Tuesday, June 22, 2021

Cotter on Extraterritorial Damages in Patent Law

My article Extraterritorial Damages in Patent Law, 39 Cardozo Arts & Entertainment Law Journal 1-54 (2021), is now out.  Here is a link to the article on CAELJ's website, and here is the link to ssrn.  Here is the abstract: 

In 2018, the Supreme Court in WesternGeco LLC v. ION Geophysical Corp. held that the owner of a U.S. patent could recover its lost profit on sales it would have made outside the United States, but for the defendant’s violation of 35 U.S.C. § 271(f)(2)—a rarely-used provision of the Patent Act that prohibits, subject to certain conditions, the export of patented components for combination abroad. The Court left open the question of whether owners also can recover extraterritorial damages resulting from the (much more common) setting in which the defendant is accused of an initial act of making, using, or selling the invention within the United States, in violation of § 271(a). Consideration of this question exposes an ostensible tension between two long-established principles of U.S. patent law: first, that owners are, in general, entitled to full compensation for their losses; and second, that patent rights are territorial, that is, unenforceable against conduct occurring outside a nation’s borders.

In this Article, I argue that allowing patent owners to recover damages for extraterritorial losses stemming from violations of § 271(a) does not, in fact, undermine the territoriality principle, as long as courts are consistent in their application of three limiting principles. The first is that the domestic infringement must be the cause-in-fact (or “but-for” cause) of the defendant’s subsequent foreign sales. While this requirement might seem obvious, in the present context it means that, if the defendant could have avoided infringing the U.S. patent by outsourcing production, then as a matter of economic logic the domestic infringement is not a cause-in-fact of the extraterritorial sales, and at most the patent owner is entitled to a royalty reflecting the lower cost, if any, of domestic manufacture. Second, even if the domestic infringement is the cause-in-fact of foreign sales, the patent owner cannot recover damages unless those sales also are proximately caused by the domestic infringement. Contrary to the views of some commentators, however, there is nothing inherently unforeseeable, indirect, remote, or speculative about foreign sales tied to domestic infringement, and no sound public policy reason for categorically excluding them from consideration. The third principle is that courts should not compensate patent owners twice for the same loss. Fortunately, courts in the U.S. and elsewhere have considerable experience applying, under a range of circumstances, the “single recovery” rule (otherwise known as the rule against double recovery). Taken together, application of these principles should enable courts to avoid the parade of horribles that some commentators fear will result from any slackening of the territoriality principle.

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