Lost foreign profits are defined as profits that the patent owner could have made overseas or outside of the United States. Normally, patent owners can only recover for lost profits that they incur based on a competitor’s activity within the United States. To put it differently, patent owners generally cannot recover for lost foreign profits based on activity outside of the United States. In WesternGeco LLC v. Ion Geophysical Corp (S. Ct. 2018), the Supreme Court held that recovery of lost foreign profits is permissible in some cases, as discussed below.
Lost foreign profits are permissible
To clarify the holding, the Supreme Court emphasized that this opinion only deals with the permissibility of awarding lost foreign profits. Lost foreign profits are not mandatory. For example, to limit exposure, competitors are free to argue that the infringing activities was not the proximate cause of the lost profits. In support thereof, footnote 3 of the opinion stated that “In reaching this holding, we do not address the extent to which other doctrines, such as proximate cause, could limit or preclude damages in particular cases.” As such, this opinion is good news for patent owners but has its limits.
Fact pattern of WesternGeco LLC
The specific facts of this case are discussed below. The patent owner (Westerngeco) owns patents related to a system for surveying the ocean floor. The system uses lateral-steering technology to produce higher quality data than prior art survey systems. In its business structure, the patent owner “does not sell its technology or license it to competitors. Instead, it uses the technology itself, performing survey for oil and gas companies.”
The infringer (ION Geophysical Corp.) “began selling a competing system. It manufactured the components for its competing system in the United States and then shipped them to companies abroad. Those companies combined the components to create a surveying system indistinguishable from WesternGeco’s and used the system to compete with WesternGeco.”
The patent owner (WesternGeco) lost 10 contracts outside of the United States because of the infringer’s activity of selling a component part and exporting such components overseas for assembly into the infringing product. The patent owner could have made a profit of $12.5 million on those contracts, and thus was awarded that amount in damages.
Activities that constitute patent infringement
A patent provides a patent owner a right to exclude others from making, using, offering to sell, or selling within the United States or importing any patented invention into the United States. When patent attorneys explain the rights that a patent gives the patent owner, this is the bundle of rights that are listed and is based on 35 USC 271(a). These rights are all based on activities based within the United States and any damage award is based on a competitor’s activity within the United States as well. However, Section 271 has other sections that provide other patent rights which if violated constitutes patent infringement.
Under Section 271(b), inducing someone else to infringe a patent constitutes patent infringement.
Under Section 271(c), importing a unique component especially made for a patented machine constitutes patent infringement.
Under Section 271(f)(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.
Under Section 271(f)(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.
Under Section 271(g), importing a product made by a patented process into the United States constitutes patent infringement.
In the instant case, the infringer was found to infringe the patent based on Section 271(f)(2) listed above. They supplied a unique component of the patented invention from within the United States which was then assembled outside of the United States into a product that infringed the patent.
Analysis of whether lost foreign profits is permissible
Now, the issue before the court was whether the infringer is liable for the lost profits that the patent owner would have made on those 10 lost foreign contracts or for something less such as the lost profits for the unique component sold by the infringer to others. Presumably, the profit on 10 components would be substantially less than the service contract using those components.
In general, courts presume that federal statutes like the patent statute apply only within the territorial jurisdiction of the United States. However, this presumption can be overcome which in this case it was. The basic reason was that the type of infringing activity that was being regulated was that of “exporting” components from the United States. The court also referenced Section 284 which sets an award of damages for patent infringement so that the damage aware completely compensates the patent owner due to the infringement. To compensate the patent owner, this includes lost profits but also includes lost foreign profits.
This case dealt with the availability of lost foreign sales based on infringement under Section 271(f)(2) but the court expressly stated that this holding does not apply to infringement under Section 271(f)(1). Section 271(f)(2) addresses the activity of supplying a unique component of a patented invention from the U.S. to outside the U.S., whereas Section 271(f)(1) addresses activities of supplying a generic component from the United States to a foreign country and inducing others to infringe use the component outside of the U.S. to infringe the patent. Because of the differences in standards for what constitutes infringement under the two subsections, the court reserved the decision as to whether recovery of lost foreign sales for infringement under Section 271(f)(1) for a later date.
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