In
recent years, courts in a few countries have begun to address the following question:
where a patent owner proves that a defendant’s act of domestic infringement caused
the patent owner to lose foreign sales that it otherwise would have made, is
the defendant obligated to pay damages for those extraterritorial losses notwithstanding
the fact that the extraterritorial conduct itself doesn’t infringe the patent
owner’s domestic patent rights? In its
2018 decision in WesternGeco LLC v. ION Geophysical Corp., the U.S. Supreme
Court held that the answer to this question is yes, at least in a case in which
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. Earlier this year, the Federal Circuit in Brumfield
v. IBG, LLC, adopted a broad interpretation of WesternGeco, holding
that where the domestic manufacture of a patented invention in violation of Patent
Act § 271(a) enables further activity abroad, the patent owner may be able to recover
from the domestic infringer a reasonable royalty that reflects the value to the
infringer of that subsequent foreign activity, subject to normal principles of
cause-in-fact and proximate cause. (For discussion
on this blog, see here and here.) The Court of
Appeal for England and Wales adopted a similar approach in its 2023 decision in
Anan Kasei v. Neo (see here, here, and here); and there are other decisions
in the same vein in Canada and Japan, as discussed in my 2021 article Extraterritorial Damages in Patent Law. My own view,
as expressed in that article, is consistent with the rules announced in these
cases. Specifically, I argued that the
defendant should be required to compensate the plaintiff for extraterritorial losses
that are caused-in-fact and proximately caused by the domestic infringement,
subject to the caveats that (1) a defendant who could have avoided domestic
infringement by resorting to the noninfringing alternative of making the
product abroad should be liable only for a reasonable royalty reflecting
some portion of the advantage, if any, of domestic as opposed to foreign
manufacture, and not for lost profits; and (2) in cases in which the owner has a
corresponding patent in the other country, courts should be careful to
avoid double recovery for the exact same loss.
I also gave some consideration to other special cases, including where the
defendant or a third party owns the corresponding patent in the other country.
We now
have a decision on this topic from German Bundesgerichtshof (Federal Supreme
Court), which I learned of last week from Florian Mueller, who spotted it in a
LinkedIn post from one of the law firms involved in the case. The decision is BGH, Judgment of May 7, 2024,
X ZR 104/22, available here (in the original German). The facts of the case relevant here are as follows. The plaintiff owned EP 1 070 223 for a
steam-drying apparatus. The German
portion of the patent was still in force at the time relevant here, but the
patent had expired in Sweden. The defendant,
in Germany, made an offer to a Swedish concern to make the patented apparatus in
Sweden, which offer was accepted and the plan carried out (in Sweden). The plaintiff sued for infringement of
the German patent, but at an earlier stage of the litigation the lower court held that the only infringing conduct occurring
in Germany was the aforementioned offer; there was no
infringing conduct in Sweden because, as noted above, the patent was not in
force there. The plaintiff nevertheless sought damages of €1,986,000, which the lower courts rejected. The BGH holds nonetheless that the plaintiff
can recover damages resulting from the German offer.
In
reaching this conclusion, the BGH states that “profits from the performance of
a contract, which stands in a causal relationship with a patent-infringing
offer, are not to be ignored in calculating the damages caused by the offer, simply
because the acts undertaken in performing the contract took place in a
patent-free country” (para. 18, my translation). The Court further notes that although an infringing
offer as such typically does not lead to a loss, it can if it results in
business transactions or deliveries which pertain to the protected subject
matter (para. 22). Moreover, the fact
that the offer leads to business in a foreign country where the patent owner
already has a patent does not compel a different result, though the court
determining damages must be careful to apportion damages correctly (paras.
24-27; this would appear to be dicta, since there was no enforceable foreign patent
here). Moreover, the lower court erred
in concluding that there could be no reasonable royalty award in a case like
this simply because parties generally don’t negotiate royalties for the mere act of
making an offer; the question is what licensing terms reasonable parties could
have negotiated for the mere offer of patented products domestically, taking
into account that foreign activity itself doesn’t need a license (see paras. 34,
53-56).
The
most interesting parts of the decision, in my view, are those that discuss
noninfringing alternatives (rechstmä§ige Alternativverhalten). At para. 45, the Court states that the
objection that the same commercial result could have been attained by
noninfringing conduct does not, in principle, result in the exclusion of a
claim for damages. The Court reiterates this
point at para. 58, stating that the mere fact that the defendant could have made
the offer abroad does not suffice to negate the determination of the accrued
injury. The Court also states, however, that the possibility of
making a noninfringing offer abroad might mean that the prohibition on domestic
offers provides the rightsholder with comparatively little protection. But even if a third party would not have been
prepared to accept a license in exchange for permission to make such offers,
this does not rule out assessing the damages resulting from an unlawful offer
by means of a hypothetical royalty (para. 60).
