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Will damages for infringing a U.S. patent soon reach foreign sales?

Zachary Silbersher

In June of this year, the Supreme Court issued a decision in WesternGeco LLC v. Ion Geophysical Corp.  On its face, the case had minimal potential impact because it was limited to a more rarified form of infringement.  Now, however, the District Court in the long-running dispute between Power Integrations and Fairchild Semiconductor has suggested WesternGeco could justify taxing foreign sales for other forms of infringement of a United States patent.  And the Court has also kicked this question up to the Federal Circuit to decide.  Will damages for infringing a U.S. patent soon reach foreign sales? 

Briefly, in WesternGeco, the Supreme Court held that lost profits damages for infringement under a certain section of the Patent Statute (35 U.S.C. § 271(f)(2)) may be recovered for overseas sales.  The case addressed infringement of patents for conducting seismic surveys used for searching for oil and gas beneath the ocean floor.  The defendant, ION Geophysical Corp., does not make any infringing products within the U.S.  Rather, it makes components domestically that are shipped abroad, and then assembled by customers into infringing products.  Because of this, the plaintiff, WesternGeco, claimed lost profits for customer contracts it lost to ION Geophysical abroad. 

The Federal Circuit held that U.S. patents have territorial limits, and thus lost profits for infringement occurring abroad, or in this case, “on the high seas,” could not be recovered.  But then, the Supreme Court reversed the Federal Circuit.  It held that lost profits could be recovered in this case because the case involved a domestic application of the Patent Statute. 

WesternGeco case was technically limited to Sec. 271(f)(2) of the Patent Statute, which covers a very unique and relatively rare form of infringement.  Sec. 271(f)(2) provides that supplying components from the U.S., which are subsequently manufactured abroad into an infringing device, constitutes infringement of a U.S. patent covering that device.  Likewise, the Supreme Court held that the focus of this statutory provision was on domestic conduct, i.e., supplying components from the U.S.  Because of this, the Court held that WesternGeco could recover lost profits for ION Physicals’s sales contracts abroad.

The case was important within the ever-shifting balance between patent-holders and accused infringers.  While the pendulum has no doubt swung in favor of accused infringers over the past 10 to 15 years, the Supreme Court’s WesternGeco decision was viewed as a partial sop to patent-holders, at least to the extent it broadened the scope of potential damages.  This is especially so in today’s economy, where so many hard-tech companies are located domestically, and benefit from sales of their products that eventually make their way into devices sold in the U.S..  Yet, these companies have avoided patent liability because their products are technically manufactured and distributed wholesale abroad. 

The smartphone is a case-in-point.  There are likely thousands of separately, patented technologies within that each phone, and though suppliers of those components are present in the U.S., they often attempt to avoid infringement by arguing that all manufacture and sale of their products occurs abroad.  The first instance their product appears in the U.S. is when it is imported inside the phone itself, and these suppliers can then easily claim ignorance for where their products eventually end up.

Indeed, this is an argument currently playing out within the long-running dispute between Power Integrations and Fairchild Semiconductor.  Power Integrations pursued a unique theory to capture Fairchild’s foreign sales.  It argued that by virtue of Fairchild’s domestic, U.S. infringement, Fairchild was able to capture foreign business.  In other words, Fairchild’s U.S. infringement was what allowed it to win Samsung’s business, which included foreign sales that displaced Power Integrations’ lost profits abroad.

The Federal Circuit rejected this “foreseeability” theory.  See Power Integrations, Inc. v. Fairchild Semiconductor, Inc., 711 F.3d 1348 (Fed. Cir. 2013).  Namely, the Court rejected the argument that lost sales abroad are recoverable because they might have been a foreseeable result of direct, domestic infringement.  Id. at 1371.  The Federal Circuit subsequently relied upon that same reasoning to reject WesternGeco’s appeal for foreign lost profits.  In the course of doing so, it identified its decision in Power Integrations, LLC v. Fairchild Semiconductor, Inc., as “the leading case on lost profits for foreign conduct.”  See WesternGeco, LLC v. ION Physical Corp., 791 F.3d 1340, 1350-51 (Fed. Cir. 2015). 

Yet, now, the Supreme Court has evidently rejected the Federal Circuit’s prior reasoning—namely, that a foreseeability theory of damages for foreign, lost sales is necessarily impossible.  In fact, the Supreme Court in WesternGeco appears to have held that foreign lost sales that are incidental to domestic infringement may, under some circumstances, be recoverable.

The District Court, in the Power Integrations case, appears to agree.  It recently held that, in its view, the Supreme Court’s WesternGeco decision implicitly overruled the Federal Circuits Power Integrations decision.  The District Court stated that it found the Supreme Court’s reasoning in WesternGeco, which applied to infringement under 271(f)(2), has equal applicability to infringement under 271(a).  See Case No. 04-1371 (D. Del.) (Oct. 14, 2018). 

That’s a fairly big statement.  And the District Court has simultaneously deemed this issue ripe for interlocutory appeal to the Federal Circuit.  That means, the Federal Circuit will shortly decide whether the reasoning underlying the Supreme Court’s decision in WesternGeco, which was facially limited to infringement under 271(f)(2), may also apply to direct infringement under 271(a).

The reason this is important is because the scope of cases relying upon infringement under 271(a) is much broader than those relying upon the more limited, and rare grounds of infringement provided for in 271(f)(2).  If the Federal Circuit, or eventually the Supreme Court, holds that foreign sales are reachable under 271(a), that could potentially rock the patent world, and swing the pendulum back slightly in favor of patent-holders.

That is especially so given how domestic companies operate today.  They frequently farm out infringing acts abroad.  This has become a convenient mechanism for building a business that relies substantially on eventual sales to the United States, but avoids any corresponding liability for infringement.  As a result, much of the teeth of U.S. patents are blunted.

That said, there are undoubtedly many distinctions that Fairchild will draw to keep the scope of permissible damages for patent infringement reigned in.  And the Supreme Court will surely be mindful that expanding the scope of foreign damages for direct patent infringement too far could have implications against the presumption against foreign application for domestic statutes outside the patent context.  The case remains worth watching.