Reasonable Royalties Measured by Extraterritorial Sales of a Complementary Product

In Power Integrations, Inc. v. Fairchild Semiconductor Int'l, Inc., 711 F.3d 1348 (Fed. Cir. 2013), the Federal Circuit held that the owner of a U.S. patent cannot recover extraterritorial lost profits caused by an act of domestic infringement in violation of § 271(a); and in Carnegie Mellon Univ. v. Marvell Tech. Group, Ltd., 807 F.3d 1283 (Fed. Cir. 2015), it held that the U.S. patent owner also cannot recover reasonable royalties that reflect extraterritorial uses of its patented technology, even if these uses stem from an act of  domestic infringement in violation of Patent Act § 271(a).  (For previous discussion on this blog, see here.)  In WesternGeco LLC v. ION Geophysical Corp., 138 S. Ct. 2129 (2018), however, the U.S. Supreme Court held that when an act of domestic infringement in violation of Patent Act § 271(f) causes the patent owner to suffer the loss of extraterritorial sales, the patent owner is entitled to recover damages for that extraterritorial loss.  (For previous discussion, see here.)  Whether WesternGeco implicitly overrules Power Integrations and Carnegie Mellon remains a matter of debate (see, e.g., here, here, here, and here), though a couple of district court decisions last year held that WesternGeco does overrule Power Integrations.  (For discussion of one of them, see here.)  Professor Dmitry Karshtedt has now sent me a copy of a new decision, SIMO Holdings Inc. v. Hong Kong uCloudlink Network Technology Ltd., in which U.S. District Judge Jed Rakoff in effect holds that WesternGeco overrules Carnegie Mellon.

Earlier this year, Judge Rakoff granted the plaintiff summary judgment that the accused WiFi hotspot devices and mobile phones, which enable users to access data while traveling abroad without incurring roaming charges, infringe claims 8 and 11 of U.S. Patent No. 9,736,689.  See SIMO Holdings Inc. v. Hong Kong uCloudlink Network Tech. Ltd., 376 F. Supp. 3d 397 (S.D.N.Y. 2019).  In May, the court held a jury trial on invalidity and damages.  The jury returned a verdict finding the patent valid and the infringement willful, and awarding compensatory damages of $2,183,562.40.

On a post-trial motion, Judge Rakoff concludes, among other things, that (1) his jury instruction on willfulness was appropriate; (2) the plaintiff was entitled to a permanent injunction, in large part because the parties are competitors; and (3) the plaintiff was not entitled to attorneys' fees, because the case was not exceptional.  The willfulness portion of the opinion is interesting, so let me note just a couple of things on that issue before returning to extraterritoriality.  The court states (pp.23-25):

The Court instructed the jury that, "[t]o prove willful infringement, plaintiff must prove by a preponderance of the evidence that uCloudlink actually knew it was infringing at least one Asserted Claim of SIMO's '689 Patent, that is, that uCloudlink actually knew of SIMO's Patent and intentionally,chose to infringe it." Jury Instructions 20, ECF No. 184. The Court declined, however, to instruct the jury (as uCloudlink had requested) that the jury could "consider whether uCloudlink's behavior was malicious, wanton, deliberate, consciously wrongful, flagrant, or in bad faith." uCloudlink contends that this omission was prejudicial.

The Court is not persuaded. uCloudlink has.plucked this list of descriptors from the Supreme Court's opinion in Halo, 136 S. Ct. at 1932. Crucially, however, uCloudlink's proposed instruction omits the word "deliberate." See id. ("The sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or - indeed - characteristic of a pirate."). So the Supreme Court made clear that "deliberate" - that is, intentional - infringement can be "wilful." . . . The Court is satisfied that its instructions to the jury conveyed this legal principle, as the jury was told that it needed; to conclude that uCloudlink knew it was infringing and intentionally chose to infringe.

uCloudlink does not explain how the jury was misled by the Court's instruction. The Court declined to adopt uCloudlink' s proposed language because the list of descriptors - many of them not really applicable to this case - would have confused the jury and required additional supplemental explanation. See Tr. 575. If all that is meant by "wanton" is "deliberate" - and that is the lesson the Court takes from Halo - the Court does not see the use in defining the word "wanton" for the jury. Moreover, because the descriptors are listed in the disjunctive, the jury could still have returned a verdict of willfulness upon finding that defendants' conduct was deliberate or intentional. There is no reason to think that adding several near-synonyms would have changed that result.

Earlier in the opinion, the court also concluded that the circumstantial evidence of willfulness was "more than 'a complete absence of evidence' . . .  supporting the jury's verdict of willfulness . . ." (p.9, quotation omitted).  I note these points at some length simply because I might have thought that "willful" misconduct had to be something more than "intentional" conduct; but maybe not.

