WesternGeco Opens the Door to Foreign Lost Profits, but Uncertainties Remain

The US Supreme Court has issued its decision in WesternGeco v. ION Geophysical, ruling that patent plaintiffs may recover lost profits damages when an infringer has made certain components in the US for an invention that gets assembled abroad. However, while oral arguments for the case suggested that the decision would address how parties will prove damages for such cases, as well as the impact of allowing lost profits damages with respect to foreign courts, the unexpectedly narrow majority opinion (authored by Justice Clarence Thomas) addressed neither of those issues.

RPX data indicates that infringement is claimed under the relevant statute, 35 USC Section 271(f), relatively infrequently, with about 5% of the complaints filed since January 1, 2017 including allegations brought under that provision. RPX will monitor future filings to assess the impact this decision will have on complaints going forward.

Although the issues sidestepped by the Court in WesternGeco may ultimately blunt some of the decision’s effects, its impact will nevertheless ripple through patent litigation and the patent marketplace for a number of reasons.

Higher Damages

The newfound availability of foreign lost profits damages in certain cases will likely motivate plaintiffs both to plead infringement under the applicable subsection (Section 271(f)(2)) more frequently in the near future and to up the amount of damages sought in many infringement cases going forward, as long as plaintiffs can argue that defendants have provided at least one specialized component of a foreign-manufactured accused product. WesternGeco applies only to the domestic provision of one or more specializedcomponents of a purported invention, but many popular types of accused products will still likely be affected. Consumer electronics, for example, commonly contain globally sourced components, including many produced in the US.

Software as a “Component”

Depending on how courts refine the metes and bounds of what constitutes a “component” in the Section 271(f)(2) context, WesternGeco may cause headaches for companies providing software, such as businesses creating websites in the US that get hosted abroad. In Microsoft v. AT&T, the Supreme Court held in 2007 that software code on its own is “uncombinable” except when coupled with an “activating medium” such as a CD-ROM. It remains to be seen how courts will interpret “activating medium” in the context of digitally delivered software that is executable without the need for physical media in the wake of WesternGeco. Furthermore, the Federal Circuit’s 2011 opinion in Cardiac Pacemakers v. St. Jude Medical casts additional doubt on the notion that software on its own would be considered a “component” under current case law; in that decision, the court held that Section 271(f) does not cover method claims (present in almost all patents covering “software” inventions). Such hurdles may not deter all plaintiffs, however.

Causality for Damages

Given the additional damages now on the table in patent suits, an inevitable result of WesternGeco will be that parties will start spending more time and energy disputing whether the defendant’s infringing conduct under Section 271(f) actually caused the plaintiff’s lost profits, or whether an intervening cause or causes led to a reduction in those profits (i.e., whether something else broke the chain of causality). This issue, also called proximate cause, was not addressed by the Supreme Court in WesternGeco despite extended discussion of that topic in oral arguments and briefing. Further litigation and appellate review may be needed to get an answer from the Supreme Court as to the presently applicable standard for proximate cause in this context. (The Federal Circuit adopted an “objective foreseeability” standard for determining proximate cause in patent cases in its 1995 en banc holding in Rite Hite v. Kelly, but the Supreme Court has never addressed foreseeability in patent suits.)

Foreign Litigation

As noted by Justice Neil Gorsuch in his dissent, which was joined by Justice Stephen Breyer, the majority opinion (allowing the enforcement of US patents against foreign sales) may lead courts in other countries to issue reciprocal rulings; i.e., to impose damages for infringement of foreign patents as a result of infringing conduct perceived to occur within the US.

A detailed overview of the WesternGeco majority opinion and Justice Gorsuch’s dissent is available on RPX Insight.