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What is at stake in the Supreme Court’s pending decision in WesternGeco v. ION Geophysical?

Zachary Silbersher

The cover of the latest issue of the The Economist discusses the battle for digital supremacy.  Within the Leader, The Economist argues that the prior technological bargain between the U.S. and China, where “America supplies the brains, and China supplies the brawn,” has come to pass.  In addition to noting that China’s tech-prowess is gaining ground—it has the fastest supercomputer, and it is purportedly cutting the edge on quantum computing—The Economist also notes that China’s theft of intellectual property may be damaging U.S. businesses upwards of a trillion dollars.

A case currently pending before the Supreme Court, WesternGeco LLC v. ION Geophysical Corp., may make it easier for U.S. businesses to fight IP theft abroad.  Whether it will put a dent into that trillion dollar number remains to be seen, but it could nevertheless add teeth to patent infringement that attempts to avoid liability for domestic infringement by offshoring sales abroad.

The patents in the case cover marine seismic surveys that are used for searching for oil and gas beneath the ocean floor.  To conduct a marine seismic survey, a ship tows sensors that detect soundwaves, and then uses that data to create maps of the subsurface geology.  The patent owner, WesternGeco LLC, does not make or sell any products, but rather conducts surveys for fees using equipment embodying its patented technology.  The defendant in the case, ION Geophysical Corp., makes components domestically that are shipped abroad, and then assembled by customers into infringing products.  The jury awarded the WesternGeco roughly $12 million in royalties for past damages, but another $90 million for lost profits.  To justify the lost profits award, WesternGeco argued that it would have earned an additional $90 million in contracts that it lost because of the defendant’s infringement.

The Federal Circuit reversed.  It held that U.S. patents have territorial limits.  Thus, the lost profits award could not be sustained because the award was for contracts the patent owner would have performed “on the high seas,” i.e., outside the territorial limits of the United States.

The Department of Justice has filed an amicus brief with the Supreme Court in support of WesternGeco.  The DOJ argues that the guiding principle behind awarding damages for patent infringement is to compensate the patent owner as near as possible had the infringement not occurred.  In this case, the DOJ argues there was no dispute that domestic infringement occurred, and that infringement caused WesternGeco harm.  At that point, according to the DOJ, the only remaining question is how much profits did WesternGeco lose, not where did it lose those profits.

Creeping behind this case is the principle of comity, and the hesitance of courts to indirectly or inadvertently regulate foreign conduct.  But whether or not foreign conduct is being regulated is not immediately apparent.  Also, being unnecessarily restrictive of proscribing lost profits for foreign sales potentially ignores the realities of today’s cross-border commerce.  At the Federal Circuit, the Honorable Evan J. Wallach dissented and cautioned that barring consideration of foreign lost profits for domestic infringement potentially opens up an avenue for companies to run-around U.S. patents through cross-border commerce:   “[a]n unduly rigid rule barring the district court from considering foreign lost profits even when those lost profits bear a sufficient relationship to domestic infringement improperly cabins [a court’s] discretion, encourages market inefficiency, and threatens to deprive plaintiffs of deserved compensation in appropriate cases.”

Thus, potentially at stake in this case is whether patent law can come to terms with the now commonplace manner in which technological components fitted into end-user products are designed, manufactured and sold through cross-border commerce.  Companies frequently design and develop technology domestically, but then manufacture and sell it abroad.  Yet, those component technological parts are then inserted into end-user products, such as smartphones, that have an enormous market within the United States. 

If the patent owner’s sales are themselves abroad, should that necessarily cutoff all lost-profit damages?  What if there is a one-to-one correlation between an infringing product made domestically, and a non-infringing sale made abroad?  Going further, should foreseeability play a role in the scope of recoverable damages for lost profits?  Or should firms be permitted to avoid lost profits damages for patent infringement by turning a blind eye to where their products end up?  If so, will that that encourage companies to off-shore sales of infringing products, turn a blind eye to where they will end up, but nevertheless ramp up a production volume that only makes sense if the products are eventually making their way back to the United States?  Given the realities of today’s cross-border commerce, an overly rigorous approach to collecting lost profits damages could dilute the value of United State’s intellectual property protection on which many American firms depend. 

Exactly where to draw the line remains at issue in this case.  The case of WesternGeco v. ION Geophysical is unlikely to answer all of these questions.  But the Federal Circuit has been leaning towards a rigorous approach to cutting off lost profits damages when domestically produced products are sold abroad.  That approach has already met with dissent within the Court.  And, within recent years, the Supreme Court has not resoundingly endorsed the Federal Circuit’s decisions on many big issues.  WesternGeco may therefore be a leading indicator of whether the Supreme Court intends to put some teeth back into the reach of United States patents.