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WesternGeco v. ION Geophysical: SCOTUS to Decide Whether Damages for Domestic Patent Infringement Should Include Profits Lost Overseas

Reports Patent

Petition for Writ of Certiorari, WesternGeco LLC v. ION Geophysical Corp., No. 16-1011 (U.S.  Feb. 17, 2017), petition hosted by SCOTUSblog. Brief in Opposition, (Apr. 19, 2017), brief hosted by SCOTUSblog. Petitioner’s Reply Brief (May 8, 2017), brief hosted by SCOTUSblog.

Last month, the Supreme Court of the United States agreed to hear an appeal from the Court of Appeals for the Federal Circuit in WesternGeco LLC v. ION Geophysical Corp., 837 F.3d 1358 (Fed. Cir. 2016), to address whether a patent holder may recover extraterritorial lost profits it would have earned oversees had it not been for the defendant’s domestic infringement under 35 U.S.C. § 271(f). Section 271(f)(1) provides that “whoever without authority supplies … from the United States all or a substantial portion of the components of a patented invention … to actively induce the combination of such components outside of the United States in a manner that would infringe the patent … shall be liable as an infringer.”

Petitioner WesternGeco LLC (WesternGeco) is a wholly owned subsidiary of Schlumberger Ltd., the world’s largest oilfield services company. Respondent ION Geophysical Corp. (ION) is a small company that provides seismic data acquisition products to the global oil and gas industry. Both WesternGeco and ION manufacture products, for marine seismic surveys, used to steer ships and floating objects (called streamers) that scan beneath the ocean floor for oil and gas. ION does not compete with WesternGeco’s survey services, but ION’s customers do. Both companies are headquartered in Houston, TX.

The district court found that ION infringed four patents held by WesternGeco under Section 271(f) and awarded WesternGeco $93.4 million in lost profits, as well as reasonable royalty from the foreign uses ($12.5 million) and other remedies. 953 F. Supp. 2d 731. The Federal Circuit reversed the lost profits award, stating that it was legally impermissible to award lost profits from surveys performed by foreign third parties overseas that used ION’s components as part of a complete survey system. In so holding, the Federal Circuit emphasized the presumption that U.S. patent law applies only domestically.

Judge Evan Wallach dissented, applying ordinary common-law damages principles in torts law to conclude that lost-profits damages should be recoverable to fully compensate the patentee. He noted that preventing the district court from considering foreign lost profits improperly limits the court’s discretion, encourages market inefficiency, and threatens to deprive plaintiffs of deserved compensation. Judge Wallach’s view is echoed by WesternGeco’s petition and the Solicitor General’s friend of the court brief in support of the petition. WesternGeco argues that it should be able to recover from ION the lost-profit damages for ten survey contracts it allegedly lost to ION’s foreign customers, since ION’s customers would not have won those contracts without access to ION’s products.

In contrast, ION argues that the Supreme Court should deny lost-profit damage awards arising from wholly extraterritorial acts under Section 271(f), because Section 271(f) was never intended to create more exposure for the exporter of components than for the exporter of finished goods. Under Section 271(a), an exporter of finished goods is not liable for damages arising from foreign use of the exported article. ION further argues that adopting WesternGeco’s view would undermine the Supreme Court’s own precedent in Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007), and risk the well-established presumption against extraterritoriality, creating a worldwide exclusive right to a U.S. patent holder, which would be contrary to law and against the notion of comity in international law.

One last wrinkle complicating the case is the disputed validity of WesternGeco’s patent claims: four of the five claims on which lost profits were awarded have been found invalid by the Patent Trial and Appeal Board (PTAB) through the inter partes review procedure (“IPR”). These claims involve methods to steer vessels and streamers from side to side, which—according to the PTAB—were not newly invented by WesternGeco. The PTAB decisions are now on appeal; and if the Federal Circuit affirms, the relief based on the cancelled patent claims will be void.

As Prof. Timothy Holbrook comments in Patently-O, this case is noteworthy to the patent community because the Supreme Court may jettison the Federal Circuit’s notion of a territorial limit to patent infringement damages. On a broader scope, this decision would add to the line of cases at the Supreme Court that touches on the extraterritorial reach of U.S. law.

Yoonkyung Eunnie Lee is a 1L student at Harvard Law School with a Ph.D. in mechanical engineering from MIT.