Now, on to damages.  First off, the judge rejected arguments that the plaintiff's expert's methodology was improper.  In particular, the expert (Christopher Martinez) had "calculated the reasonable royalty as a function of the number of" noninfringing Daypass data packages the defendant sold to users in the United States--the theory being, if I understand correctly, that neither company makes a profit on the sale of its devices, but rather on these complementary products, and that a reasonable royalty for use of the patented technology would reflect some portion of the value derived from the sales of these products (pp. 13-15, 37).  From the opinion (pp. 14-15):

Here, as discussed above, the value of uCloudlink's devices is not in the hardware itself. Rather, it is the fact that the products permit convenient global mobile network access. The devices themselves are useful only insofar as they serve as "gateways" to the data or mobile network. And, crucially, the manner in which the uCloudlink devices provide roaming services infringed SIMO's '689 Patent. Thus, by limiting the reasonable royalty rate to the sales of Daypasses, Martinez adequately focused on the value added by the '689 Patent - i.e. the ability to provision mobile roaming services. To suggest that the reasonable royalty should be based only on the Infringing Devices, rather on the data access that the infringement makes possible, is simply to ignore economic reality.

Second, the court addressed whether to supplement the damages award to include international sales.  Here's what Judge Rakoff says (pp. 42-45):

SIMO also contends that the damages award should be supplemented to include sales of Daypasses sold internationally for use with devices purchased in the United States. Pl. Mem. Supp. Mot. Amend Judgment 9. During a January 2, 2019 phone conference, the Court orally denied SIMO's application to compel discovery on this issue, without prejudice to renewal at a later date. Prior to trial, the Court granted uCloudlink's motion in limine to preclude plaintiff's damages expert from offering an opinion as to global damages. Upon further consideration, however, the Court concludes that SIMO is entitled to recover damages for the sales of Daypasses linked to U.S.-purchased devices.

uCloudlink argues that SIMO cannot recover for Daypasses purchased abroad because foreign infringement is not infringement at all. Def. Mem. Opp. Mot. Amend Judgment 8; see Power Integrations, Inc. v. Fairchild Semiconductor Intern., Inc., 711 F.3d 1348, 1371-72 (Fed. Cir. 2013). But that argument "conflates legal injury with the damages arising from that injury." WesternGeco LLC v. ION Geophysical Corp., 138 S. Ct. 2129, 2138 (2018). SIMO does not seek to recover for "infringement" abroad. Rather, it seeks to recover fully for a domestic act of infringement, i.e. the sale of an Infringing Device in the United States. And SIMO is entitled to full compensation for that act of infringement, even if some of the harm traceable to it occurred abroad.

WesternGeco controls this case. . . . It reasoned that permitting recovery for lost foreign profits was not an impermissible "extraterritorial" application of the statute, because the focus of § 284 is the infringement, which occurred domestically. Id. at 2137-38.

The same is true here. uCloudlink committed an act of infringement by selling its devices in the United States. In the hypothetical world in which the parties had reached an ex ante licensing agreement, SIMO would be entitled to a licensing fee based on the number of Daypasses sold for use with that device, whether the Daypasses were used domestically or abroad. . . .

. . . uCloudlink argues that foreign damages are only available when, as in WesternGeco, the theory of infringement is exporting components abroad. Def. Mem. Opp. Mot. Amend Judgment 8. But that is not right. WesternGeco did not hold that a patentee could recover based on acts of infringement committed abroad; it held that you could recover for harms abroad that are proximately caused by domestic acts of infringement. . . .

The Court understands WesternGeco to mean that patentees may recover for infringement foreign injuries caused by domestic acts of infringement - as long as, of course, those injuries are proximately caused by the domestic acts. 138 S. Ct. at 2139 n.3. Here, there is no proximate cause concern. The devices at issue are hotspots for international roaming. They are explicitly marketed and promoted as permitting easy access to data while traveling internationally. It was plainly foreseeable that owners of such devices, purchased in the U.S., would buy Daypasses while traveling to other countries.

Accordingly, SIMO's motion to amend the judgment is granted to the extent of ordering an accounting of (1) U.S. sales of devices and Daypasses from January 1, 2019 through August 31, 2019; and (2) sales of Daypasses abroad for use with devices purchased in the U.S.

I think Judge Rakoff's analysis of the extraterritoriality issue is correct--assuming, as Judge Rakoff concludes, that the parties would have considered both domestic and foreign sales of Daypasses in negotiating a royalty for the domestic use of the patented technology.  Although I had some difficulty making up my mind on this issue initially, I eventually came around to the view that U.S. patent owners should be able to recover damages for extraterritorial losses that are proximately caused by an act of domestic U.S. infringement.  (For some of my previous posts, see, again, here and here.)  As I hope to discuss in a paper Jorge Contreras and I are planning to resume work on later this year, however, I also think that courts in the U.S. and elsewhere need to make sure that any damages they award are not duplicative of damages already awarded by a foreign tribunal--and to apply appropriate proximate cause and non-infringing alternative principles, as they should in all cases.