  Is the U.S. patent owner entitled to its lost profit in case (1), or a higher reasonable royalty in case (2), as long as the causal chain is not too remote--that is, as long as the sales the defendant made abroad were proximately caused by the infringement?  As I've noted previously, I've come around to the view that the answer is yes, and I'm inclined to read Justice Thomas's statements as quoted above as supporting that result.  He says that the "focus" of § 284 is "the infringement," and that § 284 is intended to provide "full compensation" for such infringement; and  § 271(a) defines infringement as the unauthorized domestic manufacture, sale, or use of the patented invention.  In other words, "the conduct relevant to" § 284's "focus" is domestic conduct, and as long as that is so § 284 provides for full compensation for the harm flowing from that domestic conduct (subject, surely, to normal proximate cause limitations, even if the Court stubbornly refuses to address that topic).  So there's no need to fret about whether whether the presumption against extraterritoriality applies, I guess.

In dissent, Justice Gorsuch actually agrees that "WesternGeco's lost profits claim does not offend the judicially created presumption against the extraterritorial application of statutes."  Nevertheless, he argues that the Patent Act itself does not "permit awards of this kind" because "[a] U.S. patent provides a lawful monopoly over the manufacture, use, and sale of an invention within this country only," and "WesternGeco seeks lost profits for use of its invention beyond our borders" (dissent p.1).  But I think Justice Thomas has the better of the argument here, when he states in the majority opinion that this "position wrongly conflates legal injury with the damages arising from that injury" (majority opinion p.9).  And I'm not convinced by Justice Gorsuch's parade of horribles, for example this:

Suppose a company develops a prototype microchip in a U.S. lab with the intention of manufacturing and selling the chip in a foreign country as part of a new smartphone. Suppose too that the chip infringes a U.S. patent and that the patent owner sells its own phone with its own chip overseas. Under the terms of the Patent Act, the developer commits an act of infringement by creating the prototype here, but the additional chips it makes and sells outside the United States do not qualify as infringement. Under WesternGeco’s approach, however, the patent owner could recover any profits it lost to that foreign competition—or even three times as much, see § 284—effectively giving the patent owner a monopoly over foreign markets through its U.S. patent. That’s a very odd role for U.S. patent law to play in foreign markets, as “foreign law alone, not United States law,” is supposed to govern the manufacture, use, and sale “of patented inventions in foreign countries.” Microsoft, supra, at 456 (dissent pp. 7-8).

I have a hard time imagining the initial act of manufacturing the infringing prototype in the U.S. as being the proximate cause of all of the infringer's sales abroad.  And what about the noninfringing alternative of manufacturing the prototype in a country where it isn't patented (a point the Solicitor General made in his brief, as I recall)?  That would seem to eliminate most of the damages resulting from the foreign sales, I should think.

Justice Gorsuch also worries that other countries will follow suit:

Worse yet, the tables easily could be turned. If our courts award compensation to U.S. patent owners for foreign uses where our patents don’t run, what happens when foreign courts return the favor? Suppose our hypothetical microchip developer infringed a foreign patent in the course of developing its new chip abroad, but then mass produced and sold the chip in the United States. A foreign court might reasonably hold the U.S. company liable for infringing the foreign patent in the foreign country. But if it followed WesternGeco’s theory, the court might then award monopoly rent damages reflecting a right to control the market for the chip in this country—even though the foreign patent lacks any legal force here (dissent p.8).

I suppose that's a risk--but for that matter, other countries could interpret their patents as having extraterritorial force altogether, if they wanted to.  But they won't.  If proximate cause and analysis of noninfringing alternatives would limit the damages available for most of the losses occurring outside the U.S., the practical consequences of WesternGeco won't be so far-reaching, and won't provoke such a far-reaching response from other countries.