Wednesday, March 27, 2024

Federal Circuit: Damages for Extraterritorial Injuries Caused by Domestic Infringement Are in Principle Recoverable

The decision is Brumfield v. IBG, LLC, opinion by Judge Taranto, joined by Judges Prost and Hughes.  The case involved four patents, relating to “improved graphical user interfaces for commodity trading and methods for placing trade orders using those interfaces” (p.3), owned by Trading Technologies International, Inc. (TT).  (They are now owned by a trust of which Mr. Brumfield, the appellant named in the caption, is the sole trustee.  The court refers to “TT” as the entity in interest throughout.)  TT alleged that IBG infringed various claims of these patents, and that “the instrument of the alleged infringement was the BookTrader module (trading tool) that is part of IBG’s Trade Workstation Platform (TWS), software that traders load onto their computers and use for buying and selling on exchanges, such as commodities exchanges” (p.11).  The district court found the asserted claim of two of the patents in suit invalid for lack of patentable subject matter, however, a conclusion that the Federal Circuit now affirms (and that I will omit for present purposes).  The matter went to trial on five method claims and one computer readable medium (CRM) claim of the ’304 Patent, and three method and two CRM claims of the ’132 Patent.  The jury found these claims infringed and not invalid, and awarded $6,610,985 in damages.  TT nevertheless challenges the judgment, on the ground that the district court improperly excluded TT’s expert’s damages theory as it related to foreign activities (in which case the damages awarded presumably would be undercompensatory.)  In particular, the district court, uncertain whether the Supreme Court’s decision in WesternGeco LLC v. ION Geophysical Corp., 485 U.S. 407 (2018), overrules the Federal Circuit’s decision in Power Integrations, Inc. v. Fairchild Semiconductor International, Inc., 711 F.3d 1148 (Fed. Cir. 2016), had excluded testimony that apparently would have at least partly based the reasonable royalty due for the domestic infringement of the claims in suit on the value the patentee would have expected to derive from foreign activity that was enabled by the domestic infringement.  WesternGeco specifically held that a U.S. patent owner can recover damages, where the defendant violates Patent Act § 271(f) by exporting components from the United States to be combined abroad, and the resulting extraterritorial combination deprives the patent owner of the profit it would have earned on extraterritorial sales it would have made but for the infringement; it did not expressly address the question of whether the analysis would the same or different when the act of domestic infringement is the (much more common) violation of § 271(a) (making, using, selling in the United States), although I and (some) others have argued that the reasoning of the opinion would apply in this context as well.

In what may prove to be a landmark opinion, the Federal Circuit concludes that WesternGeco overrules Power Integrations , and that a reasonable royalty  awarded for domestic infringement that enables further activity abroad may under some circumstances reflect the value to the infringer of that subsequent foreign activity.  So the district court was wrong on this issue; but unfortunately for TT, the court also concludes that because the expert’s model was premised on domestic manufacture, and the plaintiff hadn’t proven that any infringing domestic manufacture by the defendant actually caused the defendant to gain any foreign benefit, the expert’s testimony on this matter was correctly excluded.

In concluding, as it does, that “[f]or a determination whether patent damages are properly awarded in a particular case based partly on conduct abroad, the decision in WesternGeco established a framework of analysis that necessarily supersedes the analysis set forth in our earlier decision Power Integrations” (p.25), the court’s analysis is consistent with what I argued in my article Extraterritorial Damages in Patent Law, 39 Cardozo Arts & Enter. L.J. 1 (2021).  In particular:

            The first doctrinal issue before us is whether the WesternGeco framework applies when the direct infringement in question (either itself or as a component of indirect infringement) is one of the acts at issue here accused of infringing under § 271(a). We readily conclude that it does.


           Nothing about the WesternGeco analysis of § 284, the damages provision, or about § 281, the cause-of-action provision, is altered when “the infringement” at issue is infringement under § 271(a) rather than § 271(f). Under WesternGeco we must examine the particular acts alleged to constitute infringement under particular statutory provisions to determine if the allegations focus on domestic conduct. Section 271(a) provides that “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” 35 U.S.C. § 271(a) (emphases added). At least the making, using, offering to sell, and selling provisions are expressly limited to domestic acts. . . .


            If the exporting covered by § 271(f)(2) is a domestic act for purposes of the extraterritoriality analysis, as WesternGeco held, so too are the § 271(a)-covered acts at issue in this case. The WesternGeco extraterritoriality framework for damages under § 284 therefore applies to the infringement under § 271(a) here. . . .


           We also conclude that the WesternGeco framework applies to a reasonable-royalty award, not just a lost-profits award, under § 284, though its application must reflect the established differences in standards for the two types of awards. . . .


            This case involves a reasonable royalty, and repeatedly articulated standards frame how the particular issue presented here is properly formulated. . . .


            Those principles point to a minimum requirement for a patentee seeking reasonable-royalty damages based on foreign conduct that is not independently infringing. Under the foregoing principles, the hypothetical negotiation must turn on the amount the hypothetical infringer would agree to pay to be permitted to engage in the domestic acts constituting “the infringement.” 35 U.S.C. § 284. If the patentee seeks to increase that amount by pointing to foreign conduct that is not itself infringing, the patentee must, at the least, show why that foreign conduct increases the value of the domestic infringement itself—because, e.g., the domestic infringement enables and is needed to enable otherwise-unavailable profits from conduct abroad—while respecting the apportionment limit that excludes values beyond that of practicing the patent. This kind of causal connection, framed in terms of the agreement-to-pay aspect of a hypothetical negotiation, is a necessary beginning—we need not here say it is sufficient—for a foreign-conduct analysis in a reasonable-royalty case. Cf. Carnegie Mellon, 807 F.3d at 1307 (noting that defendant’s sales abroad were “strongly enough tied to its domestic infringement as a causation matter to have been part of the hypothetical-negotiation agreement,” before moving on to apply extraterritoriality standards based on Power Integrations, now superseded by WesternGeco) (pp. 33-37).

