Possible liability for damage suffered outside the US resulting from infringement of a US patent

October 2018 | SPOTLIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

October 2018 Issue

A recent decision of the US Supreme Court has raised the prospect of being able to obtain an award of damages from a US court for losses arising outside the US from acts found to have been an infringement of a US patent. The US Patent Act provides that in the event that there is a finding of infringement of a valid US patent, the infringer is liable for the damage resulting from that infringement.

The statutes

35 USC 284 reads as follows: “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.”

Infringement can occur in number of different ways as set out in 35 USC 281. Most of these are defined in such a way that the possibility of damage arising from acts outside the US is remote. For example, unauthorised making, using or selling any patented invention, within the US, or importation into the US any patented invention as set out in 35 USC 281(a) requires that the damage occurs in the US. However, this section also makes it an infringement to make an offer for sale of the patented item in the US without specifying that the sale itself must be within the country.

Other provisions that may have extraterritorial implications include those set out in 35 USC 281(f). First, whoever without authority supplies or causes to be supplied in or from the US 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 US in a manner that would infringe the patent if such combination occurred within the US, shall be liable as an infringer. Second, whoever without authority supplies or causes to be supplied in or from the US 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 non-infringing 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 US in a manner that would infringe the patent if such combination occurred within the US, shall be liable as an infringer.

The WesternGeco decision

Traditionally courts in the US have been reluctant to grant awards of damages with respect to acts that have occurred abroad, even when one of the above noted acts of infringement has occurred on the basis that patents are territorial in their application, and that the courts should be cautious in making decisions that might appear to give them extraterritorial effect. This may now be changing.

On 22 June 2018, in WesternGeco LLC v. Ion Geophysical Corporation, the Supreme Court held that when calculating damages for patent infringement, where the act of infringement was export from the US of a component especially made or especially adapted for use in a patented invention intending that component be incorporated into the patented invention outside the US, that is where there is an act of infringement under 35 USC 281(f)(2) as noted above, loss of foreign profits resulting from that act could be included in the damages award.

The patent in suit owned by WesternGeco related to a system for surveying the ocean floor. Ion Geophysical made components for a competing system and shipped them overseas where they were assembled into a system competing with WesternGeco’s. The Court of Appeals for the Federal Circuit had affirmed a finding of infringement under 35 USC 271(f)(2) but denied

WesternGeco’s claim for lost profits damages based on foreign contracts that had been secured by the defendants only as a result of the defendant’s export of equipment from the US. The district court had awarded lost profits damages on this basis. The majority of the Federal Circuit, however, held that such lost profits were not recoverable as damages since awarding damages in such a case would be an impermissible extraterritorial extension of US patent laws.

The Supreme Court disagreed. It reversed the Court of Appeals based on its reading of 35 USC 284 which provides that “the court shall award the claimant damages adequate to compensate for the infringement”. The Supreme Court noted a general presumption that federal laws apply only within the territorial jurisdiction of the US and that the defendants had argued that since foreign conduct after the act of infringement was necessary to give rise to the injury, this presumption against extraterritorial application of US law should apply in the present case.

The Supreme Court again disagreed. Prior case law on the general question of extraterritorial application of US laws requires a two step analysis: (i) “whether the presumption [against extraterritorial application of the law] … has been rebutted”; and (ii) “whether the case involves a domestic application of the statute”, noting that courts make the second determination by identifying “the statute’s ‘focus’” and then asking whether the conduct relevant to that focus occurred in US territory.

In the present case, the Supreme Court focused on step two, dismissing step one by noting that while “it will usually be preferable” to begin with step one, courts have the discretion to begin at step two “in appropriate cases”. One reason to exercise that discretion is if addressing step one would require resolving difficult questions that do not change the outcome of the case, but could have far-reaching effects in future cases. That was true here.

On step two, the court noted: “If the conduct relevant to the statute’s focus occurred in the US, then the case involves a permissible domestic application” of the statute, “even if other conduct occurred abroad”.

The Supreme Court noted that the focus of Section 284, in a case involving infringement under Section 271(f)(2), is on the act of exporting components from the United States… and the conduct in this case that is relevant to that focus clearly occurred in the US, as it was Ion’s domestic act of supplying the components that infringed WesternGeco’s patents.

Consequently it followed that “the lost-profits damages that were awarded to WesternGeco were a domestic application of §284” and the presumption against extraterritorial application of US laws was inapplicable in this case.

Dissenters expressed concern that the decision would effectively allow US patent owners to use American courts to extend their monopolies to foreign markets. That in turn would invite other countries to use their own patent laws and courts to assert control over our economy. Nothing in the terms of the Patent Act supports that result. The dissent noted that the use on which the damage claim was based in this case was a use that did not infringe any US patent because it took place abroad beyond the reach of any US patent. Damages should not be awarded for non-infringing uses. The majority dismissed such concerns as “wrongly conflating legal injury with the damages arising from that injury”.

