The Supreme Court issued a disappointing opinion [PDF] today holding that a company could recover patent damages for lost profits overseas. The court’s reasoning could make overseas damages available in many patent cases. This will disadvantage companies that do research and development in the United States. When patent law discourages domestic innovation, it achieves the opposite of its intended purpose.
The case, called WesternGeco LLC v. ION Geophysical Corp., involved a patent on a method of conducting marine seismic surveys. ION exported components that, when combined, were used to infringe the patent overseas. Under Section 271(f) of the Patent Act, exporting components of a patented invention for assembly abroad is considered infringement. WesternGeco received damages for the U.S. sales of the components. The court considered whether WesternGeco could also receive damages for lost profits for the use of the invention overseas.
Together with the R Street Institute, EFF filed an amicus brief [PDF] in the case explaining that worldwide damages are not consistent with the domestic focus of the patent act. Our brief, co-written with Professors Bernard Chao and Brian Love, provided an example of how such a ruling could harm U.S. innovation:
[C]onsider how such a regime might impact two hypothetical companies. Two companies, a domestic one A and a foreign one B, design and test semiconductor chips and contract with a foreign manufacturer to produce their designs. A patent owner claims that both companies’ testing processes infringe a patent, and demands damages for the manufactured chips on the theory that those chips’ manufacture and sale are proximately and factually caused by the infringing testing. [If the Court allows worldwide damages then] Company A could be liable for a reasonable royalty on its worldwide sales. In contrast, Company B would likely only be liable for royalties on its U.S. sales. This would effectively punish Company A for conducting research and development in the United States.
Justices Gorsuch and Breyer broadly agreed with this reasoning. Indeed, Justice Gorsuch’s dissent includes a similar hypothetical and notes that it is a “very odd role for U. S. patent law to play in foreign markets.” Unfortunately, the other seven justices were unpersuaded.
Most patent cases are brought under Section 271(a) of the Patent Act, which concerns infringement “within the United States.” As noted, today’s case considered a claim under Section 271(f), which concerns the export of components. It is tempting to hope that the court’s ruling will only apply to 271(f) cases. Unfortunately, the Supreme Court’s reasoning might result in patent owners arguing they deserve damages in all patent cases where domestic infringement supposedly causes harm overseas. In our view, that would be a terrible result.
It may be that courts will apply proximate cause principles to find that overseas damages are not available for sales loosely linked to US research and development. We hope that damages will be not awarded in cases where there was U.S. research and development but the manufacture and sales occur overseas. If that became the norm, it would be a big disincentive to innovate within the United States.