The court goes on to note, however, that there has to be proximate cause in addition to cause-in-fact, and that the proximate cause analysis as it relates to reasonable royalties may be tricky:

          The foregoing authorities [various Supreme Court decisions] raise questions about the proper approach to determining, based on “other doctrines, such as proximate cause,” WesternGeco, 585 U.S. at 417 n.3, when foreign conduct can properly play a role in calculating patent damages. One such question is whether the “reasonable, objective foreseeability” presumptive standard for lost profits, Rite-Hite, 56 F.3d at 1546, is applicable where the damages are for a (non-established) reasonable royalty, whose conceptual foundation is notably different from that of lost profits. Another question concerns the long-recognized general avoidance of extraterritorial reach that is an aspect of the statutory context. . . . What, if any, room is there to take that consideration into account in applying the proximate-cause requirement, itself not addressed in WesternGeco, without contradicting the Supreme Court’s ruling in WesternGeco? We need not and do not here suggest answers to, or further explore, those or other questions (pp. 39-40).

For my own ruminations on proximate cause and royalties in this context, see my article above at pp. 39-42, 51-52.

The reason the court doesn’t need to explore those issues for now is its factual conclusion that the expert had not shown “the needed causal relationship to the foreign conduct for which recovery is sought” (p.40).  The asserted infringement on which the expert relied was “Making the Accused Product,” but that (the court says) cannot refer to the method claims in suit, because you don’t “make” a method (p.41).  The expert’s analysis therefore would have had to refer to the CRM claims, but the expert did not focus on the defendant’s making of “an individual memory-device unit,” but rather its TWS BookTrader software—“software in the abstract”—which was not itself claimed in the patents in suit (pp. 41-42).  The expert’s analysis therefore didn’t start from an act of domestic infringement, i.e., “making a claimed CRM (or method)” (p.42).  Instead—if I am understanding this correctly—the expert sought to include the foreign use of copies of the TWS BookTrader software in the royalty base (see p.16), but without tying that use to a predicate act of infringing domestic manufacture.  At least, I think that’s the gist of it.  The court further observes:

          We may assume (without deciding) that IBG had to make early CRMs domestically (or practice the claimed method) as part of its process of developing its software and that the value of such development work to IBG might reflect prospective foreign-earned revenue for the resulting product. Cf. Carnegie Mellon, 807 F.3d at 1294, 1297, 1307 (referring to payment for domestic infringement that is part of development work that, when completed, would produce large foreign revenues). In this case, however, according to TT and Ms. Lawton, IBG’s development of its BookTrader product meeting all claim limitations occurred before TT’s patents issued: TT accused IBG of marketing its BookTrader product before July 20, 2004, which caused infringement to begin precisely when the ’304 patent issued. On that premise, IBG’s making of CRMs in the initial creation of a BookTrader product meeting all claim limitations was not infringing under § 271(a), and IBG therefore did not need to pay TT anything for that work, which could not properly be included in the calculation in the hypothetical negotiation held “just before” July 20, 2004. . . .   


         Later domestic making of BookTrader-containing CRMs (or practicing of the claimed methods) could be infringing, of course, and properly be subject to a royalty. But TT was permitted to introduce evidence that some foreign users of BookTrader obtained their copies from domestic acts of making a copy or selling. FRE 702 Opinion, 2021WL 5038754, at *2. The only disallowed proposal therefore had to involve making copies abroad for foreign users (and foreign sales).


           On TT’s and Ms. Lawton’s premise that pre-July 20, 2004 versions of TWS BookTrader met the limitations of the ’304 and ’132 patents’ claims, TT has not offered a concrete, coherent account of why, in the hypothetical negotiation, the royalty for new domestic acts of making claimed CRMs (or practicing claimed methods), starting July 20, 2004, would have properly been increased to reflect the prospective making and sale of CRMs abroad for use abroad. On the noted premise, IBG, even before the patents issued, already had CRMs containing TWS BookTrader that met the patents’ limitations. “[N]either export from the United States nor use in a foreign country of a product covered by a United States patent constitutes infringement.” Johns Hopkins University v. CellPro, Inc., 152 F.3d 1342, 1366 (Fed. Cir. 1998). And TT has not argued that the making of CRMs abroad would be infringing, even if the software installed abroad came from the United States, either under § 271(a), see Centillion Data Systems, LLC v. Qwest Communications International, Inc., 631 F.3d 1279, 1288 (Fed. Cir. 2011); Deepsouth, 406 U.S. at 527, or under § 271(f), see Microsoft, 550 U.S. at 449–50 (software itself is not a “component” under § 271(f)). . . .


          IBG might of course infringe by domestically making new CRMs containing upgraded versions of TWS BookTrader. But TT has not shown how value added by the upgrades would be properly added to the royalty in light of the apportionment requirement to avoid charging for value not attributable to the claimed invention. In particular, TT has not explained how such upgrade value would be anything but the value of features beyond what is required by the patent claims . . . . (pp. 43-45).

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