The minimal protection that a prohibition against a mere offer of the
relevant protected product might provide does not warrant the conclusion that a
reasonable rightsholder would have granted a royalty-free license for such
activity. The circumstance, that offers
could have been made exclusively in a patent-free country may result in only
minimal negative consequences for a competitor.
But this is not an adequate ground for authorizing royalty-free domestic
offers and thus forsaking a portion of the existing protection (para. 62). And then in para. 68 the court states that,
in apportioning the profit derived from the infringing offer, “the scope and
intensity of the patent-infringing offer-activity in Germany can be meaningful,
as well as the advantages which the infringer must have anticipated deriving from the
patent-infringing conduct.” Aside from
the making of the offer, relevant activity might include, where appropriate, contractual
negotiations and other communications with customers directed to the conclusion
of a contract. Great weight can be
accorded especially to the advantages resulting from such activity, if the
potential customer placed special value on contractual negotiations in Germany or
if an offer in Germany renders organizational or financial aspects simpler for
the infringer that would be the case for equivalent conduct outside of
Germany. “In this regard, it may be
significant that the defendant would have had the possibility of making the
offer outside of Germany” (para. 70). For
lost profits, the hypothetical course of causation that would have been
expected absent the infringement is of significance; similarly, it may be appropriate
to reduce the license rate when there is only an offer, and not the importation
of products (paras. 71-72).
My
reaction to the decision is mixed. On
the one hand, if the defendant could have avoided infringement altogether by
making its offer outside Germany, and the end result would have been exactly
the same, I don’t see (logically) how there can be any lost profit at all. (In other words, I believe that the U.S. perspective on the relevance of noninfringing alternatives to lost profits is more sensible than the U.K. approach as expressed in the old United Horse Shoe case. See, e.g., here.) However, I can understand how, in principle,
the defendant might have benefited from making the offer in Germany as opposed
to Sweden, if for example it was simply more convenient to do so, or there was
some other cost advantage from doing so; in that case, though, economic logic
would suggest that the appropriate compensation would be a reasonable royalty
reflecting some portion of that advantage, and not a lost profit. More generally, though, I agree that
extraterritorial compensation should not be off the table altogether just
because the defendant’s only act of domestic infringement was an offer, subject
to the caveats that the plaintiff should recover only for losses that are
both caused in fact and proximately caused by that domestic infringement (and which
therefore could be minimal, depending on the facts). This is essentially the point I made in my
2021 article, which briefly speculated on how U.S. courts would apply the WesternGeco
decision in a case involving an infringing offer; note, however, that on
the issue of what counts as an infringing offer, U.S. law appears to
differ from German law insofar as U.S. law as interpreted by the Federal
Circuit requires that the offer contemplate a domestic sale. Here is what I wrote then (p.53):
In conformity with
the TRIPS Agreement, U.S. patent owners enjoy the exclusive right to, among
other things, “offer to sell” their patented technologies within the United
States. Exactly what this means, however, is debatable: in order to infringe, is
it the offer that has to be made in the United States, the contemplated sale,
or both? In a series of recent cases, the Federal Circuit has held that an
offer made anywhere in the world infringes the U.S. patent owner’s rights, if the contemplated sale would occur in
the United States, whereas an offer made in the United States does not infringe
the U.S. patent owner’s rights, if the contemplated sale would occur abroad. If
this interpretation is correct, the issues presented in this Article are
unlikely to arise in connection with the offer-to-sell right, since the
loss-generating event (the sale) occurs in the United States. On the other
hand, if this interpretation is wrong, such that a domestic offer to sell infringes
even if the sale itself takes place elsewhere, it is not clear how a court
would evaluate the damages resulting from the domestic offer without taking
into account the value of the resulting foreign sales. Without attempting to
resolve the interpretive question here, this Article will note only that, should
the Supreme Court ever overturn the Federal Circuit’s current interpretation,
this might provide further reason to believe that extraterritorial losses
resulting from domestic infringement (here, offers to sell) are cognizable
harms.
It
will be interesting to see how U.S. law eventually resolves these issues relating to offers and damages—and how
the German court resolves them on remand, if the case does not settle.