Extraterritoriality and US patent damages

In litigation, economic and financial experts are often asked to calculate the amount of patent damages that would be “adequate to compensate for the infringement” as stated in 35 USC §284. But a recent ruling illustrates the difficulty of defending IP rights in today’s global economy, where multinational business operations are the norm and patent litigants must grapple with how national patent laws apply to the products and services of global businesses.

In WesternGeco, LLC v ION Geophysical Corp a jury found that infringement by ION caused WesternGeco to lose 10 contracts that it would have otherwise won and awarded lost profit damages of $93.4 million arising from the lost contracts. WesternGeco’s patents related to technology providing improvements to underwater operations used by oil exploration companies in surveying the seabed. The patented inventions were commercialised through its product Q-Marine. An integrated company, WesternGeco manufactured the Q-Marine product in the United States, which it then used to perform surveys in the high seas on behalf of oil exploration companies. ION's accused product was DigiFIN™. ION did not perform surveys; rather, it sold the accused products to survey companies that competed with the survey services offered by WesternGeco.

WesternGeco claimed (and the jury agreed) that the evidence showed that without the infringing ION product, ION’s customers could not have made the service sales at issue and that WesternGeco would have made them. This direct link between the infringing sales and the patentee’s lost sales and profits is an essential component to proving lost-profit damages, and it was proven here to the satisfaction of the fact finder.

The lost profits initially awarded by the lower court were later overturned by the Federal Circuit, which ruled – citing the presumption of extraterritoriality – “that WesternGeco is not entitled under United States patent law to lost profits from the foreign uses of its patented invention” (opinion at 20). In doing so the Federal Circuit focused on the issue of where marine surveys occurred. The court concluded that the lost profits stemmed from activities (the surveys) that occurred outside US territory, rather than the sale of the infringing device in the United States, and thus were not available to the plaintiff. Judge Wallach dissented, stating the “majority’s near-absolute bar to the consideration of a patentee’s foreign lost profits is contrary to the precedent both of this court and of the Supreme Court” (dissent at 19). Consistent with this dissent, it could be argued that no matter whether the survey revenue resulted from overseas activity, the presumption was not that the service sale is infringing, only that the loss of service revenue arose on account of the infringing US sales).

Estimating damages – comment
Setting aside the legal disagreement, economic experts must now ensure that their damages estimates are consistent with WesternGeco. They must also be consistent with other recent rulings as to extraterritoriality, such as:

  • Power Integrations v Fairchild Semiconductor, especially as it pertains to lost-profit damages;
  • Carnegie Mellon v Marvell Technologies, which deals with quantification of reasonable royalties patent damages in transnational sales; and
  • Promega Corp v Life Technologies Corp, relating to whether a single component covered by a US patent used outside the United States in a multicomponent product can be considered an infringing act under US law.

Experts should pay particular attention to causation between the US acts of infringement and the damages resulting from the infringement, specifically where the damages might be said to arise from extraterritorial activities. The goal of lost-profit patent damage awards rests on the principle of making the patentee whole, returned to a position in which it would have been but for the infringement. Where liability has been proven, the patent statute provides that “the court shall award the claimant damages adequate to compensate for the infringement”. In WesternGeco the Federal Circuit inserted a qualifier to that principle.

At their most basic, damages arise from the difference between what actually happened and what would have happened but for the infringement. This is true whether the damages are in the form of lost profits or reasonable royalty. The WesternGeco ruling requires experts to apply that framework while closely considering the location of each activity that gives rise to the lost profits in terms of what is and is not US-based. Of course, this approach raises practical concerns, since it is often difficult to discern the nexus between an act that might infringe a patent in one country and a commercial activity that occurs elsewhere. Such a determination requires a legal conclusion, and thus an expert must wait for ruling on the issue, make assumptions about which sales have appropriate nexus or present a damages analysis that includes alternatives that differ depending on alternative findings with respect to the territorial nexus.

Further, even though lost-profit damages may have been disallowed in WesternGeco, the Federal Circuit provided for an alternative avenue for compensation in the form of a reasonable royalty. Here an expert must be careful not to simply use reasonable royalty as a back door to a lost-profit claim, but rather to assess the effects of extraterritorial lost profits in a hypothetical negotiation between the parties that results in a reasonable royalty. While a reasonable royalty may not provide full compensation to offset infringement, it may provide some compensation where lost profits are explicitly disallowed. 

WesternGeco highlights the difficulty of estimating damages in light of extraterritoriality. Patentees and experts may want to continue to seek lost profits, despite the ruling, in situations where relevant transactions involve both US and foreign activities. However, such claims will have to carefully tie the damages to acts that can be considered infringing in the United States, and any analyses should be adjusted accordingly.

The views and opinions expressed here are those of the authors and do not necessarily reflect the opinions, position or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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