35 USC 271(f)(2) that was in issue in this case relates to situations where the acts taking place abroad are analogous to acts that would be regarded as contributory infringement if they took place in the US. The decision specifically states that it does not address the position where the acts of infringement in question are actionable.

Other situations to which the Supreme Court’s reasoning may apply

USC 271(f)(1) is analogous to what would be considered active inducement of infringement if the acts in question took place in the US. In that case, there is infringement if there is active inducement and a substantial portion of the components are exported from the US irrespective of whether they are especially adapted for use in the invention. The Supreme Court has, however, pointed out that the statutory language refers to components in the plural and held that export of a single component does not constitute infringement under this section. Although the Supreme Court stated that it was not addressing this issue, the logic of the WesternGeco decision would seem to apply in this situation.

Another situation where there is cause for concern is where an offer for sale is made in the US with respect to sales that will take place outside the US. As noted above, an offer for sale of an infringing product is a separate ground of infringement from actual sale. The Court of Appeals for the Federal Circuit held in North American Phillips v. American Vending Sales Inc. that the “tort” of patent infringement occurs where the offending act [making, using, selling, offering for sale or importing] is committed and not where the injury is felt.

The court particularly pointed out that for the purposes of determining where a patent-infringing sale occurred, one did not necessarily look only at where legal title to the goods passed from seller to buyer but also at the locations of contracting and performance. In Halmar Robicon Group v. Texas Instruments it had been held that if the offer for sale originates from the US there may be an infringement even if the physical embodiment never enters the US as was found in where a letter making an offer for sale originated in Texas but the goods in question were made in Japan and shipped direct to a customer in Canada.

On the other hand more recently, in Transocean Deepsea Drilling Inc. v. Maersk Contractors USA Inc. an offer to sell was made in Norway by a US company to a US company to sell a product within the US for delivery within the US. The Federal Circuit found this to be an infringement of a US patent under 35 USC 271(a). The court noted that: “the location of the contemplated sale controls whether there is an offer to sell within the United States” and “the fact that the offer was negotiated or a contract signed while the two US companies were abroad does not remove this case from statutory liability”.

It was also held that the fact that the actual product sold was modified to avoid infringement was irrelevant to whether there was infringement based on an offer for sale if the product contemplated at the time of the offer would be an infringement.

In Halo Electronics Inc. v. Pulse Electronics Inc. it was held that the mere fact that part of the negotiations leading up to a contract for sale (that was ostensibly between non-US parties) took place within the US did not make the acts an offer for sale for the purposes of the Patent Act where the products were made outside the US delivery was to take place outside the US. This was essentially the view maintained by the Federal Circuit in Halo Electronics Inc. v. Pulse Electronics Inc. after that case had been returned to it from the Supreme Court after the latter court had held that district courts have discretion in awarding enhanced damages, the Supreme Court having declined to consider the question of how infringement under the “offer for sale” possibility applied to transactions having an international dimension.

Upon return to Federal Circuit, the court noted that this was the reverse situation to Transocean but the same presumption against extraterritoriality applied. Similarly in Carnegie Mellon University v. Marvell Technology Group Ltd the Federal Circuit Court of Appeals found that when calculating a damage award, the district court had erred in basing the damages on the defendant’s worldwide sales and should have excluded chips made abroad that never enter the US unless the ‘sale’ took place in the US and a new trial ordered on this question.

There is, therefore, some uncertainty as to whether the presumption against extraterritorial application of US laws applies in cases where an offer for sale was made in the US but the actual transfer of goods takes place outside the US. In WesternGeco, the Supreme Court focused on the fact that export from the US was an act occurring in the US. As noted in the Halo case, the Supreme Court ducked the question of whether further acts within the US in addition to verbal agreement on a sale was necessary for there to be an offer for sale in the US. In view of the decision in WesternGeco and the increasing literalism of the Supreme Court in construing statutes, there is a real possibility that the verbal agreement alone will suffice to constitute infringement.

Following the WesternGeco decision, claims for damage awards for allegedly lost foreign sales were denied by the Federal Circuit Court of Appeals in Texas Advanced Optoelectronic Solutions Inc. v. Renesas Electronics America Inc. on the grounds that there was insufficient evidence of either a sale or offer for sale in the US.

Conclusion

Since 35 USC 271(f)(2) applies only to export of components that are “especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial non-infringing use especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial non-infringing use”, the impact of the decision may be less dramatic than at first appears.

However, the possibility that its reasoning could be extended to situations under 35 USC 271(f)(1) or applied to offers for sale where no such limitations apply may require pause for thought. In the meantime, it may be desirable to ensure that no more than one component of a patented item is exported from the US, if advice is given as to how to use exported components to produce something that would infringe a US patent if produced in the US, and to avoid contract negotiations in the US that may be regarded as constituting ‘offers for sale’, if the products in question are subject to a US patent but are to be delivered and used elsewhere.

John Richards is of counsel at Ladas & Parry LLP. He can be contacted on +1 (212) 708 1915 or by email: jrichards@ladas.com.

John Richards

Ladas & Parry LLP