Monday, July 6, 2015

Westerngeco v. ION: No Lost Profits on Lost Extraterritorial Sales

Last week, the Federal Circuit handed down opinions in WesternGeco L.L.C. v. ION Geophysical Corp. (link here).  At issue are four patents asserting claims "relating to technologies used to search for oil and gas beneath the ocean floor" (p.3).  WesternGeco makes and sells products embodying the patented technologies, and its accused its competitor ION of violating 35 U.S.C. § 271(f)(1) and (2).  I'll focus exclusively on the remedies issues.

In relevant part, § 271(f) reads: 
(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
The Federal Circuit affirmed the jury's finding of liability under § 271(f)(2) (and did not reach the issue of liability under § 271(f)(1)), but the majority (in an opinion by Judge Dyk, joined by Judge Hughes) concluded that this did not entitle WesternGeco to lost profits on certain contracts that WesternGeco believes it would have earned, but for the violation.  

To understand the ruling requires some factual background.  According to the court (pp. 16-17):
WesternGeco makes the Q-Marine [described earlier in the opinionas "its commercial embodiment of the patented technologies"] domestically and performs the surveys abroad on behalf of its customers—oil companies looking to extract oil from the sea floor. ION makes the DigiFINs [described earlier as the "allegedly patent-practicing device"] domestically and then ships them overseas to its customers, who, in competition with WesternGeco, perform surveys abroad on behalf of oil companies. WesternGeco identified ten surveys for which it believes that, but for ION’s supplying of DigiFINs to ION’s customers, WesternGeco would have been awarded the contract. These ten surveys allegedly would have generated over $90,000,000 in profit. According to WesternGeco, ION’s customers would not have been able to win the contracts if they did not have access to the DigiFINs. Thus, according to WesternGeco, but for ION’s sales to its customers, WesternGeco would have earned over $90 million in profit from the ten lucrative services contracts performed abroad. 
ION argues that WesternGeco cannot receive lost profits resulting from the failure to win these contracts. The service contracts were all to be performed on the high seas, outside the jurisdictional reach of U.S. patent law. There is also no contention that the service contracts were entered into in the United States.
Invoking the presumption against extraterritoriality, and characterizing § 271(f) as expanding territorial scope only to the extent of treating the export of components of a patented system the same way as the export of a finished system, the court sided with ION (pp. 18-19):
It is clear that under § 271(a) the export of a finished product cannot create liability for extraterritorial use of that product. The leading case on lost profits for foreign conduct is Power Integrations, Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348 (Fed. Cir. 2013). There, the patentee, a chip supplier, lost contracts to supply a prospective customer with computer chips in the United States and abroad because the accused infringer became a competitor for such contracts as a result of the U.S. infringing sales. If the accused infringer had been precluded from U.S. infringement, the patentee alleged that the accused infringer could not have competed for the contracts which necessarily involved supplying chips both in the United States and abroad. The patentee argued that it should recover world-wide lost profits. 
We rejected that argument: “[Our patent laws] do not thereby provide compensation for a defendant’s foreign exploitation of a patented invention, which is not infringement at all.” Power Integrations, 711 F.3d at 1371. Rather, “we find neither compelling facts nor a reasonable justification for finding that [the patentee] is entitled to ‘full compensation’ in the form of damages based on loss of sales in foreign markets which it claims were a foreseeable result of infringing conduct in the United States.” Id. at 1372. “[T]he entirely extraterritorial production, use, or sale of an invention patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement.” Id. at 1371–72. Under Power Integrations, WesternGeco cannot recover lost profits resulting from its failure to win foreign service contracts, the failure of which allegedly resulted from ION’s supplying infringing products to Western-Geco’s competitors.
The majority also responded to dissenting Judge Wallach's arguments in support of a lost profits award (pp. 20-22):
First, the dissent identifies Supreme Court cases it believes approved awards of lost profits for foreign sales, citing Goulds’ Manufacturing Co. v. Cowing, 105 U.S. 253 (1881), Dowagiac Manufacturing, Co. v. Minnesota Moline Plow Co., 235 U.S. 641 (1915), and Duchesne, 60 U.S. 183. None of these cases is remotely similar to this one. To be sure, they suggest that profits for foreign sales of the patented items themselves are recoverable when the items in question were manufactured in the United States and sold to foreign buyers by the U.S. manufacturer. See Goulds’ Mfg., 105 U.S. at 254; Dowagiac Mfg., 235 U.S. at 642–43; Duchesne, 60 U.S. at 196. There is no such claim here. Rather, the claim is for lost profits from the use abroad of the items in question. . . .
Second, the dissent argues that the surveys should be recoverable as “convoyed sales” of the domestically manufactured components of the infringing DigiFINs. But, WesternGeco did not raise this argument before the district court or this court. And, the dissent points to no case extending the convoyed sales doctrine to cover sales of related products or services abroad. . . .
Third, the dissent expresses concern that our ruling today might effectively prevent WesternGeco from recovering lost profits at all, as the surveys were conducted on the high seas and were outside of the territorial reach of any patent jurisdiction in the world. This may or may not be the case. Indeed, WesternGeco does not contend that it is barred from recovering in the jurisdiction in which the services contracted was negotiated and signed, nor does it contend that it is barred from recovering in the jurisdiction from which the ship performing the seismic surveys is flagged. In any event, the possible failure of liability provides no basis for ignoring the presumption against extraterritoriality.
As a result, the court held that WesternGeco could recover only a reasonable royalty--noting, however, that  "[t]he extent to which these royalties may be affected by lost profits suffered abroad is an issue not presented here. See Union Carbide Chems. & Plastics Tech. Corp. v. Shell Oil Co., 425 F.3d 1366, 1378 (Fed. Cir. 2005), overruled on other grounds, Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348, 1365 (Fed. Cir. 2009) (en banc); see also Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F.3d 1365, 1378 n.7 (Fed. Cir. 2015)" (p.20 n.7).  The issue of whether a royalty can reflect foreign use that allegedly is attributable to an initial act of infringement in the U.S. is currently on appeal in the Carnegie-Mellon case (see blog post here.)

Also on the issue of royalties, the court affirmed the district court's decision to exclude testimony from WesternGeco's expert  that an appropriate royalty would have been 10% of the $3.3 billion in revenue that ION's customers received from performing surveys with ION's DigiFIN, reasoning that the court did not abuse its discretion given that the proposed royalty "would have exceeded ION's revenue by four times" (p.24).  The court also affirmed the decision not to enhance damages, on the ground that ION's defenses were reasonable.

Though I need to give the matter some more thought, I'm inclined to think the majority view is correct. WesternGeco may have lost sales, and thus profits, to foreign customers as a result of ION's alleged conduct in violation of § 271(f), but to allow recovery would seem to undermine the presumption against extraterritoriality.  The causal chain has to stop somewhere.  I am more receptive in such cases to the idea of basing a reasonable royalty on the value of the use to the defendant, where such value contemplates sales to foreign buyers; though there too I'm not entirely sure I've made up my mind.  This is quite a complex area of damages law.

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